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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2411605
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(Address of Principal executive offices)
Registrant's telephone number, including area code: (213) 980-8145
NONE
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days.
YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K.[X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 27,1997 was $95,915,244 based on a $19 5/8 average of the
high and low sales prices for the Common Stock on such date. For purposes of
this computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such executive officers and directors are, in fact, affiliates of the
Registrant.
Indicate the number of shares outstanding of each of the issuer's classes of
of stock as of the latest practicable date.
Common Stock, No Par Value, 14,816,635 Shares as of March 27, 1997
Portions of Part III of this report have been incorporated by reference
from the Company's Proxy Statement for 1997 Annual Shareholders meeting.
99 Cents Only Stores
Table of Contents
Part I
Item 1. Business..............................................
Item 2. Properties............................................
Item 3. Legal Proceedings.....................................
Item 4. Submission of Matters to Vote of Security Holders.....
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters........................
Item 6. Selected Financial Data...............................
Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations................
Item 8. Financial Statements..................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................
Part III
Item 10. Directors and Executive Officers of Registrant........
Item 11. Executive Compensation................................
Item 12. Security ownership of Certain Beneficial Owners
and Management.....................................
Item 13. Certain Relationships and Related Transactions........
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................
Part I
ITEM 1 BUSINESS
GENERAL
99 Cents Only Stores is a leading, deep-discount
retailer of primarily name-brand, close-out and
reorderable general merchandise at an affordable, single
price point. From its first store opening on August 13,
1982, the Company's chain of 99 Cents Only Stores has
expanded to 45 stores at March 27, 1997. The Company
believes that it operates the nation's oldest, existing one-
price general merchandise chain and that it was the
first chain to sell all merchandise at a single price point
of 99 Cents or $1.00. The Company's stores are
attractively merchandised, clean, full-service locations
that offer customers significant value on their
everyday household needs in an exciting shopping environment.
Merchandise purchased by the Company is also
distributed through its Bargain Wholesale operation at
prices generally below normal wholesale to both small and
large domestic retailers, other distributors and
exporters. Bargain Wholesale complements the Company's
retail operation by allowing the Company to purchase in
larger volumes at more favorable pricing and to generate
additional net sales with relatively small incremental
increases in operating expenses.
The Company sells consumer items in staple product
categories including beverages and food, health and beauty
aids, household products (cleaning supplies, paper goods,
etc.), housewares (glassware, kitchen items, etc.), and
hardware. The Company purchases most of its merchandise
directly from the manufacturer. The Company's suppliers
include many of the nation's leading consumer product
companies. During 1996, the Company purchased merchandise
from more than 999 suppliers, including Colgate-Palmolive
Company, The Dial Corp., Eveready Battery Company Inc.,
General Electric Company, Gerber Products Company, The Gillette
Company, Hershey Foods Corporation, Johnson & Johnson, Kraft
General Foods, Inc., Lever Brothers Company, Mattel Inc., The
Mead Corporation, Nabisco Inc., Nestle, The Pillsbury Company,
The Procter & Gamble Company, Revlon Inc., and Smithkline
Beecham Corporation.
Industry
The Company participates primarily in the highly
competitive "deep-discount" retail industry. The deep-
discount retail industry is distinguished from other retail
formats by the purchase of close-out and other special
situation merchandise at prices substantially less than
original wholesale cost, and the subsequent sale of this
merchandise at prices significantly below regular retail.
This results in a continually changing selection of specific
brands of products. According to Discount News (July 3,
1995), the deep-discount retail industry is a growing subset
of the $290.4 billion discount retail industry - one of the
fastest growing retail sectors in the United States.
The sale of close-out or special situation merchandise
evolved in response to the need of manufacturers,
wholesalers and others to distribute merchandise outside
their normal channels. Close-out or special-situation
merchandise becomes available for a variety of reasons,
including a manufacturer's over-production, discontinuation
due to a change in style, color, size, formulation or
packaging, inability to move merchandise effectively through
regular channels, reduction of excess seasonal inventory,
discontinuation of test-marketed items and financial needs.
Many deep-discount retailers also sell merchandise that
can be reordered from a manufacturer or wholesaler on a
regular basis. Although this merchandise can usually be
purchased at less than regular wholesale and sold below
normal retail, the discount, if any, is generally less than
that of close-out merchandise. Deep-discount retailers
sell reorderable merchandise to ensure a degree of
consistency in their product offerings and to establish
themselves as a reliable source of basic goods.
The Southern California Market
The Company currently targets the five-county Southern
California market. As of March 27, 1997, the Company's
stores are located as follows: Los Angeles (39 stores);
Orange (5 stores); San Bernardino (1 store); Ventura (none
currently) and Riverside (none currently). These counties
have an aggregate estimated 1995 population of 15.6 million
(9.2 million in Los Angeles County alone), and a non-
agricultural workforce of approximately 5.9 million.
According to the Economic Development Corporation of Los
Angeles County, total personal income for Southern
California was over $360 billion and taxable retail sales
topped $91 billion in 1995. In addition to providing a
consumer market greater than that of most nations,
international trade in the Southern California market
grew to more than $168 billion in 1995.
Business Strategy
The Company's business strategy is based on the
following principles that distinguish it from other "dollar
stores" as well as other deep-discount operators:
Excellent Value at an Affordable Price: The Company is
dedicated to providing exceptional value to its customers.
The Company strives to be the most competitively priced
consumable merchandise retailer in the communities it
serves. Management believes that the items the Company sells
for 99 cents are typically sold for significantly higher
prices elsewhere.
Focus on "Name-Brand" Consumables: The Company provides
its customers with a wide variety of first quality, name
brand consumable merchandise. The Company strives to exceed
customers' expectations of the range and quality of name-
brand consumables that can be purchased for 99 cents. A
majority of the items purchased by the Company in 1996 was
comprised of name-brand products that have immediate
consumer recognition. The Company believes that this name-
brand focus, along with a product mix of everyday household
items, increases the frequency of consumer visits and
impulse purchases and reduces the Company's exposure to
seasonality and economic cycles.
Broad Selection of Reorderable Basic Household
Consumable Items: A majority of the items offered by the
Company are reorderable. By consistently offering
a wide selection of basic household consumable items, the
Company encourages consumers to regularly shop 99 Cents Only
Stores for their everyday household needs.
Strong Long-Term Supplier Relationship: The Company
believes that it has developed a reputation as a leading
purchaser of name-brand close-outs through its ability to
make immediate buy decisions, ability to pay cash or accept
abbreviated credit terms, reputation for prompt payment,
commitment to honor all issued purchase orders and
willingness to purchase goods close to a target season or
out of season. Other important factors include the Company's
ability to minimize channel conflict for the manufacturer
by quickly selling name-brand close-outs without, if
requested by the supplier, advertising or wholesaling the
item. The Company believes this reputation along with its
clean, attractively merchandised stores have helped create
strong, long-term relationships with many leading consumer
product companies.
Savvy Purchasing: The Company purchases merchandise at
substantially discounted prices as a result of its buyers'
knowledge, experience and negotiating ability and its
established reputation among its suppliers. The Company is
willing to take advantage of large-volume purchases, close-
outs and other special situations in order to obtain
merchandise at favorable prices.
Attractive and Consistent Store Economics. The Company
believes that its attractive store level economics will
facilitate its planned expansion. The average investment per
new store opened in 1996, including improvements, fixtures,
equipment and inventory on-hand, but excluding pre-opening
expenses, which are expensed as incurred, was approximately
$550,000. New stores opened in 1995 had average sales of
approximately $4.35 million during the first year of
operations. In 1996, the Company's earnings before interest,
taxes, depreciation and amortization (EBITDA) was 13.7%.
Focus on Southern California Market: Management
believes Southern California has significant potential for
Company growth in store locations, sales and profitability.
By continuing to focus store openings in Southern
California, the Company will be able to take advantage
of its existing warehouse and distribution facility,
regional advertising and other management and operating
efficiencies to provide for further growth without incurring
the additional overhead and risk that would be entailed by
expansion in new geographic markets.
Complementary Bargain Wholesale Operations: Bargain
Wholesale complements the Company's 99 Cents Only Stores by
allowing the Company to purchase in larger volumes at more
favorable pricing, and to generate increased net sales with
relatively small incremental increases in operating
expenses.
Expansion Strategy
Management believes that the primary sources of sales
growth in the future will be new store openings and growth
in its wholesale division. In 1994 and 1995, the Company
opened 4 stores in each year, respectively (including 2
stores relocated in 1995). In 1996 the Company accelerated
the pace of its new store openings to 8 stores, including
1 relocation. The Company plans to open new stores at an
annual growth rate of 20%. Of the stores planned for 1997,
the Company has, as of March 27, 1997, opened 2 stores and
secured leases for 5 additional store locations.
The Company continues to target Southern California for
its new store openings. The Company expects to open stores
in new communities within this region and "fill in" existing
markets by opening additional stores in communities that are
currently served. Although locating larger new stores close
to existing stores has had, and could continue to have, a
negative impact on comparable store net sales, this strategy
has generated increased operating income as well as sales.
management believes Southern California offers significant
potential for growth in sales and profitability. See
"Business - The Southern California Market." By continuing
to focus on Southern California, the Company will be
able to take advantage of its existing warehouse and
distribution facility, regional advertising and other
management and operating efficiencies to provide for further
growth without incurring the additional overhead and risk
that would be entailed by expansion in new geographic
markets.
While the Company's near-term expansion plans are for
Southern California, the Company believes the 99 Cents Only
Stores format could be successful in other densely populated
areas of the country that also have a wide range of socio-
economic and demographic characteristics. Densely populated
geographic markets offer the potential for multiple
locations. Clustering multiple stores in a single market
allows the Company to take advantage of distribution,
advertising and other operational efficiencies. Although the
Company has no immediate plans to expand into other
geographic markets, it would consider such an expansion
by acquisition of a chain or chains of clustered
retail sites in densely populated regions. Any such
decision would be dependent upon market conditions, the
terms of any proposed acquisition, the demographics of the
proposed community or communities and available Company
resources.
The average investment per new store opened in 1996,
including improvements, fixtures, equipment and inventory
but excluding pre-opening expenses which are expensed
as incurred, are approximately $550,000. New stores opened
during 1995 had average net sales of approximately $4.35 million
during the first year of operation. In 1996, the Company's EBITDA
was 13.7% of sales. The Company seeks to locate new stores
in suitable existing structures which can be refurbished in
a manner consistent with its retail concept. This strategy
allows the Company to open stores in new locations generally
within two to four months following the conclusion of
lease negotiations.
Net sales in the Company's wholesale division grew from
$18.9 million in 1994 to a record $40.5 million in 1996.
Bargain Wholesale's recent growth is primarily attributable
to an increased focus on large domestic and international
accounts and expansion into new geographic markets. Although
international sales have historically not been material to
the Company's consolidated sales, they have contributed to
recent growth in Bargain Wholesale's net sales and are
expected to continue to do so in the near future. The
Company intends to expand its wholesale operation further by
continuing this focus, increasing its marketing and
promotional program as well as the number of trade shows at
which it exhibits improving customer service and aggressively
contacting its customers on a more frequent basis through
telephone, facsimile and mail. Additionally, the Company opened
a show-room in New York City in February, 1997.
99 Cents Only Stores-Retail Operations
The Company's 99 Cents Only Stores offer customers
quality merchandise, generally at a significant discount
from normal retail. The Company's stores are attractively
merchandised, clean, full-service "destination" locations
that offer consumable general merchandise to value-conscious
consumers for their regular household needs. All merchandise
is sold in the Company's stores for 99 cents per item or two
or more items for 99 cents. A majority of the items purchased
by the Company in 1996 was comprised of name-brand merchandise
that has immediate consumer recognition. The Company
strives to exceed the customer's expectations of the range
and quality of name-brand consumables that can be purchased
for 99 Cents. Management believes that many of its customers
purchase more items than they anticipated.
Merchandising: The Company's stores retail a broad
variety of first-quality, name-brand and other close-out
merchandise as well as a wide assortment of regularly
available consumer goods. The Company believes that the
success of its 99 Cents Only Stores concept arises from the
value inherent in selling primarily name-brand consumables,
most of which were originally priced to retail from $1.29 to
$9.99, for only 99 cents per item or group of items. Each
store typically carries several thousand different stock
keeping units (SKUs). The merchandise sold in the Company's
stores consist primarily of a wide variety of basic consumer
items including beverages and food, health and beauty aids,
and household products (cleaning supplies, paper goods,
etc.). The stores also carry housewares (glassware, kitchen
items, etc.), hardware, stationary and party goods, seasonal,
baby products and toys, giftware, pet products and clothing.
While 99 Cents Only Stores regularly carry a variety of
basic household consumer items, the stores differ from
typical discount retail stores in that they do not
continuously stock complete lines of merchandise. Although a
substantial portion of the merchandise purchased by the
Company in 1996 is available for reorder, the mix of
specific brands of merchandise frequently changes,
depending upon the availability of close-out and
other special-situation merchandise at suitable prices.
Since commencing its close-out purchasing strategy in 1976,
the Company has not experienced difficulty in obtaining
name-brand close-outs as well as reorderable
merchandise at attractive prices. Management believes that
the continuously changing specific name-brands found in
its stores from one week to the next encourages impulse and
larger volume purchases, results in customers shopping more
frequently and helps to create a sense of urgency, awareness
and excitement. Unlike many discount retailers, the Company
imposes no limitations on the quantity of specific items
that may be purchased by a single consumer.
The layout of each of the Company's 99 Cents Only
Stores is customized to the actual size and configuration of
the individual space. The interior of each store is,
however, designed to reflect a uniform format, featuring
attractively displayed products in windows, consistent
merchandise display techniques, bright lighting,
cleanliness, lower shelving height that allows unobstructed
visibility throughout the store, distinctive color scheme,
interior and exterior signage, and customized check-out
counters, floors, price tags, shopping carts and shopping
bags. The Company emphasizes strong visual presentation in
all key traffic areas of the store. Merchandising displays are
maintained throughout the day and changed or moved frequently,
and often incorporate seasonal themes. The Company believes
that due to the continuously changing brand-names, the lower
shelving height and the absence of aisle description signs,
the typical customer tends to shop the whole store.
The Company targets value-conscious consumers from a
wide range of socio-economic backgrounds with diverse
demographic characteristics. Purchases are by cash, credit
or debit card. The Company's stores do not accept checks or
manufacturers coupons. The Company's stores are open every
day with opening hours designated to meet the needs of
family consumers, The Company advertises that its stores are
open "9:00 a.m. to 9:00 p.m., 9 days a week."
Store Locations: At March 27, 1997, The Company's 45
99 Cents Only Stores are located in Southern California and
average 13,800 gross square feet. Since January 1, 1994,
the Company has opened 18 new stores (including 2 relocations
in 1995 and 1 in 1996) that average 17,300 gross square
feet and currently targets new store locations between
15,000 and 23,000 gross square feet. The Company believes
that its larger 99 Cents Only Stores allow it to fully
display its wide assortment of merchandise in a more
attractive format, carry deeper stock positions and provide
customers with a more inviting and convenient environment
that encourages longer shopping and increased purchases.
The Company's decision to target larger stores reflects the
higher average annual store revenues and operating profits
typically achieved by these stores.
Store Management: Substantially all merchandise decisions
with respect to pricing and advertising are made at the Company's
headquarters. The Company employs eight district managers
responsible for store operations. Reporting to each district
manager is one merchandising supervisor responsible for store
merchandising in that district. The store managers also report to
the district manager. These district managers are supervised by the
Company's Vice President of Retail Operations. District managers
visit each store in their district at least twice a week and focus
on the implementation of Company's policies, operations and
merchandising philosophy. District managers also help train
store management. The Vice President of Retail Operations
also supervises a cashiers training school located at the
Company's Corporate offices. Merchandising supervisors and
their crew (usually three to five experienced stock people)
visit each of the stores at least once a week and help the
store managers to maintain and improve the appearance of the
sales floor, move merchandise sections, organize the
stockroom and train store personnel. Typically the Company's
stores are staffed with a manager, two assistant managers, a
head cashier, 13 cashiers and 12 stockers. Store managers
are responsible for assessing their respective stores
stocking needs and ordering accordingly. Accounting and
general financial functions are performed at the Company's
corporate offices.
Advertising: Advertising expenditures were $1.4
million, $1.2 million and $1.5 million for 1994, 1995 and
1996, respectively, or 1.0%, 0.8% and 0.8% of net sales,
respectively. The Company manages its advertising without
the assistance of an outside agency. The Company allocates
the majority of its advertising budget to newspaper and
radio advertising. The Company's advertising strategy
emphasizes the offering of nationally recognized, name brand
merchandise at significant savings. The Company minimizes
its advertising expenditures by an efficient implementation
of its advertising program combined with word-of-mouth
publicity, locations with good visibility and efficient
signage. Because of the Company's distinctive grand opening
promotional campaign, grand openings often attract long
lines of customers and receive media coverage.
Bargain Wholesale
The Company conducts its wholesale operations under the
trade name, "Bargain Wholesale," through its 15,000 square
foot product showroom located at the Company's 880,000
square foot single-story warehouse and distribution facility.
In February, 1997, Bargain Wholesale opened a showroom
in New York City. Bargain Wholesale also conducts business
through general merchandise trade shows and mailed products
circulars.
The following table presents certain information
regarding the Company's wholesale division:
Years Ending December 31, (000's)
----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net Sales (in thousands) $21,938 $18,028 $18,916 $30,337 $48,480
Annual growth
in net sales 12.2% -17.8% 4.9% 60.4% 59.8%
Historically, Bargain Wholesale relied upon small and
medium size Southern California retailers to form its core
customer base. In December, 1991, the Company began to focus
greater attention on Bargain Wholesale with the hiring of a
Senior Vice President of Wholesale Operations. Outside factors
including the 1992 Los Angeles civil disturbances and the
1994 Northridge earthquake, had an adverse impact on Bargain
Wholesale's traditional core customer base. By shifting its
focus to large domestic and international accounts and the
expansion of its geographic markets, Bargain Wholesale was
able to recover from the outside factors affecting its 1993
and 1994 results to significantly improve its performance
in 1995 and continued to grow in 1996 at an accelerated pace.
In 1996, Bargain Wholesale sold merchandise to over 999
customers. The Company advertises its wholesale operations
primarily through direct mail. The Company plans to continue
to expand its wholesale operations by continuing its focus
on the needs of large domestic and international accounts,
expansion into new geographic markets, increasing its
marketing and promotional programs, increasing the number of
trade shows at which it exhibits, focusing on its recently
opened show-room in New York City, improving customer service
and aggressively contacting its customers on a more frequent
basis through telephone, facsimile and mail.
The Company's wholesale product line is substantially
similar to its retail product line. Typical wholesale
customers include other wholesalers, small local
retailers, large regional and national retailers, and
exporters. During 1996, no single customer accounted
for more than 4% of Bargain Wholesale's net sales. The
Company offers 15-day payment terms to its Bargain Wholesale
customers who meet the Company's credit standards. Customers
located abroad, certain smaller customers or others who do
not meet the Company's credit standards pay cash upon pickup
or before shipment of merchandise.
Bargain Wholesale complements the Company's retail
operations by allowing the Company to purchase in larger
volumes at more favorable pricing and to generate additional
net sales with relatively small increments in operating
expenses. Bargain Wholesale also provides the Company
with a channel by which it may distribute merchandise
above the 99 cents price point.
Purchasing
The Company's purchasing department staff consists of
eight buyers, managed by the Company's Vice President of
Purchasing. The Company's Chief Executive Officer also
participates in the Company's purchasing activities. The
Company's buyers purchase for both the 99 cents Only Stores
and Bargain Wholesale.
The Company believes a primary factor contributing to
its success is its ability to identify and take advantage of
opportunities to purchase merchandise with high customer
interest at lower that regular wholesale prices. The Company
purchases most of its merchandise directly from the
manufacturer. The Company's other sources of merchandise
include wholesalers, manufacturers' representatives,
importers, barter companies, auctions, professional finders
and other retailers. The Company develops new sources of
merchandise primarily by attending industry trade shows,
advertising, marketing brochures and referrals.
The Company has no continuing contracts for the
purchase of merchandise and must continuously seek out
buying opportunities from both its existing suppliers and
new sources. No single supplier accounted for more than 4%
of the Company's total purchases for 1996. In 1996, the
Company purchased its inventory from more than 999
suppliers, including Colgate-Palmolive Company, The Dial
Corp., Eveready Battery Company Inc., General Electric
Company, Gerber Products Company, The Gillette Company,
Hershey Foods Corp., Johnson & Johnson, Kraft General Foods
Inc., Lever Brothers Company, Mattel Inc., The Mead
Corporation, Nabisco Inc., Nestle, The Pillsbury Company,
The Procter & Gamble Company, Revlon Inc., and Smithkline
Beecham Corporation.
Almost half of the merchandise purchased by the
Company in 1996 was close-out or special-situation
merchandise. Close-out or special-situation merchandise
becomes available for a variety of reasons, including a
manufacturer's over-production, discontinuation of
merchandise due to a change in style, color, size,
formulation or packaging, inability to move merchandise
effectively through regular channels, reduction of excess
seasonal inventory, discontinuation of test-marketed items
and financial needs. The Company's buyers search
continuously for close-out opportunities. The Company's
experience and expertise in buying merchandise has enabled
it to develop relationships with many manufacturers that
often offer some or all of their close-out merchandise to
the Company prior to attempting to sell it through other
channels.
The Company has developed strong relationships with
many manufacturers and distributors that recognize their
special-situation merchandise can be moved quickly through
the Company's retail and wholesale distribution channels.
These strong relationships along with the Company's ability
to purchase in large volumes also enable the Company to purchase
reorderable name-brand goods at discounted wholesale prices.
Reorderable merchandise historically account for over half of
the Company's annual purchases. The key elements to
these supplier relationships include the Company's (i) ability
to make immediate buy decisions, (ii) experienced buying
staff, (iii) ability to pay cash or accept abbreviated
credit terms, (iv) reputation for prompt payment, (v)
commitment to honor all issued purchase orders and (vi)
willingness to purchase goods close to a target date or
out of season. The important factors include the
Company's ability to minimize channel conflict for the
manufacturer by quickly selling name-brand close-outs
without, if requested by the supplier, advertising or
wholesaling the item. The Company's ability to purchase and
resell large volume orders and the ability to minimize the
risk of damage to a product's image by having attractively
merchandised stores filled with name-brand items. Management
believes the Company's long-term relationship with its
suppliers and its reputation for integrity will continue to
provide the Company with opportunities to acquire quality
merchandise at reduced wholesale prices.
Private label consumer products, made exclusively for
the Company, accounted for approximately 4% of total
merchandise purchased in 1996. The Company is continuously
developing new private label consumer products to broaden
the assortment of merchandise that is consistently
available. The Company also has an in-house operation called
Deluxe Imports that imports products primarily from
Southeast Asia. Deluxe Imports accounted for approximately
4% of total merchandise purchased in 1996. The Company
primarily imports merchandise in product categories which
are not brand sensitive to consumers such as kitchen items,
housewares, toys, seasonal, petcare and hardware.
Warehousing and Distribution
The Company maintains an 880,000 square foot, single-
story warehouse and distribution facility located on
approximately 23 acres in the City of Commerce, California.
The Company's headquarters are also located in this
facility. The site is located near downtown Los Angeles and
has close access to the Southern California freeway and rail
systems and the ports of Los Angeles and Long Beach. The
warehouse has 129 dock doors available for receiving or
shipping. The Company believes that its current warehouse
and distribution facility will be able to support
distribution to more than 99 stores in Southern California.
Most of the Company's merchandise is shipped by truck
directly from manufacturers and other suppliers to the
Company's warehouse and distribution facility. As part of
its distribution network, the Company owns a fleet of over 10
tractors and over 20 trailers which are primarily used to deliver
merchandise to its stores. Full truck deliveries are made
from its distribution center to each store typically four
times a week. Product is delivered to a store the day after
the store places a scheduled order. Most of the merchandise
is requested by the store (i.e., ordered by the store
manager) versus pushed by the distribution center (i.e.,
sent by order of the Company's distribution personnel).
Approximately 2% of product stocked by the stores is shipped
by the manufacturer directly to the store. The Company
attempts to optimally utilize its fleet by a combination of
filling outbound trucks to capacity and instituting a
backhaul program whereby products are picked up from
suppliers in conjunction with deliveries to stores in the
same general area. Backhauls accounted for approximately
half of all merchandise picked up by the Company's trucks.
The Company also uses its own vehicles to pick-up
certain shipments at local ports and rail yards. The size of
the Company's distribution center allows storage of bulk
one-time close-out purchases and seasonal or holiday items
without incurring additional costs. There can be no
assurance that the Company's existing warehouse will provide
adequate space for the Company's long-term storage needs.
Information Systems
The Company's business is currently supported by a
standard accounting and financial reporting system utilizing
a PC-based local area network (LAN) and a separate partially
customized inventory control system processed by a Hewlett-
Packard RISC-based computer. The Company's inventory
management system is designed to track all inventory
received at the Company's distribution center and shipped to
each 99 Cents Only Stores location or Bargain Wholesale
customer. The Company's systems allow management to monitor
inventory and assist store operations. In light of the
Company's continuously changing merchandise and other
factors, the Company has not determined to install a point
of sale system. The retail order processing system has been
designed to expedite the processing of retail store orders,
for both store and warehouse personnel. Buyers use inventory
and historical shipment information to assist in reordering
and inventory planning functions. The Company employs an
accounts payable and general ledger software package that
shares information with a separate inventory management,
order processing and accounts receivable system. The Company
is in the process of integrating these functions. The
Company has implemented various reporting tools to support
the timely generation of financial and managerial reports
from the Company's information systems. The Company's
accounting and management information system was originally
installed in 1990 and the Company's inventory control system
was installed in 1994. These systems have continuously been
upgraded and enhanced from time-to-time and continue to
evolve. This process is monitored by a steering committee
consisting of six department heads including three inside
members of the Board of Directors and one outside member of
the Board of Directors. The Company believes that its
accounting and management information system and inventory
control system adequately provide for its current needs. The
Company intends to continue to update and enhance its
systems in order to improve capabilities and provide
for planned growth. If the Company should experience faster
than anticipated growth, the Company may be required to
install a new management information or inventory control
system or undergo a significant modification of its current
systems to accommodate a larger business.
Competition
Each of the markets in which the Company operates is
highly competitive. The Company sells product lines which
are similar to other wholesalers, deep-discount stores,
single price point merchandisers, discount merchandisers,
food markets, drug stores, club stores and other retailers.
The industry also includes a number of small privately held
companies and individuals. In some instances, these
competitors are also customers of the Company's Bargain
Wholesale division. However, most single price point
retailers do not have 99 Cents Only Stores' focus on
consumable name-brand merchandise. Nevertheless, there is
increasing competition with other wholesalers and retailers,
including other deep-discount retailers, for the purchase of
quality close-out and other special situation merchandise.
Some of these competitors have substantially greater
financial resources and buying power than the Company. The
Company's ability to compete will depend on many factors
including the success of its purchase and resale of such
merchandise at lower prices than the competition. The
Company may face intense competition in the future
that could have an adverse effect on its business and
results of operations.
Employees
At December 31, 1996, the Company had 1,546 employees
(1,354 in its retail operation, 135 in its warehouse and
distribution facility, 48 in its corporate offices and 25
in its wholesale division). None of the Company's employees
is party to a collective bargaining agreement. The Company
considers relations with its employees to be satisfactory.
The Company offers certain benefits, including health
insurance and stock options to its full time employees.
Trademarks and Service Marks
"99 Cents Only Stores" and "99 Cents" are registered
service marks of the Company and are listed on the United
States Patent and Trademark Office Principal Register.
Bargain Wholesale is a service mark used by the Company.
Management believes that the Company's trademarks, service
marks and trade names are an important but not critical
element of the Company's merchandising strategy.
Environmental Matters
Under various Federal, state and local environmental
laws and regulations, a current or previous owner or
occupant of real property may become liable for the costs of
removal or remediation of hazardous substances at such real
property. Such laws and regulations often impose liability
without regard to fault. The Company currently leases 42 of
its 43 existing stores, as well as its warehouse and
distribution facility (where its executive offices are
located). In connection with such leases, the Company could
be held liable for the costs of remedial actions
with respect to hazardous substances. In addition, the
Company operates one recently installed underground diesel
storage tank and one above-ground propane tank at its
warehouse and distribution facility. Although the Company
has not been notified of, and is not otherwise aware of, any
specific current environmental liability, claim or non-
compliance, there can be no assurance that the Company will
not be required to incur redemption or other costs in the
future in connection with its leased properties or its
storage tanks or otherwise. In the ordinary course of its
business, the Company from time to time handles
or disposes of ordinary household products that are
classified as hazardous materials under various Federal,
state and local environmental laws and regulations. The
Company has adopted policies regarding the handling and
disposal of these products, and has implemented a training
program for employees on hazardous material handling and
disposal. There can be no assurance, however, that such
policies or training will be successful in assisting the
company in avoiding violations of environmental laws and
regulations relating to the handling and disposal of such
products in the future.
ITEM 2 PROPERTIES
As of March 27, 1997, the Company leases all but 2 of
its store locations, and has been able to add stores without
incurring indebtedness to acquire real estate. The Company
currently leases 13 of its 45 store locations and a parking
lot associated with one of these stores from certain of the
Existing Shareholders or their affiliates. In addition, the
Company has entered into a lease with certain existing
Shareholders or their affiliates for one additional location.
See "Part III" Item 13 "Certain Relationships and related
Transactions."
Management believes that the Company's stable operating
history, excellent credit history and ability to generate
substantial customer traffic give the Company significant
leverage when negotiating lease terms. Most of the Company
leases provide for fixed rents, subject to periodic adjustments.
The Company has purchased 2 locations, 1 opened in November, 1996
and 1 opened in February, 1997. The Company may also purchase other
locations in the future. Certain of the Company's store leases
contain provisions that grant the Company a right of first refusal
to acquire the subject site.
The following table sets forth, as of the date of this
filing, information relating to the expiration dates of
the Company's current 99 Cents Only Stores leases assuming
the exercise of all options to extend:
Expiring Expiring Expiring Expiring 2003
1997 1998-1999 2000-2002 and Beyond
------ ------ ------ ------
7 (1) 3 11 22
(1) Includes 6 stores leased on a month to month basis.
The table below summarizes certain information with respect to
the Company's existing 99 Cents Only Stores as of March 27, 1997:
Gross Saleable
Year Square Square
Location Open Footage Footage
- --------- ---------- ---------- ----------
Westchester Area 1982 10,000 7,500
Azusa 1983 4,200 3,600
Arcadia 1984 10,600 6,200
Garden Grove #1 1984 12,000 9,200
Hawthorne #1 1984 15,000 12,200
Montebello 1984 5,200 3,800
La Puente 1985 7,000 5,800
Panorama City 1985 10,600 9,900
Pico/Union District 1987 4,500 3,400
Van Nuys 1987 7,600 5,400
Hawthorne #2 1988 19,600 13,500
Maywood 1988 12,800 9,400
Fairfax/Wilshire #1 1989 7,400 5,700
North Hollywood 1989 8,600 6,200
Ontario 1989 10,600 8,100
Paramount 1990 13,100 9,400
Pico Rivera 1990 18,900 14,300
Temple City 1990 7,700 6,300
Whittier 1990 8,700 6,600
Norwalk 1991 17,000 11,100
Pasadena 1991 17,000 11,000
Canoga Park 1992 14,400 12,300
Huntington Park 1992 12,900 9,500
La Mirada 1992 18,400 13,800
Lawndale 1992 14,200 11,500
Santa Monica 1992 6,300 5,000
North Long Beach 1993 12,000 10,200
Arleta 1994 20,300 15,700
Fairfax/Wilshire #2 1994 18,600 15,500
Universal City 1994 12,000 8,600
Walnut Park 1994 7,900 5,900
Garden Grove #2 1995 22,400 19,600
Hawaiian Gardens 1995 15,000 12,400
Reseda 1995 15,000 11,500
San Pedro 1995 13,500 10,200
Harbor City 1996 20,600 17,400
Huntington Beach 1996 24,600 18,200
Anaheim 1996 26,000 22,600
Lincoln Heights 1996 10,900 8,500
El Monte 1996 14,800 12,700
Fullerton 1996 22,400 19,400
Inglewood 1996 17,700 14,200
Granada Hills 1996 15,000 11,900
Lakewood 1997 22,100 19,000
East LA 1997 16,400 13,600
------- -------
Total 621,500 487,800
====== ======
Average 13,800 10,800
====== ======
The Company's 45 existing 99 Cents Only Stores (43 at
December 31, 1996) are located in Southern California average
13,800 gross square feet. Since January 1, 1994, the Company has
opened 18 new stores (including 2 relocations in 1995 and 1 in
1996) that average over 17,300 gross square feet and currently
targets new store locations between 15,000 and 23,000 gross
square feet. The Company believes that its larger 99 Cents Only
Stores allows it to fully display its wide assortment of
merchandise in a more attractive format, carry deeper stock
positions and provide customers with a more inviting and
convenient environment that encourages longer shopping and larger
purchases. The Company's decision to target larger stores
reflects higher average annual store revenues typically achieved
by these stores.
The Company's stores are located in freestanding buildings
neighborhood shopping centers (anchored by 99 Cents Only Stores,
a supermarket and/or a drug store) or downtown central
business districts. None of the Companys stores are
located in an indoor shopping mall, outlet mall or small
strip center. The stores are all located within a fifty-mile
radius of downtown Los Angeles, primarily in densely
populated, demographically diverse neighborhoods. Of the
Companys stores, 39 are located in Los Angeles County, 5
are located in Orange County and 1 is located in San
Bernardino County.
The Company leases 43 of its 45 retail locations. The
Company typically seeks leases with an initial five to ten
year term with one or more five-year options. See Business-
Properties. The Company identifies potential sites through
a network of contacts within the brokerage and real estate
communities and through independent investigation by Company
personnel.
The Company currently leases 13 of its 45 store
locations and a parking lot associated with one of these
stores from certain of the Existing Shareholders or their
affiliates. In addition, the Company has entered into a lease
with certain Existing Shareholders or their affiliates for
one additional location. See "Part III" Item 13 "Certain
Relationships and Related Transactions."
Since 1982, the Company has acquired groups of store
sites and inventory from three different chains. The Company
either immediately converted the acquired sites to the
99 Cents Only Stores format, operated the acquired sites
under their original tradename until they were either converted,
closed or sold, or immediately closed the site. The last of such
stores was closed in May, 1995. The Company may acquire additional
sites in the future from existing chains if suitable opportunities
are presented to the Company.
In the past, as part of its strategy to expand retail
operations, the Company opened certain new stores in close
proximity to existing stores where the Company determined
that the trade area could support a larger facility. In some
of these situations, the Company retained its existing store
so long as it continued to contribute store-level operating
income. While this strategy was designed to increase
revenues and store-level operating income, it has had a
negative affect on comparable store net sales as some
customers migrate from the existing store to the close-by
larger new store. Except for 3 relocations to larger, nearby
sites and 1 store closure as a result of a fire, the Company
has never closed one of its 99 Cents Only Stores.
The following table sets forth relevant information with respect to
the growth of the Company's existing 99 Cents Only Stores operations:
Years Ending December 31, (000's)
--------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
99 Cents Only Stores net sales $95,873 $101,828 $110,724 $121,998 $143,163
Annual Growth Rate 6.6% 6.2% 8.7% 10.2% 17.3%
Store Count Beginning of Year 24 30 31 34 36
New Stores 6 (1) 1 4 4 8
Stores Closed 0 0 1 (2) 2 (3) 1 (3)
Store count at year end 30 31 34 36 43
Average net sales per store (4) $3,550 $3,349 $3,267 $3,467 $3,667
Total estimated saleable square
footage period end 259,000 269,000 293,000 326,000 487,800
Average sales per estimated
saleable square foot $417 $388 $396 $397 $389
Change in comparable store
net sales (5) -8.6% -3.5% -1.4% -0.2% 2.8%
(1) One of the new stores was a June 1992 conversion of
an operating retail store run by the Company under a trade
name different from the 99 Cents Only Store concept.
(2) Store closed September 1994 due to fire.
(3) Store closed due to relocation to larger nearby sites.
(4) For stores open for the entire fiscal year.
(5) Change in comparable stores net sales compares net sales
for stores open for the entire two years compared.
The Company leases its 880,000 square foot, single-
story warehouse and distribution facility. The company's
executive offices are also located in this facility. In
December 1993, the Company entered into a seven year triple-
net lease agreement with a purchase option, that is
accounted for on the Company's financial statements as a
capitalized lease obligation. The lease included the
Company's initial payment of $2.75 million and eighty four
monthly payments of $70,000. As part of the lease agreement,
the Company received $500,000 in 1993 and $1.0
million in 1994 to apply to renovation costs. The facility's
fire prevention and lighting systems were completely
upgraded. A state-of-the-art sprinkler system, hundreds of
new smoke-vents (skylights) and energy efficient lighting
with motion detectors were installed. Also, over 25 dock
levers and new racking with over 10,000 pallet positions
were installed. The Company has the option to purchase the
property for $10.5 million at the end of the lease and the
Company currently intends to exercise the option. If the
Company does not exercise the purchase option, then the
Company will be subject to a $7.6 million penalty.
ITEM 3 LEGAL PROCEEDINGS
The Company is engaged in litigation in the ordinary
course of its business, none of which the Company believes
is material.
In 1989 the Company purchased $220,000 of inventory for
resale. A third party claimed to have a valid lien on such
inventory sold to the Company. After a series of judgments,
reveals and other legal actions, the litigation was settled
for $200,000 in early 1995. From 1991 through 1993 the
Company provided a reserve of $3.1 million for estimated
litigation and interest costs. As a result of the
settlement, $200,000 was charged to the reserve and the
remaining $2.9 million was included in income in 1994.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of the Company's 1996 calendar year.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the New York Stock
Exchange under the symbol NDN. Trading of the Company's stock
commenced on May 23, 1996. The following table sets forth, for
the periods indicated, the high and low sales prices of the
shares of the Common Stock as reported by the New York Stock
Exchange.
Calendar 1996: High Low
First Quarter - -
Second Quarter 15 7/8 13 3/4
Third Quarter 15 1/4 13 1/4
Fourth Quarter 17 3/8 13 1/2
On March 27, 1997, the last reported sale price for the
Company's Common Stock as quoted by the New York Stock Exchange
was $19 5/8 per share. As of March 27, 1997, the Company had
3,100 beneficial shareholders.
The Company anticipates that all of its income in the foreseeable
future will be retained for the development and expansion of its
business and therefore does not anticipate paying dividends on its
Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated
selected financial data for the Company. The selected income statement
and balance sheet items which follow have been derived from the Company's
financial statements and notes thereto included elsewhere herein audited
by Arthur Andersen LLP, independent public accountants, as set forth in
their report also included elsewhere herein. This information should be
read in conjunction with the Financial Statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the other financial information included elsewhere
in this form 10-K.
Years Ended December 31
--------------------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
(In thousands, except per share and sales
per square foot data and number of stores)
Statement of Income Data:
Net Sales:
99 Cents Only Stores $95,873 $101,828 $110,724 $121,998 $143,163
Other Retail Sales (1) 3,125 3,093 2,097 492 -
Bargain Wholesale 21,938 18,028 18,916 30,337 40,480
------- ------- ------- ------- -------
Total 120,936 122,949 131,737 152,827 183,643
Cost of Sales 79,748 81,480 88,045 102,160 120,922
------- ------- ------- ------- -------
Gross profit 41,188 41,469 43,692 50,667 62,721
Selling, general and
administrative expenses 29,060 32,081 32,661 33,809 39,692
------- ------- ------- ------- -------
Operating Income 12,128 9,388 11,031 16,858 23,029
Special litigation
provision reversal (2) - - (2,900) - -
Interest (income)
expense (net) (50) 45 764 755 (126)
------- ------- ------- ------- -------
Income before pro forma
provision for income
taxes (3) 12,178 9,343 13,167 16,103 23,155
Pro forma provision for
income taxes (3) 4,739 3,477 5,163 6,509 9,453
------- ------- ------- ------- -------
Pro forma net income (3) $7,439 $5,866 $8,004 $9,594 $13,702
======= ======= ======= ======= =======
Pro forma earnings per
common share (3)(4) $0.97
=======
Pro forma weighted average
number of common shares
outstanding (3)(4) 14,079
=======
Company Operating Data:
Sales Growth
99 Cents Only Stores 6.6% 6.2% 8.7% 10.2% 17.3%
Bargain Wholesale 12.2% -17.8% 4.9% 60.4% 33.4%
Total Company Sales 7.4% 1.7% 7.1% 16.0% 20.2%
Gross Margin 34.1% 33.7% 33.2% 33.2% 34.2%
Operating Margin 10.0% 7.6% 8.4% 11.0% 12.6%
Pro forma net income 6.2% 4.8% 6.1% 6.3% 7.5%
Retail Operating Data:(5)
Number of stores end
of period 30 31 34 36 43
Change in comparable
stores net sales (6) -8.6% -3.5% -1.4% -0.2% 2.8%
Average net sales per
store open the full
year $3,550 $3,349 $3,267 $3,467 $3,667
Average net sales per
estimated salable
square foot (7) $417 $388 $396 $397 $389
At December 31
--------------------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
Balance Sheet Data:
Working Capital $24,173 $19,242 $24,713 $28,690 $58,822
Total assets 33,343 46,960 51,419 57,598 98,997
Long-term debt - - - - -
Capital lease obligation,
including current
portion - 11,080 10,548 9,977 9,365
Total shareholders'
equity $24,494 $23,307 $30,811 $35,558 $76,505
(1) The Company operated other stores during the periods presented
under different trade names pending conversion to 99 Cents Only
Stores format or their eventual closing. Only one such store
was closed in May 1995.
(2) See Note 9 to "Notes to Financial Statements"
(3) Prior to May 1, 1996 the Company was treated as an S
corporation for federal and state income tax purposes. The pro
forma presentation reflects a provision for income taxes as if
the Company had always been a C corporation, at an assumed
effective tax rate of 40.1% in 1992 and 41.0% in 1993, 1994,
1995 and 1996, plus the effect of deferred taxes and tax credits.
(4) Pro forma earnings per common share have been computed by
dividing pro forma net income by the pro forma weighted average
number of common shares and common stock equivalents outstanding.
Pro forma weighted average common equivalent shares include
2,753,000 shares to fund certain notes issued and dividends
payable declared to then Existing Shareholders, in connection
with the termination of the Company's status as an S corporation.
Common stock equivalents include all outstanding stock options
and warrants after applying the treasury stock method. All
currently outstanding options have been considered outstanding
for all fiscal years presented and included in the calculation
of the weighted average number of common shares and common stock
equivalents outstanding for pro forma earnings per common share
computations in accordance with the rules of the Commission.
(5) Includes retail operating data solely for the Company's 99 Cents Only
Stores.
(6) Change in comparable stores net sales compares net sales for
stores open the entire two periods compared.
(7) Computed based upon estimated total saleable square footage of
open for the entire period.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with
the Company's Financial Statements and notes thereto and the
other financial data included elsewhere in this Form 10-K.
See also "Selected Financial Data."
General:
The Company has been engaged since 1976 in the
purchase and sale of name-brand, close-out and regularly
available general merchandise. Since that time, the Company
had distributed its merchandise on a wholesale basis through
its Bargain Wholesale division. On August 13, 1982, the
Company opened its first 99 Cents Only Stores location and
as of March 27, 1997 operates a chain of 45 deep-discount
99 Cents Only Stores. The Company's growth during the
last three years has primarily come from new store openings
and growth in its Bargain Wholesale division. The Company
opened 4, 4, and 8 stores in 1994, 1995, and 1996,
respectively (3, 2 and 7 respectively, net of relocated and closed
stores, and 1 store closed as the result of a fire in 1994). The
Company opened 2 stores in the first three months of 1997, 1
in Lakewood, California and 1 in East Los Angeles, California
and expects to open new stores at an annual growth of 20%.
Of the additional stores planned for 1997, the Company has
secured 5 locations.
Other retail operations include operations of acquired
stores pending their closure or conversion to the 99 Cents Only
Stores retail format. Since 1982, the Company has acquired
groups of store sites and inventory from three different
chains. The Company either immediately converted the
acquired sites to the 99 Cents Only Stores format, operated the
acquired sites under the original tradename until they were
either converted, close or sold, or immediately closed the
site. The last of such stores was closed in May 1995. The
Company may acquire sites in the future from existing chains
if suitable opportunities arise.
Bargain Wholesale's growth over the three years ending
December 31, 1996 was primarily attributable to an increased
focus on large domestic and international accounts and
expansion into new geographic markets. The Company generally
realizes a lower gross profit margin on Bargain Wholesale
net sales than on 99 Cents Only Stores net sales. However,
Bargain Wholesale complements the Company's retail
operations by allowing the Company to purchase in larger
volumes at more favorable pricing and to generate additional
net sales with relatively small incremental operating expenses.
Comparable stores net sales (computed on 99 Cents Only Stores
open during the entire two years compared) improved in each of the
five calendar years from January 1, 1992 through December 31,
1996. The Company believes that this trend had resulted in
part from its expansion strategies. In the past, as part of
its strategy to expand retail operations, the Company opened
certain larger new stores in close proximity to existing
stores where the Company determined that the trade area
could support a larger facility. In some of these
situations, the Company retained its existing store so long
as it continued to contribute store-level operating income.
While this strategy was designed to increase revenues and
store-level operating income, it has had a negative impact
on comparable store net sales as some customers migrate from
the existing store to the close-by new store. The Company
believes that this strategy has impacted its historical
comparable sales growth.
During each of the calendar years in the period from
January 1, 1992 to December 31, 1996, average net sales per
estimated saleable square foot (computed on 99 Cents Only Stores
open for a full year) have declined from $417 per square
foot in 1992 to $389 per square foot in 1996. This trend
reflects the Company's determination to target larger locations
for new store development. Existing stores average 13,800
square feet. Since January 1, 1994, the Company had opened
18 new stores (including 2 relocations in 1995 and 1 in 1996)
that average 17,300 gross square feet. The Company currently
targets new store locations ranging in size from 15,000 to 23,000
gross feet. Although it is the Company's experience that
larger stores generally have lower average net sales per
square foot than its smaller stores, they generally achieve
higher average annual store revenues and operating income.
The Company has experienced a 14.3% compound annual
growth rate in net sales over the last three years.
Effect of Change in Form from an S Corporation to a C Corporation:
Effective May 1, 1996 the Company changed in form from an
S corporation to a C corporation, a change that will affect
its operations and financial condition by an increase in the level
of federal and state income taxes.
As an S corporation, the Company's income, whether or
not distributed, was taxed at the shareholder level for
federal income tax purposes. For California franchise tax
purposes, S corporations were taxed at 2.5% of taxable
income through 1993 and 1.5 % of taxable income in 1994,
1995 and 1996. Currently, the top federal tax rate
for C corporations is 35% and the corporate tax rate
in California is 9.3%. The pro forma provision for income taxes
in the accompanying statements of income shows results as if
the Company had always been a C corporation and had
adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" prior to January 1, 1991.
The change in form has affected the earnings and cash flow
of the Company.
Results of Operations
The following table sets forth, for the periods
indicated, certain selected income statement data as a
percentage of net sales:
Years Ended December 31,
==============================
1994 1995 1996
===== ===== =====
Net Sales
99 Cents Only Stores 84.0% 79.8% 78.0%
Other retail 1.6% 0.3% -
Bargain Wholesale 14.4% 19.9% 22.0%
------ ------ ------
Total 100.0% 100.0% 100.0%
Cost of sales 66.8% 66.8% 65.8%
------ ------ ------
Gross profit 33.2% 33.2% 34.2%
Selling, general and administrative
expenses 24.8% 22.2% 21.6%
------ ------ ------
Operating income 8.4% 11.0% 12.6%
Special litigation reversal -2.2% - -
Interest (income) expense, net 0.6% 0.5% -
------ ------ ------
Income before pro forma provision for
income taxes 10.0% 10.5% 12.6%
Pro forma provision for income taxes 3.9% 4.2% 5.1%
------ ------ ------
Pro forma net income 6.1% 6.3% 7.5%
====== ====== ======
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995.
Net Sales: Total net sales increased $30.8 million, or 20.2%
from $152.8 million in the 1995 period to $183.6 million in
the 1996 period. 99 Cents Only Stores net sales increased
approximately $21.2 million, or 17.3%, from $122.0 million in
the 1995 period to $143.2 million in the 1996 period, and
Bargain Wholesale net sales increased approximately $10.1
million, or 33.4%, from $30.3 million in 1995 period to $40.5
million in the 1996 period. There were no other retail
operations in 1996. The increase in 99 Cents Only Stores net
sales was primarily attributed to the positive effect of a
net increase of 7 stores opened in 1996 and 4 stores opened
in 1995 that were not open for the full year in 1995, and
a 2.8% or $2.6 million increase in comparable store net
sales from the 1995 period to the 1996 period. The increase
in Bargain Wholesale net sales was primarily attributed to
increased marketing activity during the 1996 period.
Gross profit: Gross profit increased approximately $12.1
million, or 23.8% from $50.7 million in the 1995 period to
$62.7 million in the 1996 period. The increase in gross
profit was primarily due to higher net sales. As a percentage
of net sales, gross profit improved from 33.2% in the 1995
period to 34.2% in the 1996 period reflecting favorable
merchandise cost and mix factors.
Selling, general and administrative: Selling, general and
administrative expenses ("SG&A") increased by $5.9 million,
or 17.4% from $33.8 million in the 1995 period to $39.7
million in the 1996 period, primarily due to increased costs
associated with new store growth and increased executive
compensation expense of approximately $0.8 million. SG&A decreased
as a percentage of net sales from 22.2% in the 1995 period to
21.6% in the 1996 period. The decrease as a percentage of net
sales in 1996 resulted primarily from spreading SG&A over a larger
revenue base.
Operating income: As a result of the items discussed above,
operating income increased $6.2 million, or 36.6%, from $16.9
million in the 1995 period to $23.0 million in 1996. Operating
income increased as a percentage of net sales from 11.0% in
1995 to 12.6% in 1996.
Interest expense: Interest expense relates to interest
accrued on the Company's capitalized warehouse lease, net of
interest income on the Company's marketable securities. The
change in interest expense between 1995 and 1996 was not
material. During the 1995 and the 1996 periods, the Company
had no bank debt. Interest income earned on marketable
securities was $0.9 million in 1996.
Pro forma provision for income taxes (unaudited): The
Pro forma provision for income taxes in 1996 was $9.5
million, or 5.1% of net sales, compared to $6.5 million, or
4.2% of net sales in 1995. The effective rate of the pro
forma provisions for income taxes were 40.4% and 40.8% in
the 1995 period and the 1996 period, respectively. The
effective rates are less than the statutory rates in each
period due to the benefit of certain tax credits. See Note 5
of "Notes to Financial Statements."
Pro forma net income (unaudited): As a result of the
items discussed above, pro forma net income increased
$4.1 million, or 42.8%, from $9.6 million in the 1995
period to $13.7 million in the 1996 period. Pro forma
net income increased as a percentage of net sales from
6.3% in 1995 to 7.5% in 1996.
Year Ended December 31, 1995 Compared to Year Ended December
31, 1994
Net sales: Total net sales increased $21.1 million, or 16.0%
from $131.7 million in 1994 to $152.8 million in 1995. 99 Cents
Only Stores net sales increased approximately $11.3 million,
or 10.2% from $110.7 million in 1994 to $122.0 million in
1995, and Bargain Wholesale net sales increased
approximately $11.4 million, or 60.4%, from $18.9 million in
1994 to $30.3 million in 1995. Changes in other retail
operations from 1994 to 1995 reflected the closing of the
last store in May 1995. The increase in 99 Cents Only Stores net
sales was primarily attributed to the positive effect
of a net increase of 5 stores opened in 1994 and 1995, which
were not open for the full year in 1994, offset by a 0.2% or
$0.2 million decrease in comparable store net sales from 1994
to 1995. Change in comparable stores net sales compares net
sales for stores open during the entire two years compared.
The Company opened 4 new stores and closed 1 store due to a
fire in 1994, and opened 4 new stores (which included 2
stores which were relocated) in 1995. The increase in Bargain
Wholesale net sales was primarily attributed to an increased
focus on large domestic and international accounts and
expansion into new geographic markets.
Gross profit: Gross profit increased $7.0 million, or 16.0%,
from $43.7 million in 1994 to $50.7 million in 1995. The
increase in gross profit was due to higher net sales. As a
percentage of net sales, gross profit remained constant at
33.2% between years.
Selling, general and administrative: SG&A increased by $1.1
million, or 3.5%, from $32.7 million in 1994 to $33.8
million in 1995, primarily due to increased costs associated
with new store growth. SG&A decreased as a percentage
of net sales from 24.8% in 1994 to 22.2% in 1995. The decrease
as a percentage of net sales in 1995 resulted primarily from
spreading SG&A over a larger revenue base.
Operating income: As a result of the items discussed
above, operating income increased $5.9 million, or 52.8%,
from $11.0 million in 1994 to $16.9 million in 1995.
Operating income increased as a percentage of net sales from
8.4% in 1994 to 11.0% in 1995.
Special litigation reversal: The benefit from
litigation expense in 1994 of $2.9 million, or 2.2% as a
percentage of net sales, reflects the reversal of previously
provided reserves not used due to the settlements of
litigation for $200,000. See "Business-Legal Proceedings"
and Note 9 to "Notes to Financial Statements."
Pro forma provision for income taxes (unaudited): The pro forma
provision for income taxes in 1995 was $6.5 million, or 4.2%
of net sales, compared to $5.2 million, or 3.9% of net sales
in 1994. The effective rate of the pro forma for income
taxes was 40.4% and 39.2% 'in 1995 and 1994, respectively.
The effective rates are less than the statutory rates in
each period due to the benefit of certain tax credits. See
Note 5 of "Notes to Financial Statements."
Pro forma net income (unaudited): As a result of the items
discussed above, pro forma net income increased $1.6
million, or 19.9%, from $8.0 million in 1994 to $9.6 million
in 1995. Pro forma net income increased as a percentage of
net sales from 6.1% in 1994 to 6.3% in 1995.
Liquidity and Capital Resources
Since inception, the Company had funded its operations
principally from cash provided by operations, and has not
generally relied upon external sources of financing. The
Company's capital requirements result primarily from
purchases of inventory, expenditures related to new store
openings and the working capital requirements for new and
existing stores. The Company takes advantage of close-out
and other special-situation opportunities which frequently
results in large volume purchases, and as a consequence, its
cash requirements are not constant or predictable during the
year and can be affected by the timing and size of its
purchases.
During 1994, 1995 and 1996, net cash provided by (used
in) operations was $7.6 million, $17.3 million and $(12.0)
million, respectively. The $12.0 million used in operations
in 1996 reflects the impact of $27.6 million of available
cash, invested in trading securities. Trading securities are
securities that consist of high grade debt securities,
purchased and held principally for the purpose of selling
them in the near term. Interest, including amortization of
acquisition premium and discount is included in current
period earnings. Excluding the $27.6 million purchase of the
short term investments in 1996, net cash provided from
operations would have been $15.6 million. Net cash provided
by operations also reflects increases in inventories in the
amount of $5.3 million, $1.8 million and $2.6 million during
1994, 1995 and 1996, respectively. During 1994, 1995 and
1996, net cash used in investing activities for purchases of
property and equipment was $1.9 million, $2.7 million and
$7.3 million, in 1994, 1995 and 1996, respectively. Net cash
used in financing activities in 1994 and 1995 was $6.1
million and $11.8 million respectively. These funds
represented payments of capital lease obligations and
distributions to shareholders to cover, in part, federal and
state income taxes payable by the Existing Shareholders with
respect to the net income of the Company. In 1996 proceeds
from financing activities was $19.6 million and included
$65.2 million from the Company's initial public offering. In
addition the Company paid $35.5 million of notes payable to
shareholders and issued dividends to shareholders for $4.4
million. Another $5.6 million represented payments of
capital lease obligations and distributions to shareholders
to cover, in part, federal and state income taxes payable by
the Existing Shareholders with respect to the net income of
the Company prior to the change of the Corporate tax status
from an S corporation from a C corporation.
The Company plans to aggressively open new stores at an
annual rate of at least 20%. The average investment per new
store opened in 1996, including improvements, fixtures,
equipment and inventory but excluding pre-opening expenses, which
are expensed as incurred, was approximately $550,000 per store.
The Company's cash needs for new stores opening are expected to
total approximately $5.0 million and $6.2 million in each of 1997
and 1998, respectively. The Company's total planned expenditures
in each of 1997 and 1998 for additions to fixtures and leasehold
improvements of existing stores are approximately $600,000.
The Company has a $7.0 million bank credit facility
bearing interest at the bank's prime rate. Under the terms
of its credit facility, the Company must comply with one
financial covenant, the ratio of total liabilities to tangible
net worth (as defined by the agreement). Noncompliance with respect
to this covenant would constitute an event of default that gives
the bank the right to call the credit facility and to pursue certain
remedies. At December 31, 1996, the Company was in compliance
with this covenant. The credit agreement expires in
June 1997, at which time the Company expects that it will
be renewed.
As of December 31, 1996, there were no borrowings
outstanding under the line of credit and outstanding letters
of credit were approximately $1.9 million ($1.6 million of which
related to a standby letter of credit required by the State
of California to be self-insured for worker's compensation).
The Company leases its 880,000 square foot single-story
warehouse and distribution facility under a lease accounted
for as a capital lease. The lease requires monthly payments
of $70,000 and accrues interest at an annual rate of 7%. At
the lease expiration in December 2000, the Company has the
option to purchase the facility for $10.5 million. The Company
currently intends to exercise the option at the end of the lease.
If the company does not exercise the purchase option, the Company
will be subject to a $7.6 million penalty.
The Company believes that it can adequately fund its
planned capital expenditures and working capital requirements
for the next 12 months from net cash provided by operations,
availability under its credit facilities, and marketable
securities.
Seasonality and Quarterly Fluctuations
The Company has historically experienced and expects to
continue to experience some seasonal fluctuation in its net
sales, operating income and net income. The highest sales
periods for the Company are the Christmas and Halloween
seasons. A greater amount of the Company's net sales and
operating and net income is generally realized during the
fourth quarter. The Company's quarterly results of operations
may also fluctuate significantly as a result of a variety of
other factors, including the timing of certain holidays
(e.g., Easter) and the timing of new store openings
and the merchandise mix.
The following table sets forth certain unaudited results
of operations for each quarter during 1995 and 1996. The
unaudited information has been prepared on the same basis as
the audited financial statements appearing elsewhere in this
Form 10-K and includes all adjustments, which management
considers necessary for a fair presentation of the financial
data shown. The operating results for any quarter are not
necessarily indicative of the results to be attained for any
future period.
Year Ended December 31, 1995 Year Ended December 31, 1996
========== =========
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter Quarter Total
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net Sales
99 Cents Only Stores $27,092 $29,807 $30,096 $35,003 $121,998 $32,256 $34,136 $35,211 $41,560 $143,163
Other Retail 327 165 - - 492 - - - - -
Bargain Wholesale 6,138 6,370 8,017 9,812 30,337 10,020 9,037 10,173 11,250 40,480
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total 33,557 36,342 38,113 44,815 152,827 42,276 43,173 45,384 52,810 183,643
Cost of Sales 22,430 24,291 25,475 29,964 102,160 28,810 28,239 29,266 34,607 120,922
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross Profit 11,127 12,051 12,638 14,851 50,667 13,466 14,934 16,118 18,203 62,721
Selling, general and
administrative expenses 7,753 8,302 8,459 9,295 33,809 9,066 9,607 10,334 10,685 39,692
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Income 3,374 3,749 4,179 5,556 16,858 4,400 5,327 5,784 7,518 23,029
Interest (Income) Expense 189 189 189 188 755 189 63 (242) (136) (126)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before pro forma
provision for income taxes 3,185 3,560 3,990 5,368 16,103 4,211 5,264 6,026 7,654 23,155
Pro forma provision for
income taxes 1,238 1,408 1,665 2,198 6,509 1,719 2,162 2,474 3,098 9,453
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income $1,947 $2,152 $2,325 $3,170 $9,594 $2,492 $3,102 $3,552 $4,556 $13,702
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Inflation
The Company's ability to provide quality merchandise at
the 99 cents price point is subject to certain economic factors
which are beyond the Company's control, including inflation.
Inflation could have a material adverse effect on the
Company's business and results of operations, especially
given the constraints on the Company's ability to pass on
any incremental costs due to price increases or other
factors. The Company believes that it will be able to
respond to ordinary price increases resulting from
inflationary pressures by adjusting the number of items sold
at the single price point (e.g., two items for 99 cents instead
of three items for 99 cents) and by changing its selection
of merchandise. Nevertheless, a sustained trend of
significantly increased inflationary pressure could require
the Company to abandon its single price point of 99 cents per
item, which could have a material adverse effect on the
Company's business and results of operations. See also "Risk
Factors- adverse Economic Trends; Change in minimum wage"
for a discussion of additional risks attendant to
inflationary conditions.
New Authoritative Pronouncements
In March 1995, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment for Long-
Lived Assets to be Disposed Of." The statement requires
impairment losses to be recorded on long-lived assets used
in operations when indications of impairment are present and
the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. The
Company adopted this statement in the fourth quarter of
1995. No adjustment was required to reflect the adoption of
this statement.
The FASB has issued SFAS No. 123, "Accounting for
Stock Based Compensation." The Company has adopted
this standard effective in 1996. The Company adopted
the disclosure requirements under this standard,
and as such, the adoption did not have a material impact on
the Company's financial position or results of operations.
See Note 10 of "Notes to Financial Statements".
In March 1997, the FASB issued SFAS No. 128, "Earnings per
Share" (SFAS 128) and SFAS No. 129, "Disclosure of Information
about Capital Structure" (SFAS 129). SFAS 128 revises and
simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS 129 requires additional
disclosures regarding the Company's capital structure. Both
standards will be adopted in fiscal 1997. Management does
not expect the adoption of these standards to have a material
effect on the Company's financial position or the results
of operations.
Forward looking Statements
The Company had made in this report, and from time to
time may otherwise make, forward-looking statements
concerning the Company's operations, economic performance
and financial condition. This report may include, in
particular, forward-looking statements. The information
contained herein includes certain forward-looking statements
regarding store openings, purchasing abilities, and capital
requirements. Such forward looking statements are subject to
various risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number
of factors. Some of those factors include (i) the Company's
ability to open new stores on a timely basis and operate
them profitably, (ii) the risks attendant to the importing
of merchandise, particularly from China, including the
potentially higher costs and lower quality of merchandise
should the Company be forced to buy large quantities of
domestic goods, (iii) the orderly operation of the Company's
receiving and distribution process, operations, (iv)
inflation, consumer confidence and other general economic
factors, (v) the availability of adequate inventory, capital
resources and external financing, (vi) the risk of a
disruption in sales volume in the fourth quarter and other
seasonal factors as discussed in "Management's Discussion
and Analysis and Results of operations--Seasonality and
Quarterly Fluctuations." and (viii) dependence on key
personnel and control for the Company by existing
shareholders. In addition, the market price of the Company's
Common Stock, which is quoted on the New York Stock
Exchange, may be subject to significant fluctuations in
response to operating results, comparable store sales
announcements, announcements by competitors, or in response
to market fluctuations unrelated or disproportionate to the
operating performance of the Company.
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements Page
------
Report of Independent Public Accountants
Balance Sheets as of December 31, 1995 and 1996
Statements of Income for the years ended
December 31, 1994, 1995 and 1996
Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996
Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996
Notes to Financial Statements
Report of Independent Public Accountants
To 99 Cents Only Stores:
We have audited the accompanying balance sheets of 99 Cents Only
Stores (a California Corporation) as of December 31, 1995 and 1996, and
the related statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 99 Cents Only
Stores as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 11, 1997
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1995 and 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1996
------- -------
ASSETS
CURRENT ASSETS:
Cash $3,057 $3,375
Short-term investments - 27,619
Accounts receivable, net of
allowance for doubtful accounts
of $34,000 and $211,000 as of
December 31, 1995 and 1996,
respectively 1,360 1,561
Inventories 34,313 36,933
Other 324 323
------- -------
Total current assets 39,054 69,811
------- -------
PROPERTY AND EQUIPMENT, at cost:
Land 5,107 7,159
Building and improvements 8,553 10,195
Leasehold improvements 5,025 6,546
Fixtures and equipment 3,992 5,840
Transportation equipment 421 438
Construction in progress - 134
------- -------
23,098 30,312
Less - Accumulated
depreciation and amortization (5,311) (7,239)
------- -------
17,787 23,073
OTHER ASSETS: ------- -------
Deferred income taxes 378 5,702
Deposits 231 246
Receivable from affiliated entity 107 165
Other 41 -
------- -------
757 6,113
------- -------
$57,598 $98,997
======= =======
The accompanying notes are an integral part of these balance sheets.
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1995 and 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1996
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital
lease obligation $612 $656
Accounts payable 5,750 6,577
Accrued expenses:
Payroll and payroll-related 818 1,086
Sales tax 900 1,056
Liability for claims 959 706
Other 20 34
Workers' compensation 1,209 771
Income taxes payable 96 103
------- -------
Total current liabilities 10,364 10,989
------- -------
LONG-TERM LIABILITIES:
Deferred rent 1,346 1,294
Accrued interest 965 1,500
Capital lease obligation,
net of current portion 9,365 8,709
------- -------
11,676 11,503
------- -------
COMMITMENTS AND CONTINGENCIES: - -
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized - 1,000,000 shares
Issued and outstanding - none - -
Common stock, no par value:
Authorized - 40,000,000 shares
Issued and outstanding -
9,929,135 shares at December 31,
1995 and 14,816,635 shares at
December 31, 1996 195 65,354
Retained earnings 35,363 11,151
------- -------
35,558 76,505
------- -------
$57,598 $98,997
======= =======
The accompanying notes are an integral part of these balance sheets.
99 CENTS ONLY STORES
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
1994 1995 1996
------- ------- -------
NET SALES:
99 Cents Only Stores $110,724 $121,998 $143,163
Other Retail 2,097 492 -
Bargain Wholesale 18,916 30,337 40,480
------- ------- -------
131,737 152,827 183,643
COST OF SALES 88,045 102,160 120,922
------- ------- -------
Gross Profit 43,692 50,667 62,721
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 32,661 33,809 39,692
------- ------- -------
Operating Income 11,031 16,858 23,029
------- ------- -------
OTHER (INCOME) EXPENSE:
Reversal of special litigation reserve (2,900) - -
Interest income (9) (14) (890)
Interest expense 773 769 764
------- ------- -------
(2,136) 755 (126)
------- ------- -------
Income before pro forma provision
for income taxes 13,167 16,103 23,155
PRO FORMA PROVISION FOR
INCOME TAXES (unaudited) 5,163 6,509 9,453
------- ------- -------
PRO FORMA NET INCOME (unaudited) $8,004 $9,594 $13,702
======= ======= =======
PRO FORMA EARNINGS PER COMMON SHARE (unaudited) $0.97
=======
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (unaudited) 14,079
=======
The accompanying notes are an integral part of these statements.
99 CENTS ONLY STORES
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
(AMOUNTS IN THOUSANDS)
Common Stock
----------------- Retained
Shares Amount Earnings
------- ------- -------
BALANCE, December 31, 1993 9,929 $195 $23,111
Net Income - - 13,105
Cash distributions to shareholders - - (5,600)
------- ------- -------
BALANCE, December 31, 1994 9,929 195 30,616
Net Income - - 15,947
Cash distributions to shareholders - - (11,200)
------- ------- -------
BALANCE, December 31, 1995 9,929 195 35,363
Net Income - - 20,737
Cash distributions to shareholders - - (5,000)
Distributions to shareholders in the
form of notes payable - - (35,549)
Distributions to shareholders in the
form of dividends payable (4,400)
Net proceeds from initial public offering 4,888 65,159 -
------- ------- -------
BALANCE, December 31, 1996 14,817 $65,354 $11,151
======= ======= =======
The accompanying notes are an integral part of these statements.
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
(AMOUNTS IN THOUSANDS)
1994 1995 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $13,105 $15,947 $20,737
Adjustment to reconcile net income to net
cash provided by (used in) operating activities:
Provision for doubtful accounts (69) - 177
Depreciation and amortization 1,342 1,640 2,009
Loss on disposition of property and
equipment 66 32 13
Benefit for deferred income taxes (155) (145) (5,324)
Reversal of special litigation reserve (2,900) - -
Provision for inventory reserve 1,650 - -
Changes in asset and liabilities
associated with operating activities:
Accounts receivable (387) (466) (378)
Purchases of short-term investments - - (27,619)
Inventories (5,347) (1,795) (2,620)
Other assets (202) 77 42
Deposits 145 90 (15)
Receivable from affiliated entity - (107) (58)
Accounts payable (642) 1,018 827
Accrued expenses 420 (291) 185
Worker's compensation 462 147 (438)
Income taxes payable - 96 7
Deferred rent (119) 534 (52)
Accrued interest 466 499 535
Special litigation reserve (200) - -
------- ------- -------
Net cash provided by (used in)
operating activities 7,635 17,276 (11,972)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment (1,919) (2,660) (7,308)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (532) (571) (612)
Net proceeds from initial public offering - - 65,159
Payment of notes payable to shareholders - - (35,549)
Payment of dividend payable - - (4,400)
Distributions to shareholders (5,600) (11,200) (5,000)
------- ------- -------
Net cash provided (used in) financing
activities (6,132) (11,771) 19,598
------- ------- -------
NET INCREASE (DECREASE) IN CASH (416) 2,845 318
CASH, beginning of period 628 212 3,057
------- ------- -------
CASH, end of period $212 $3,057 $3,375
======= ======= =======
The accompanying notes are an integral part of these statements.
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Line of Business
The Company, 99 Cents Only Stores is primarily a retailer of
various consumable products through 36 and 43 stores at December 31,
1995 and 1996, respectively, in Southern California. The Company is
also a wholesale distributor of various consumable products.
2. Concentration of Operations in Southern California
All of the Company's retail stores are located in Southern
California. In addition, the Company's current retail
expansion plans anticipate that all planned new stores will
be located in this geographic region. Consequently, the
Company's results of operations and financial condition are
dependent upon general economic trends and various
environmental factors in Southern California.
3. Public Offering of Stock
In May 1996, the Company completed its initial public
offering of 4,887,500 shares (including 637,500 shares from
the exercise of the over allotment option granted to the
underwriters) of common stock at an offering price of $14.50
per share. In connection with this offering, the Company
received net proceeds of $65,159,000.
4. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Inventories
Inventories are priced at the lower of cost (first in,
first out) or market.
Depreciation and Amortization
Property and equipment are depreciated and amortized on
the straight-line basis for financial reporting purposes
over the following useful lives of the assets:
Building and improvements 27.5 years
Leasehold improvements Lesser of 5 years or
remaining lease term
Fixtures And equipment 5 years
Transportation equipment 3 years
The Company follows the policy of capitalizing
expenditures that materially increase asset lives and
charging ordinary repairs and maintenance to operations as
incurred. Repairs and maintenance expense was $726,000, $629,000
and $620,000 in 1994, 1995 and 1996 respectively.,
Pro Forma Presentation
Through April 30, 1996, the Company had elected treatment
as an S corporation under provisions of the Internal Revenue
Code. Effective May 1, 1996, the Company terminated its S
corporation election and became a C corporation.
Pro Forma Statements of Income
See Note 5 for explanation of pro forma provision for income taxes
and related pro forma net income.
Pro Forma Earnings Per Common Share
Pro forma earnings per common share have been computed by
dividing pro forma net income by the pro forma weighted
average number of common shares outstanding plus the
dilutive effect of common stock equivalents. Pro forma
weighted average number of common shares outstanding also
includes 2,753,000 shares offered as a part of the public offering;
the proceeds from such shares being used to fund a $39.9 million
distribution to shareholders.
Pursuant to the rules of the Securities and Exchange Commission,
historical per share data are not presented and pro forma per
share data are presented for the latest fiscal year only in the
accompanying statements of income. Also pursuant to these rules,
the number of common shares issuable due to options granted
during the twelve months preceding the Company's public offering
are included in the calculation of shares outstanding using the
the treasury stock method from the beginning of all periods
presented.
Deferred Rent
Certain of the Company's operating leases for its retail
locations include scheduled increasing monthly payments. In
accordance with generally accepted accounting principles,
the Company has accounted for the leases to provide straight
line charges to operations over the lives of the leases.
Revenue Recognition
Revenue is recognized at the point of sale for retail
sales and at the time of shipment for wholesale sales.
Pre-Opening Costs
The Company expenses, as incurred, all pre-opening costs
related to the opening of new retail stores.
Stock Based Compensation
During 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123). The Company has elected to
comply with the pro forma disclosure requirements of this
standard (see note 10).
Statements of Cash Flows
The Company prepares its statements of cash flows using
the indirect method as prescribed by the Statement of
Financial Accounting Standards No. 95. The Company considers
all investments with original maturities of three months or
less to be cash equivalents.
Cash payments for income taxes were $134,000, $200,000
and $7,735,000 in 1994, 1995 and 1996 respectively.
Interest payments totaled approximately $308,000, $269,000
and $228,000 for the years ended December 31, 1994, 1995 and
1996 respectively.
New Authoritative Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB)
issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets to be disposed of" (SFAS 121), which requires
impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amount. The Company adopted
SFAS 121 in the fourth quarter 1995 and the impact on the Company's
financial position and results of operations was insignificant.
In March 1997, the FASB issued SFAS No. 128, "Earnings per
Share" (SFAS 128) and SFAS No. 129, "Disclosure of Information
about Capital Structure" (SFAS 129). SFAS 128 revises and
simplifies the computation for earnings per share and requires
certain additional disclosures. SFAS 129 requires additional
disclosures regarding the Company's capital structure. Both
standards will be adopted in fiscal 1997. Management does
not expect the adoption of these standards to have a material
effect on the Company's financial position or the results
of operations.
Reclassifications
Certain amounts in the prior years have been reclassified
to conform to the current year's presentation.
5. PRO FORMA INCOME TAX PROVISION
Effective May 1, 1996, the Company terminated its S
corporation election and became a C corporation. As such,
the actual taxes due by the Company through December 31,
1996 are based on S corporation tax rates for income from
January 1, 1996 through April 30, 1996 and C corporation
tax rates from May 1, 1996 through December 31, 1996. In
connection with the Company's change in tax status, the
Company recorded an increase in the deferred asset of
$4,570,000. As a C corporation, the computation of deferred
taxes is based on federal C corporation tax rates, which
are not applicable to S corporations, and C corporation
state tax rates, which are significantly larger than S
corporation state tax rates. In accordance with SFAS 109,
the gain resulting from the increase in the deferred tax
asset is included as a credit to tax expense during the
period ended December 31, 1996.
The historical provision (benefit) for income taxes and
resulting historical net income, based on S corporation and
C corporation tax rates as discussed above and including the
effect of the increase in deferred tax asset as discussed
above, for the year ended December 31, 1996 is as follows:
(Amounts in
Thousands)
--------
Income before provision (benefit) for
income taxes $23,155
Historical provision (benefit) for
income taxes:
During period as a S corporation 75
During period as a C corporation 6,913
Change in tax status (4,570)
-------
2,418
-------
Historical net income $20,737
=======
As an S corporation, the Company's income, whether
distributed or not, was taxed at the shareholder level for
federal income tax purposes. For California franchise tax
purposes, as an S corporation, the Company was taxed at 1.5
percent of taxable income.
Because of the Company's change in tax status, historical
results of operations, including income taxes, and related
earnings per share information may not in all cases, be
comparable to, or indicative of current and future results.
Therefore, pro forma information, which shows results as if
the Company had always been a C Corporation is presented on
the face of the accompanying statements.
The pro forma provision for income taxes included in the
accompanying statements of income shows results as if the
Company had always been subject to taxes as a C Corporation
and had adopted Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes," prior to
fiscal 1991.
Under SFAS 109, deferred income tax assets or
liabilities are computed based on temporary differences
between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax
rate in effect for the year in which the differences are
expected to reverse. Deferred income tax expenses or credits
are based on the changes in the deferred income tax assets
or liabilities from period to period.
Under SFAS 109, deferred tax assets may be recognized for
temporary differences that will result in deductible amounts
in future periods and for loss carry forwards. A valuation
allowance is recognized if, based on the weight of available
evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
The pro forma provision for income taxes for the years
ended December 31, 1994, 1995 and 1996 are as follows:
Years Ended December 31,
(Amounts in thousands)
------------------------------
1994 1995 1996
------ ------ ------
Current
Federal $4,215 $5,952 $8,695
State 723 1,020 1,490
------- ------- -------
4,938 6,972 10,185
Deferred 225 (463) (732)
------- ------- -------
Pro forma provision
for taxes $5,163 $6,509 $9,453
======= ======= =======
Differences between the pro forma provision for taxes and
income taxes at the statutory federal income tax rate for each
of the three years in the period ended December 31, 1996 are as
follows:
Year Ended December 31, (Amounts in thousands)
------------------------------------------------------------
1994 1995 1996
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Income tax at statutory
federal rate......... $4,608 35.0% $5,636 35.0% $8,104 35.0%
State income taxes, net
of federal income tax
effect................ 790 6.0% 966 6.0% 1,389 6.0%
Effect of permanent
differences........... 12 - 14 - 60 0.2%
LARZ and targeted jobs
credits............... (247) -1.8% (107) -0.6% (100) -0.4%
-------- -------- -------- -------- -------- --------
$5,163 39.2% $6,509 40.4% $9,453 40.8%
======== ======== ======== ======== ======== ========
A detail of the Company's deferred tax asset as of
December 31, 1995 (pro forma) and 1996 (actual) is as follows:
Years Ended
December 31,
(Amounts in thousands)
--------------------
1995 1996
(Pro Forma (Actual)
------- -------
Inventory Reserve $1,675 $1,661
Uniform inventory capitalization 931 912
Depreciation 805 1,180
Liability for claims 393 289
Workers' Compensation 496 316
Deferred rent 552 531
Larz credit 195 300
State taxes - 491
Other, net (77) 22
-------- --------
4,970 5,702
Valuation allowance - -
-------- --------
$4,970 $5,702
======== ========
6. Short-Term Investments
Investment in debt and equity securities are recorded
as required by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under the
requirements of SFAS No. 115, trading securities are
bought and held principally for the purpose of selling in
the near term. Unrealized holding gains and losses
are included in the determination of current earnings.
Quoted market prices are used to determine fair value. The
Company's short-term investments are all considered trading
securities and are bought and held principally for the
purpose of selling in the near term. Cash flows from
purchases and sales of trading securities are classified as
cash flows from operating activities.
The amortized cost basis of these trading securities
was $27.4 million at December 31, 1996. The basis for
which costs were determined in computing realized gains
was specific identification.
7. Capital Lease Obligations
The Company leases its warehouse, distribution and
corporate facility (approximately 880,000 square feet) under
a lease accounted for as a capital lease. Included in
property and equipment is approximately $13.7 million of land
and building, at cost, related to this lease.
The lease requires fixed payments of $70,000 per month and
bears interest at 7 percent per annum. At the lease
expiration in December 2000, the Company has the option to
purchase the facility for $10.5 million. The Company plans to
exercise the option at the end of the lease.
Total minimum payments under the lease are as follows:
(Amounts in
Thousands)
Year ending December 31: --------
1997 $840
1998 840
1999 840
2000 11,340
--------
13,860
Less - Amount representing
interest (4,495)
--------
Present value of minimum
lease payments 9,365
Less - Current portion (656)
--------
$8,709
========
8. Related-Party Transactions
The Company leases certain retail facilities from its
principal shareholders. Rental expense for these facilities
was approximately $1.5 million $1,6 million and $1,8 million
in 1994, 1995 and 1996, respectively.
The Company pays the premium on a split dollar life
insurance agreement with two of its principal shareholders.
Under a collateral assignment agreement, the premiums paid
by the Company will be reimbursed to the Company out of
death benefit proceeds at the death of both shareholders.
The Company has recorded a receivable of $107,000 and
$165,000 as of December 31, 1995 and 1996, respectively, from
an affiliated entity in the accompanying balance sheets for
the present value, not exceeding the cash surrender value of
the policy, based on mortality tables, of the premiums paid
through December 31, 1995 and 1996.
During 1994, 1995 and 1996 the Company expensed legal
fees to the law firm of Van Petten & Hollen of $36,000
$109,000 and $82,000 respectively. Marvin Holen, a
director of the Company, is a partner in this law firm.
9. Commitments and Contingencies
Credit Facility
In December, 1996, the Company renewed the line of
credit facility with a bank. The facility provides for a
line of credit of $7 million that can be used for working
capital purposes and issuance of letters of credit. The
line of credit bears interest at the bank's prime interest
rate (8.25% at December 31, 1996). The line of credit
expires on June 30, 1997 at which time the Company expects
that it will be renewed.
The Company must comply with one covenant, the ratio
of total liabilities to tangible net worth. At December 31,
1996 the Company was in compliance with this covenant.
As of December 31, 1996, there were no borrowings
outstanding under the line of credit and outstanding letters
of credit were approximately $1.9 million ($1.6 million of
which related to a standby letter of credit for self-insured
workers' compensation).
Special Litigation
In 1989, the Company purchased $220,000 of inventory for resale.
A third party claimed to have a valid lien on the merchandise sold
to the Company. After a series of judgments, reversals and other
legal actions, the litigation was settled for $200,000 in early 1995.
From 1991 to 1993, the Company provided a reserve for $3.1 million
for estimated litigation and interest costs. As a result of the
settlement, $200,000 was charged to the reserve and the remaining $2.9
million was included in income in 1994.
Lease Commitments
The Company leases various facilities under operating
leases which expire at various dates through 2005. Some of
the lease agreements contain renewal options and/or provide
for scheduled increases or increases based on the Consumer
Price Index. Total minimum lease payments under each of
these lease agreements, including scheduled increases, are
charged to operations on a straight line basis over the life
of each respective lease. Certain leases require the payment
of property taxes, maintenance and insurance. Rental expense
charged to operations in 1994, 1995 and 1996 was approximately
$4.7, $5.1 and $5.6 million respectively.
As of December 31, 1996, the minimum annual rentals
payable under all non-cancelable operating leases were as
follows:
(Amounts in
Thousands)
Year ending December 31: --------
1997 $6,298
1998 6,411
1999 6,090
2000 5,969
2001 4,656
Thereafter 13,117
--------
$42,541
========
In addition, the Company also leases certain retail
facilities on a month-to-month basis. The aggregate monthly
rental payments for month-to-month leases at December 31,
1996 were approximately $34,000.
Workers' Compensation
Effective August 11, 1993, the Company became self
insured as to workers' compensation claims. The Company
carries excess workers' compensation insurance which covers
any individual claim in excess of $250,000 with a $2.0 million
ceiling. Through March 11, 1997, the Company has not made
a claim against the policy. The Company provides for losses
of estimated known and incurred but not reported insurance
claims. Known claims are estimated and accrued when
reported. Incurred but not reported claims are estimated and
accrued based on the Company's experience and the experience
of a third-party administrator. At December 31, 1996, the
Company had accrued approximately $771,000 for estimated
workers' compensation claims.
In connection with the self-insurance of workers'
compensation, the Company is required, by the State of
California, to maintain a standby letter of credit. As of
December 31, 1996, there was $1.6 million under the standby
letter of credit.
10. Stock Option Plan
The Company's 1996 Stock Option Plan is a fixed plan
which provides for the granting of non-qualified and
incentive options to purchase up to 1,000,000 shares of
common stock. Options may be granted to officers, employees,
directors and consultants. Options vest over a three year
period, 33 1/3% one year from date of grant and 33 1/3% per
year thereafter. Options expire ten years from date of
grant. Information regarding the Company's stock option plan
is summarized below:
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding, December 31, 1995 - $ -
Granted 510,800 11.05
Forfeited (61,950) 10.99
-------- --------
Outstanding, December 31, 1996 448,850 $11.06
======== ========
Exercisable, December 31, 1996 - -
======== ========
Range of exercise $10.99 to
prices $13.94
Weighted average remaining
contract life 9.3 years
The Financial Accounting Standard Board issued Statement
of Financial Accounting Standard No. 123 ("SFAS No. 123")
"Accounting for Stock Based Compensation" which is effective
for fiscal years ending after December 15, 1995. The Company
has elected to continue to measure compensation costs
associated with its stock option plan, under APB 25
"Accounting for Stock Issued to Employees", accordingly
under SFAS No. 123, the expected impact on the Company's
consolidated financial statements is included in this
expanded footnote disclosure.
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model. A
weighted average fair value of options granted during the
year was calculated assuming no dividend yield, an expected
volatility of 28 percent, a risk free interest rate of 5.0 percent
and expected lives of 5.6 years. Had compensation cost for
this stock option plan been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have
been reduced to $13.5 million and $0.96 per share respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors of the registrant
required by item 401 of the regulation S-K and information
regarding Directors and Executive Officers of the registrant
required by item 405 of Regulation S-K is presented under
the captions " Election of Directors," "Management" and
Section 16(a) Beneficial Ownership Reporting Compliance"
in the definitive Proxy Statement for the Company's 1997
Annual Meeting of Shareholders, and is incorporated herein
by reference.
Item 11. Executive Compensation
The information required by item 402 of Regulation S-K
is presented under the caption "Executive Compensation" in
the definitive Proxy Statement for the Company's 1997 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
Item 12. Security ownership of Certain Beneficial Owner
and Management
The information required by item 403 of Regulation S-K
is presented under the caption "Principal Shareholders" in
the definitive Proxy Statement for the Company's 1997 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by item 404 of Regulation S-K
is presented under the caption "Certain Relationships" in
the definitive Proxy Statement for the Company's 1997 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
1 Financial Statements. Reference is made to the
Index to the Consolidated Financial Statements set forth on
page 17 of this Form 10-K.
2 Financial Statement Schedules. All Schedules for
which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are
included in the Exhibits hereto.
3 Exhibits. The Exhibits listed on the
accompanying Index to Exhibits are filed as part of, or
incorporated by reference into, this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) Securities Act of
1934, the Registrant has duly caused this report Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
99 Cents Only Stores
DATE: March 27, 1997 By: /s/ERIC SCHIFFER
Eric Schiffer
Senior Vice President
Finance and Operations
Pursuant to the requirements of the Securities Exchange Act
of 1934 this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- --------- ---------
/S/ David Gold Chairman of the Board, Chief March 27, 1997
Executive Officer and President
/S/ Howard Gold Senior Vice President March 27, 1997
Distribution and Director
/S/ Jeff Gold Senior Vice President March 27, 1997
Real Estate and Information System
and Director
/S/ Eric Schiffer Senior Vice President Finance March 27, 1997
and Operations and Director
/S/ William O. Christy Director March 27, 1997
/S/ Lawrence Glascott Director March 27, 1997
/S/ Marvin L. Holen Director March 27, 1997
/S/ Ben Schwartz Director March 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited in accordance with generally accepted auditing standards,
the financial statements of 99 Cents Only Stores included in this Form 10-K
and have issued our report thereon dated March 11, 1997. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The schedule listed in the accompanying index is the responsibility
of the Company's management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 11, 1997
99 Cents Only Stores
Schedule II - Valuation and Qualifying Accounts
For Each of the Three Years in the Period Ended December 31, 1996
Amounts in thousands
--------------------
Beginning End of
of Year Provision Reduction Year
-------- -------- -------- --------
For the year ended December 31, 1996:
Allowance for doubtful account $34 $237 $60 $211
======== ======== ======== ========
Inventory reserve 4,085 - 33 4,052
======== ======== ======== ========
For the year ended December 31, 1995:
Allowance for doubtful account 42 - 8 34
======== ======== ======== ========
Inventory reserve 4,085 - - 4,085
======== ======== ======== ========
For the year ended December 31, 1994:
Allowance for doubtful account 111 - 69 42
======== ======== ======== ========
Inventory reserve $2,435 $1,650 - $4,085
======== ======== ======== ========
Exhibit 11.1
99 Cents Only Stores
Statement Regarding Computation of
Pro Forma Per Share Earnings
Amounts in thousands
Year Ended
December 31,
1996
-------
Pro Forma Net Income $13,702
=======
Common Stock:
Shares outstanding from Beginning of period 9,929
Pro-rata shares - stock issuance 2,960
Common Stock Equivalents 104
Pro rata - pro forma Common Shares to fund
distribution to shareholders 1,086
-------
Pro forma weighted Average number of common
shares outstanding 14,079
=======
Pro forma earnings per common share $0.97
=======