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43
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Or
o 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
of Incorporation or Identification No.)
Organization)
4000 Union Pacific Avenue, 90023
City of Commerce, California (zip code)
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (323) 980-8145
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 o
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 25, 1999 was $547,638,368 based on a $40.50 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 stock as of the latest practicable date.
Common Stock, No Par Value, 24,804,203 Shares as of March 25, 1999
Portions of Part III of this report have been incorporated by
reference from the Company's Proxy Statement for the 1999 Annual
Shareholders meeting.
99 CENTS ONLY STORES
Table of Contents
Pag
e
Part I
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part
II
Item 5. Market for Registrant's Common Stock and Related Stockholder 18
Matters
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition 21
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 56
Part
III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and 56
Management
Item 13. Certain Relationships and Related Transactions 56
Part
IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 56
8-K
PART I
Item 1. Business
99 Cents Only Stores (the Company, including 99 Cents Only Stores and
Universal International, Inc. and its retail stores, Only Deals and Odd's-N-
End's) is a leading deep-discount retailer of primarily name-brand,
consumable general merchandise. The Company's stores offer a wide
assortment of regularly available consumer goods as well as a broad variety
of first-quality, close-out merchandise. In 1998, a majority of the
Company's product offerings were comprised of recognizable name-brand
merchandise and were regularly available for reorder. The Company provides
customers significant value on their everyday household needs and an
exciting shopping experience in customer-service-oriented stores which are
attractively merchandised, brightly lit and well-maintained. The Company
believes that its name-brand focus, along with a product mix emphasizing
value-priced food and beverage and other everyday household items,
increases the frequency of consumer visits and impulse purchases and
reduces the Company's exposure to seasonality and economic cycles. The
Company believes its format appeals to value-conscious customers in all
socio-economic groups and results in a high volume of sales. The Company's
66 existing 99 Cents Only Stores at March 25, 1999 are located in Southern
California and have an average size of approximately 15,000 square feet.
The Company's 99 Cents Only Stores generated average net sales per
estimated saleable square foot of $335, which the Company believes is among
the highest in the deep-discount convenience store industry, and average
net sales per store of $4.1 million in 1998.
The Company opened its first 99 Cents Only Store in 1982 and believes
that it operates the nation's oldest existing single price point general
merchandise chain. The Company competes in the deep-discount industry,
which is one of the fastest growing retail sectors in the United States.
The Company significantly increased its rate of store expansion following
its initial public offering in May 1996, expanding its 99 Cents Only Stores
from 36 stores and 332,100 estimated saleable square feet at December 31,
1995 to 64 stores and 822,900 estimated saleable square feet at
December 31, 1998, representing a compound annual growth rate ("CAGR") of
21.1% and 35.3%, respectively. The Company believes that its attractive
store-level economics facilitates its expansion. Historically, the
Company's 99 Cents Only Stores have been profitable within their first year
of operation. In the first quarter of 1999, the Company opened two stores
and plans to open an additional 11 net new stores during the remainder of
the year. The Company intends to continue its planned store expansion over
the next several years at a targeted growth rate of approximately 20% per
year. The Company estimates that the Southern California market has the
potential for over 199, 99 Cents Only Stores.
In September 1998 the Company completed its acquisition of Universal
International, Inc. and Odd's-N-End's, Inc. As a result of the Company's
acquisition, the Company owns 94% of the outstanding common stock of
Universal. As of March 25, 1999 Universal operates 69 Only Deals and Odd's-
N-End's deep discount stores located in Minnesota and the surrounding upper
Midwest, upstate New York and Texas. Like the Company's 99 Cents Only
Stores, the majority of Universal's product offerings are comprised of
recognizable name-brand consumable general merchandise, regularly available
for reorder. The Universal retail price points include items priced over 99
cents, however its retail product mix and merchandising techniques are
similar to that of the Company's 99 Cents Only Stores. As of March 25, 1999
the 69 Universal stores had 631,600 saleable square feet.
The Company also sells merchandise through its Bargain Wholesale
division at prices generally below normal wholesale levels to local,
regional, and national discount, drug and grocery store chains and
independent retailers, distributors and exporters. Bargain Wholesale
complements the Company's retail operations by allowing the Company to
purchase in larger volumes at more favorable pricing, to be exposed to a
broader selection of opportunistic buys and to generate additional sales
with relatively small incremental increases in operating expenses,
contributing to strong overall operating margins for the Company. In
addition to Universal, Bargain Wholesale enables the Company to sell
merchandise at prices other than 99 Cents, providing the Company greater
flexibility in inventory management. Bargain Wholesale represented 16.5% of
the Company's net sales in 1998.
Industry
The Company participates primarily in the deep-discount retail
industry, with its 99 Cents Only Stores and Universal's Only Deals and
Odd's-N-End's stores. Deep discount retail is distinguished from other
retail formats by the purchase of close-out and other special-situation
merchandise at prices substantially below 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. The deep-discount retail industry is one of the fastest
growing retail sectors in the United States.
The sale of close-out or special-situation merchandise develops 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, discontinuance due to a change in style,
color, size, formulation or packaging, the inability to move merchandise
effectively through regular channels, reduction of excess seasonal
inventory, discontinuation of test-marketed items and the financial needs
of the manufacturer.
Many deep-discount retailers also sell merchandise that can be
purchased from a manufacturer or wholesaler on a regular basis. Although
this merchandise can usually be purchased at less than original wholesale
and sold below normal retail, the discount, if any, is generally less than
with close-out merchandise. Deep-discount retailers sell regularly
available merchandise to ensure a degree of consistency in their product
offerings and to establish themselves as a reliable source of basic goods.
Business Strategy
The Company's goal is to continue to provide significant value to its
customers on a wide variety of consumable merchandise in an exciting store
environment. The Company's strategies to achieve this goal include the
following:
Focus on "Name-Brand" Consumables. The Company strives to exceed its
customers' expectations of the range and quality of name-brand consumable
merchandise that can be purchased for 99 Cents. During 1998, the Company
purchased merchandise from more than 999 suppliers, including
Colgate-Palmolive Company, Cheseborough Ponds, 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.
Broad Selection of Regularly Available Merchandise. The Company's retail
stores offer consumer items in each of the following staple product
categories: food and beverages, health and beauty aids, household products
(cleaning supplies, paper goods, etc.), housewares (glassware, kitchen
items, etc.), hardware, stationary and party goods, seasonal goods, baby
products and toys, giftware, pet products and clothing. The Company added a
deli and frozen food section in its 99 Cents Only Stores in the second and
third quarters of 1997. The Company ensures that its merchandise offering
is complete by supplementing its name-brand merchandise with private-label
items. By consistently offering a wide selection of basic household
consumable items, the Company encourages customers to shop the stores for
their everyday household needs, leading to a high frequency of customer
visits.
Attractively Merchandised and Well-Maintained Stores. The Company strives
to provide its customers an exciting shopping experience in
customer-service-oriented stores which are attractively merchandised,
brightly lit and well-maintained. The Company's stores are merchandised and
laid out in a "supermarket" format with items in the same category grouped
together. In addition, the shelves are restocked as needed during the day.
By offering merchandise in an attractive, convenient and familiar
environment, the Company believes its stores appeal to a wide demographic
of customers.
Strong Long-Term Supplier Relationships. The Company believes that it has
developed a reputation as a leading purchaser of name-brand, reorderable
and close-out merchandise at discount prices through its ability to make
immediate buying decisions, experienced buying staff, willingness to take
on large volume purchases and take possession of merchandise immediately,
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.
The Company's relationship with its suppliers is further enhanced by its
ability to minimize channel conflict for the manufacturer by quickly
selling name-brand merchandise without, if requested by the supplier,
advertising or wholesaling the item. Additionally, the Company believes its
well-maintained, attractively merchandised stores have contributed to a
reputation among suppliers for protecting their brand image.
Complementary Bargain Wholesale Operations. Bargain Wholesale complements
the Company's retail operations by allowing the Company to purchase in
larger volumes at more favorable pricing to be exposed to a broader
selection of opportunistic buys and to generate additional sales with
relatively small incremental increases in operating expenses, contributing
to strong overall operating margins for the Company. Net sales in the
Company's wholesale division grew from $30.3 million in 1995 to $53.3
million in 1998, primarily due to an increased focus on large domestic and
international accounts and expansion into new geographic markets. The
Company opened showrooms in New York City in February 1997 and Chicago in
February 1998 to support its Bargain Wholesale operation.
Adherence to Disciplined Cost Controls and Savvy Purchasing. The Company
is able to provide its customers with significant value while maintaining
strong operating margins through an adherence to a disciplined cost control
program. 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
applies this same approach to its relationships with other vendors and
strives to maintain a lean operating environment focused on increasing net
income.
Focus on Larger Stores in Convenient Locations. The Company's 99 Cents
Only stores are conveniently located in freestanding buildings,
neighborhood shopping centers (anchored by 99 Cents Only Stores or
co-anchored with a supermarket and/or a drug store) or downtown central
business districts where consumers are more likely to do their regular
household shopping. The Company's 64 existing 99 Cents Only Stores average
approximately 15,000 gross square feet. Since January 1, 1995, the Company
has opened 35 new stores that average over 20,000 gross square feet and
currently targets new store locations between 15,000 and 25,000 gross
square feet. Universal's Only Deals and Odd's-N-Ends Stores currently
average 10,700 gross square feet. The Company's larger 99 Cents Only Stores
allow it to more effectively display a wider assortment of merchandise,
carry deeper stock positions and provide customers with a more inviting and
convenient environment that encourages customers to shop longer and buy
more. The Company's decision to target larger stores reflects higher
average annual net sales per store and operating income typically achieved
by these stores.
Experienced Management Team and Depth of Employee Option Grants. 99 Cents
Only Stores' management team has many years of retail experience and has
demonstrated its skills through a proven track record of financial
performance. The Company's management strongly believes that employee
ownership of the Company's stock helps build employee pride in the stores
that significantly contributes to the success of the Company and its
operations. Accordingly, all members of management of the Company (other
than David Gold, the Company's Chief Executive Officer, Howard Gold, Senior
Vice President Distribution, Jeff Gold, Senior Vice President Real Estate
and Information Systems, Eric Schiffer, Senior Vice President Operations
and Finance and Karen Schiffer Senior Buyer) and all employees (part-time
or full-time) with tenure of more than six months with the Company receive
an annual grant of stock options. As of December 31, 1998, the Company's
employees (other than executive officers) held options to purchase an
aggregate of 2,015,675 shares, or over 8.2% of the fully-diluted shares of
Common Stock outstanding.
Growth Strategy
Management believes that future growth will primarily result from new
store openings facilitated by the following:
Southern California has Significant Potential for Growth. By continuing
to focus 99 Cents Only Store openings in Southern California for the
immediate future, the Company can leverage its brand awareness in the
region and take advantage of its existing warehouse and distribution
facility, regional advertising and other management and operating
efficiencies. The Company's growth strategy in Southern California will
focus on opening locations in existing markets as well as expanding into
markets adjacent to those currently served. The Company opened it's first
two 99 Cents Only Store in San Diego County in the fourth quarter of 1998.
The Company has plans to open at least 13 net new 99 Cents Only Stores in
1999 (a net increase of 20%), all in the Southern California area. As of
March 25, 1999, the Company had opened two new stores, and secured sites
for five additional store locations. The Company intends to continue its
planned store expansion over the next several years at a targeted rate of
approximately 20% per year. The Company estimates that the Southern
California market has the potential for over 199, 99 Cents Only Stores.
Portable Format Facilitates Geographic Expansion. The Company believes
that its concept of consistently offering a broad selection of name-brand
consumables, at value pricing, in a convenient store format is portable to
most other densely populated areas of the country. With the Company's
retail presence established in the upper Midwest, upstate New York and
Texas and with distribution facilities in Minneapolis serving these stores,
the Company expects to explore the potential for geographic expansion as
opportunities present themselves in the next several years. The Company
intends to focus on developing clusters of stores that can take advantage
of its local warehouse and distribution facilities.
Acquisitions. The Company considers acquisition opportunities as they are
presented to the Company and may make acquisitions of a chain, or chains,
of clustered retail sites in densely populated regions. The Company
believes that its acquisition of Universal in September 1998 satisfied this
objective.
Recent Developments
In November 1997 the Company acquired common stock of Universal equal
to 48% of the outstanding common stock. On September 16, 1998, the Company
acquired an additional 4.3 million shares or approximately 46% and now owns
94% of the outstanding Common Stock of Universal. Pursuant to the exchange
offer, the Company exchanged one share of its common stock for every 16
outstanding shares of Universal plus the associated common share purchase
rights. The offer closed on September 16, 1998. In addition the Company's
merger with Odd's-N-End's Inc. ("Odd's-N-End's") was complete on September
30, 1998. Together, these two companies operate 42 retail stores in
Minnesota and the surrounding upper Midwest region, nine retail stores in
Texas and 22 retail stores in upper New York State. The Company issued
shareholders of Universal 336,986 shares of the Company's Common Stock and
paid $843,243 to holders of Odd's-N-End's common stock.
Prior to September 16, 1998 the Company's ownership interest in
Universal was accounted for using the equity method. The impact of the
inclusion of Universal in the Company's financial statements for the nine
months ended September 30, 1998 was a charge of $1.4 million. As of
December 31, 1998, the Company has consolidated the results of operations
of Universal with those of the Company for the period from September 17,
1998 to December 31, 1998. The Company recorded approximately $8.6 million
in goodwill on its balance sheet, which will be amortized over 30 years and
will result in increased amortization expense in future periods.
Universal's business is seasonal. Historically, all of its earnings have
been generated in the fourth quarter, and it has incurred losses during the
first three quarters of the calendar year. In conjunction with the
acquisition of Universal the Company retired Universal's revolving credit
line which totaled approximately $12.5 million. The Company continues to
support Universal by providing trade credit and other advances. Such
amounts are provided from the Company's ongoing cash flows from operations
and its existing working capital.
The Company's investment in Universal was motivated by an opportunity
to apply the Company's core competencies to two under-performing retail
chains which the Company believes have significant upside potential.
Universal's strengths include its many attractive store locations, strong
trade name identity and inventory of first-quality, close-out merchandise.
In addition, Universal has built a strong management team led by its Chief
Executive Officer, Richard Ennen, who was hired in September 1996 as Vice
President of Merchandising and assumed his current position in
February 1998, and a solid corporate infrastructure and operating systems.
The Company believes Universal's historical performance has been impaired
by a lack of capital, which has limited its access to merchandise and its
ability to purchase merchandise at attractive prices, a failure to focus
attention on store merchandising and layout to create an attractive store
environment and a failure to identify and take advantage of cost saving
opportunities.
Since the Company acquired Universal it has gained greater access to
name-brand, close-out and regularly available goods, implemented more savvy
purchasing procedures, and developed and begun to implement a new
merchandising program that places greater emphasis on consumables and
focuses on attractive, convenient store layouts. Further, Universal has
determined to close unprofitable stores and has completed the consolidation
of its three warehouse and distribution facilities into a single facility.
In addition, Universal has identified several areas for cost savings,
including freight and advertising. During 1998, Universal introduced a
revised merchandising program in all of its stores to accommodate the 99
Cents Only Stores philosophy. The Company believes that its strong
reputation among suppliers and the depth of its operating experience in the
deep-discount industry has contributed to these changes. The Company and
Universal continue to review Universal's operations to identify other
opportunities for cost savings and improvements to operations. In addition,
the Company and Universal are reviewing less profitable stores to determine
stores that should be relocated or closed. Since December 31, 1998 the
company has closed six stores. As of March 25, 1999 Universal now has a
total of 69 Only Deals and Odd's-N-End's stores.
Universal's Only Deals and Odd's-N-End's stores will provide the
Company a retail channel for merchandise at prices other than the Company's
single price point and will enable the Company to increase the volume of
merchandise sold by it. The Company believes that this greater distribution
capability will provide the Company an opportunity to strengthen its
relationship with its suppliers, increase the Company's exposure to
opportunistic buying opportunities, allow the Company to capture a wider
range of merchandise and enable the Company to take greater advantage of
volume discounts. Further, the acquisitions allow the Company to diversify
its geographic presence and provide the Company valuable experience in
other merchandising formats. This geographic presence could serve as a
basis for launching the Company's 99 Cents Only Stores retail format into
these regions in future periods. The Company believes further opportunities
exist for improving store level economics. In addition, it is anticipated
that the acquisition will ultimately provide the combined businesses with
opportunities to realize the efficiencies and synergies available by
operating on a cooperative basis which include economies of scale in
purchasing, insurance, marketing, advertising, human resources and
administration.
Retail Operations
The Company's retail stores offer customers a wide assortment of
regularly available consumer goods, as well as a broad variety of
first-quality, close-out merchandise, generally at a significant discount
from normal retail. All merchandise sold in the Company's 99 Cents Only
Stores retail stores sells for 99 cents per item or two or more items for
99 cents. The Company strives to exceed its customers' expectations of the
range and quality of name-brand consumables that can be purchased for 99
cents. Universal's Only Deals and Odd's-N-End's stores also sells
merchandise at deep discounts within a similar range.
The following table sets forth relevant information with respect to
the growth of the Company's existing 99 Cents Only Store operations
(amounts in thousands, except sales per square foot):
Year Ended December 31,
1994 1995 1996 1997 1998
99 Cents Only Stores
net retail sales $110,7 $121,9 $143,1 $186,0 $238,86
24 98 63 24 7
Universal retail sales - - - - $31,107
(a)
99 Cents Only Stores
annual net sales
growth rate 8.7% 10.2% 17.3% 29.9% 28.4%
99 Cents Only Stores
store count at
beginning of year 31 34 36 43 53
New stores 4 4 8 10 13
Stores closed 1(b) 2(c) 1(c) - 2(c)
Universal stores (a) - - - - 75
Total store count at
year end 34 36 43 53 139
Average 99 Cents Only
Stores net sales per
store open the full
year(d) $3,267 $3,467 $3,667 $3,750 $4,147
Estimated saleable
square footage at
year end for 99 Cents 293,00 332,10 455,20 631,50 822,900
Only Stores 0 0 0 0
Average net sales per
estimated saleable
square foot(d) $396 $397 $389 $354 $335
Change in comparable 99
Cents Only Stores net
sales(e) (1.4)% (0.2)% 2.8% 1.5% 4.3%
Estimated saleable
square footage at
year end for - - - - 694,400
Universal's stores
(a) Represents sales from the date of acquisition September 17, 1998 to
December 31, 1998. As of March 25, 1999 Universal had closed 6 stores
and now has a total of 69 stores. The Company has closed those stores
that were performing below expectations or were in outlying areas and
the leases were expiring.
(b) Store closed September 1994 due to fire.
(c) Stores closed due to relocation to a larger nearby site.
(d) For stores open for the entire fiscal year for 99 Cents Only Stores.
(e) 99 Cents Only Stores for the years 1994-1996 change in comparable
stores net sales compares net sales for stores open for the entire two
years compared. Commencing in 1997, change in comparable stores net
sales compares net sales for all stores open at least 15 months.
Merchandising. All of the Company's stores offer 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 also carries
a line of private label consumer products made exclusively for the Company.
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 retails elsewhere from $1.19 to $9.99, for only 99 cents per
item or group of items. The Company believes that this concept also applies
to the Universal Only Deals and Odd's-N-End's stores. Each store typically
carries over five thousand different stock keeping units ("SKUs"). The
merchandise sold in the Company's stores primarily consists 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. In the second and third quarters of
1997, the Company added a deli and frozen foods section to each store. None
of the Universal stores carry deli or frozen products.
While each of the Company's 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 majority of the merchandise purchased by the
Company 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 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 rarely imposes
limitations on the quantity of specific items that may be purchased by a
single consumer.
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 Size, Layout and Locations. The Company's 66 existing 99 Cents Only
Stores are located in Southern California and average over 15,000 gross
square feet. Since January 1, 1995, the Company has opened 35 new stores
(including two relocations in 1995, one in 1996 and two in 1998) that
average over 19,000 gross square feet and currently targets new store
locations between 15,000 and 25,000 gross square feet. The Company's larger
99 Cents Only Stores allow it to more effectively display a wider
assortment of merchandise, carry deeper stock positions and provide
customers with a more inviting and convenient environment that encourages
customers to shop longer and buy more. The Company's decision to target
larger stores reflects higher average annual store revenues typically
achieved by these stores. Universal's stores average 10,700 gross square
feet and 9,100 saleable square feet. All of Universal's stores are leased.
The Company's stores are conveniently 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
where consumers are more likely to do their regular household shopping. The
stores are located primarily in more densely populated, demographically
diverse neighborhoods. The Company's 66 existing 99 Cents Only Stores are
located in five counties: 52 in Los Angeles County, nine in Orange County,
two in San Bernardino County, one in Riverside County and two in San Diego
County. Universal's 69 stores at March 25, 1999 consist of 22 Odd's-N-End's
stores located in upstate New York, 39 stores in the upper mid west and 8
stores in Texas.
The Company's stores are attractively merchandised, brightly lit,
well-maintained, "destination" locations. The layout of each of the
Company's stores is customized to the actual size and configuration of the
individual location. The interior of each store is, however, designed to
reflect a uniform format, like a typical supermarket, featuring
attractively displayed products in windows, consistent merchandise display
techniques, bright lighting, 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 a strong visual
presentation in all key traffic areas of the store. Merchandising displays
are maintained throughout the day, change 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 leases 61 of its 66 99 Cents Only Stores retail locations.
The Company typically seeks leases with an initial five to ten year term
with one or more five-year options. See "Item 2 Properties." The Company
identifies potential sites through a network of contacts within the
brokerage and real estate communities, information provided by vendors,
customers and employees and through the efforts of the Company's real
estate department. All of Universal's Only Deals and Odd's-N-End's stores
are leased with remaining lease terms extending one to six years. Most
leases have renewal options ranging from three to ten years.
As part of its strategy to expand retail operations, the Company has,
at times, opened 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 effect on comparable stores net sales as some
customers migrated from the existing store to the close-by larger new
store. Except for four relocations to larger, nearby sites and one store
closure as a result of a fire, the Company has never closed one of its 99
Cents Only Stores.
Store Management. Substantially all merchandise decisions with respect to
pricing and advertising are made at the Company's headquarters. The Company
employs ten district managers responsible for store operations. Each
district manager is responsible for up to seven stores. 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 the
Company's policies, operations and merchandising philosophy. District
managers also help train store management and assist store management with
scheduling. The Vice President of Retail Operations also supervises a
cashiers training school located at the Company's corporate offices. Each
merchandising supervisor and his crew (usually six to ten 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 and two or three
assistant managers. Store managers are responsible for assessing their
respective store's stocking needs and ordering accordingly.
Advertising. Advertising expenditures were $1.5 million, $2.0 million and
$3.1 million for 1996, 1997 and 1998, respectively, or 0.8%, 0.9% and 1.1%
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, which includes the sale of nine
televisions for 99 cents each and nine microwave ovens for 99 Cents each,
grand openings often attract long lines of customers and receive media
coverage. The Company believes that one of its biggest challenges is
attracting affluent customers to shop its stores. The Company also uses a
direct mail campaign for new customers who are homeowners in more upscale
neighborhoods. The Company believes the direct mail campaign has been
successful in attracting new customers.
Bargain Wholesale
In 1998, Bargain Wholesale sold merchandise to over 999 customers,
including other wholesalers, small local retailers, large regional and
national retailers and exporters. During 1998, no single customer accounted
for more than 3% of Bargain Wholesale's net sales. In 1998 Bargain
Wholesale shipped $12.0 million of merchandise to Universal. These
shipments were billed at cost and were shipped during the period from
January through September 16, 1998, prior to the acquisition of the
majority interest in Universal. 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
showrooms in Chicago and New York City, enhancing 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, although the Company has seen strong growth in
reorderable and private label merchandise within its wholesale operations.
Bargain Wholesale has recently begun a program to provide merchandise for
the "dollar" promotional aisles of certain supermarkets and drugstores. 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
must 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, to be exposed to a broader selection of opportunistic buys and to
generate additional net sales with relatively small incremental increases
in operating expenses contributing to strong overall margins for the
Company. Bargain Wholesale also allows the Company to purchase goods which
it would not otherwise purchase for distribution through its 99 Cents Only
Stores and provides the Company with a channel by which it may distribute
merchandise at prices other than 99 Cents.
Bargain Wholesale conducts its wholesale operations through its 15,000
square foot product showroom located at the Company's warehouse and
distribution facility. The Company's showrooms in New York and Chicago also
continue to support Bargain Wholesale's operations.
Purchasing
The Company's purchasing department staff consists of fourteen 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 99 Cents Only Stores, Universal 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 than 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 2% of the Company's total purchases in 1998. During 1998, the
Company purchased merchandise from more than 999 suppliers, including
Colgate-Palmolive Company, Cheseborough Ponds, 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. Many of these companies
have been supplying products for the Company in excess of four years.
A significant portion of the merchandise purchased by the Company in
1998 was close-out or special-situation merchandise. The Company has
developed strong relationships with many manufacturers and distributors
that recognize that their special-situation merchandise can be moved
quickly through the Company's retail and wholesale distribution channels.
The sale of close-out or special-situation merchanidse develops in response
to the need of manufacturers, wholesalers and others to distribute
merchandise outside their normal channels. 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 key elements to these supplier relationships include the
Company's (i) ability to make immediate buy decisions, (ii) experienced
buying staff, (iii) willingness to take on large volume purchases and take
possession of merchandise immediately, (iv) ability to pay cash or accept
abbreviated credit terms, (v) reputation for prompt payment,
(vi) commitment to honor all issued purchase orders and (vii) willingness
to purchase goods close to a target season or out of season. The Company's
relationship with its suppliers is further enhanced by its ability to
minimize channel conflict for the manufacturer by quickly selling
name-brand merchandise without, if requested by the supplier, advertising
or wholesaling the item. The Company believes this reputation along with
its well-maintained, attractively merchandised stores have contributed to a
reputation among suppliers for protecting their brand image.
In 1998, reorderable merchandise accounted for a majority of the
Company's purchases. The Company's strong relationships with many
manufacturers and distributors, along with its ability to purchase in large
volumes, also enable the Company to purchase reorderable name-brand goods
at discounted wholesale prices. The Company focuses its purchases of
reorderable merchandise on a limited number of SKUs, which allows the
Company to make purchases in large volumes.
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 import operation which
primarily purchases reorderable merchandise. The Company imports products
mainly from Southeast Asia. Merchandise directly imported by the Company
accounted for approximately 7% of total merchandise purchased in 1998. The
Company primarily imports merchandise in product categories which are not
brand sensitive to consumers such as kitchen items, housewares, toys,
seasonal products, petcare and hardware.
Warehousing and Distribution
The Company maintains an 880,000 square foot, single level 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, over 25 dock levers and, new racking with over
10,000 pallet positions. 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 24 tractors and 44 trailers which are primarily
used to deliver merchandise to its stores. Full truck deliveries are made
from its distribution center to each store typically three 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 in conjunction
with the Company's buyers (i.e., ordered by the store manager) as opposed
to being determined by the distribution center (i.e., sent by order of the
Company's distribution personnel). 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.
The Company believes that its current warehouse and distribution facility
will be able to support distribution to approximately 150 additional stores
in Southern California. The Company also maintains a 210,000 square foot
distribution facility in New Hope, Minnesota, which serves as a principal
distribution facility for Universal. This lease expires in July 2000. There
can be no assurance that the Company's existing warehouse will provide
adequate storage 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 retail 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, single price point and other factors,
the Company has determined not to install a point of sale system in its 99
Cents Only Stores. 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 the inventory management, order processing and accounts
receivable system. This system is currently being updated to a network
windows version and will integrate Universal's operations as well. 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 has installed personal computers in each
99 Cents Only Store location for use with a popular suite of retail
applications purchased in late 1997. The Company internally refers to this
store-level personal computer implementation as its "C.E.N.T.S." system.
The first phase of C.E.N.T.S., which includes electronic mail, electronic
forms and time and attendance module has been fully implemented as of June
1998. The second phase of C.E.N.T.S., which includes sales forecasting and
labor scheduling modules have been implemented and is being rolled out to
the stores beginning in the second quarter of 1999. Future modules will
include daily sales reporting and sales/payroll analysis, and may include
certain store-level human resources functions. The Company also embarked on
it's implementation of store ordering system to allow for a more efficient
order processing using handheld units and processed through it's C.E.N.T.S.
system. Universal uses NCR scanning equipment in its stores to track sales,
SKU level inventory and markdowns. This POS system provides real time
information to manage day to day operations at Universal.
The Company's accounting and management information systems are
overseen by a director of information systems who manages a staff of four
employees. 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. The Company has completed an assessment
and has determined that it will be required to modify or replace portions
of its software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter. The project cost is not
anticipated to have a material effect on the results of operations and is
scheduled to be completed no later than mid-1999.
Competition
The Company faces competition in both the acquisition of inventory and
sale of merchandise from other wholesalers, discount stores, single price
point merchandisers, mass merchandisers, food markets, drug chains, club
stores and other retailers. Industry competitors also include a large
number of privately held companies and individuals. In some instances these
competitors are also customers of the Company's Bargain Wholesale division.
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 from new entrants in the deep-discount
retail industry, among others, that could have an adverse effect on the
Company's business and results of operations.
Employees
At December 31, 1998, the Company had 4,433 employees. 99 Cents Only
Stores had 2,583 employees (2,190 in its retail operation, 296 in its
warehouse and distribution facility, 83 in its corporate offices and 14 in
its wholesale division), of which approximately 270 are part-time
employees. None of the Company's employees is party to a collective
bargaining agreement. The Company considers relations with its employees to
be good. The Company offers certain benefits, including health insurance
and 401(k) benefits to its full time employees. All members of management
of the Company (other than David Gold, the Company's Chief Executive
Officer, Howard Gold, Senior Vice President Distribution, Jeff Gold, Senior
Vice President Real Estate and Information Systems, Eric Schiffer, Senior
Vice President Operations and Finance and Karen Schiffer Senior Buyer) and
all employees, part-time or full-time, with tenure of more than six months
with the Company receive an annual grant of stock options. Also, Universal
has 1850 employees 124 in warehouse and administration and 1,726 are
employed in the retail operations.
Trademarks and Service Marks
"99 Cents Only Stores", "99 Cents", Only Deals and Odd's-N-End's 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. As of March 25, 1999 the Company leases
130 of its 135 existing stores, as well as its warehouse and distribution
facilities (where its executive offices are located). The Company currently
intends to exercise an option to purchase the warehouse and distribution
facility in Commerce, California, in December 2000, the end of the lease
term. In connection with such properties, the Company could be held liable
for the costs of remedial actions with respect to hazardous substances. In
addition, the Company operates one 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 25, 1999, the Company leased 130 of its 135 store
locations. The Company currently leases 13 store locations and a parking
lot associated with one of these stores from the Gold Family.
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's leases provide for fixed rents, subject to periodic
adjustments. 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
retail stores leases assuming the exercise of all options to extend:
Expiri Expirin Expirin Expiring
ng g g 2005
1999 2000-20 2002-20 and Beyond
01 04
10(a) 43 48 29
(a) Includes six stores leased on a month to month basis.
The Company has purchased five locations, one opened in each of
November 1996, February 1997, November 1997, September 1998 and March 1999.
The Company may also purchase other locations in the future.
The Company leases its warehouse and distribution facilities. The
Company's executive offices are also located in the Commerce California
facility. In December 1993, the Company entered into a seven year triple
net lease agreement with a purchase option, which 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. 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,
the Company will be subject to a $7.6 million penalty. The Company also
maintains a 210,000 square foot distribution facility in New Hope,
Minnesota, which serves as a principal distribution facility for Universal.
This lease requires minimum monthly payments of $48,000 and expires in July
2000.
Item 3. Legal Proceedings
The Company is periodically subject to legal actions which arise in
the ordinary course of its business. The Company does not believe that any
pending action is material to its results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Common Stock is traded on the New York Stock Exchange under the
symbol "NDN." The following table sets forth, for the calendar periods
indicated, the high and low closing prices per share of the Common Stock as
reported by the New York Stock Exchange. The Common Stock was not publicly
traded prior to the Company's initial public offering on May 23, 1996. All
stock prices have been restated to reflect two five-for-four stock splits
effected in the form of stock dividends which were paid on November 28,
1997 and November 12, 1998.
Price
Range
High Low
1997:
First Quarter $12.8 $10.2
7 4
Second Quarter 19.28 12.40
Third Quarter 22.07 17.28
Fourth Quarter 24.45 20.48
1998:
First Quarter $31.6 $21.6
0 0
Second Quarter 34.66 27.15
Third Quarter 37.45 28.10
Fourth Quarter 49.13 29.40
1999:
First Quarter through March 25, 1999 49.13 39.75
The closing price as reported on March 25, 1999 on the New York Stock
Exchange is set forth on the cover page of this Form 10K. As of March 25,
1999, the Company had approximately 4,441 holders of the Common Stock
including 457 shareholders of record.
The Company has not paid any cash dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance
its development and expansion and therefore does not anticipate the payment
of any cash dividends in the foreseeable future. Payment of future
dividends, if any, will depend upon future earnings and capital
requirements of the Company and other factors, which the Board of Directors
considers appropriate.
Item 6. Selected Financial Data
The following table sets forth selected financial and operating data
of the Company for the periods indicated. The following selected statement
of operations data for each of the three years ended December 31, 1996,
1997, and 1998, and the balance sheet data as of December 31, 1997 and 1998
are derived from the financial statements and the notes thereto included
elsewhere herein audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report also included elsewhere herein.
The selected statements of operations data for the years ended December 31,
1994 and 1995, and the balance sheet data as of December 31, 1994, 1995 and
1996 are derived from financial statements audited by Arthur Andersen LLP
not included herein. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the
Company and notes thereto included elsewhere in this report.
Year
Ended
December
31,
1994 1995 1996 1997 1998
(Amounts
in
thousand
s,
except
per
share
and
operatin
g data)
Statement of Operations Data:
Net sales:
99 Cents Only Stores $110,724 $121,998 $143,163 $186,024 $238,867
Universal - - - - 31,107
Other retail sales(a) 2,097 492 - - -
Bargain Wholesale 18,916 30,337 40,480 44,831 53,299
Total 131,737 152,827 183,643 230,855 323,273
Cost of sales 88,045 102,160 120,922 146,797 199,618
Gross profit 43,692 50,667 62,721 84,058 123,666
Selling, general and
administrative expenses:
Operating expenses 31,319 32,169 37,683 49,850 73,941
Depreciation and 1,342 1,640 2,009 2,989 5,053
amortization
Total operating expenses 32,661 33,809 39,692 52,839 78,994
Operating income 11,031 16,858 23,029 31,219 44,661
Special litigation provision (2,900) - - - -
reversal(b)
Interest (income) expense, 764 755 (126) (855) (1,403)
net
Equity loss and minority - - - - 1,429
interest
Income before provision for
income taxes 13,167 16,103 23,155 32,074 44,635
Provision for income
taxes(c):
Pro forma 5,163 6,509 9,453 - -
Historical 62 156 2,418 13,124 17,942
Net income(c):
Pro forma $8,004 $9,594 $13,702 - -
Historical $13,105 $15,947 $20,737 $18,950 $26,693
Earnings per common
share(c)(h):
Pro forma_Basic $0.51 $0.62 $0.68 - -
Pro forma_Diluted 0.51 0.62 0.62 - -
Historical_Basic 0.85 1.02 1.03 $0.82 $1.11
Historical_Diluted 0.85 1.02 0.94 0.81 1.09
Weighted average number of
common shares outstanding:
Pro forma_Basic 15,514 15,514 20,129 - -
Pro forma_Diluted (d) 15,514 15,514 21,999 - -
Historical_Basic 15,514 15,514 20,129 23,178 24,022
(Continued from previous page)
Company Operating Data:
Sales Growth
99 Cents Only Stores 8.7% 10.2% 17.3% 29.9% 28.4%
Universal - - - - -
Bargain Wholesale 4.9 60.4 33.4 10.8 18.9
Total Company sales 7.1 16.0 20.2 25.7 40.0
Gross margin 33.2 33.2 34.2 36.4 38.3
Operating margin 8.4 11.0 12.6 13.5 13.8
Net income margin:
Pro forma 6.1 6.3 7.5 _ _
Historical 9.9 10.4 11.3 8.2 8.3
Retail Operating Data(e):
99 Cents Only Stores at end
of period 34 36 43 53 64
Universal stores end of - - - - 75
period
Change in comparable stores (1.4)% (0.2)% 2.8% 1.5% 4.3%
net sales 99 Cents Only
Stores
Change in comparable stores
net sales Universal (f) - - - - 10.4%
Average net sales per store
open the full year 99 Cents
Only Stores $3,267 $3,467 $3,667 $3,750 $4,147
Average net sales per
estimated saleable square
foot 99 Cents Only Stores $396 $397 $389 $354 $335
(g)
Estimated saleable square
footage at year end 99
Cents Only Stores 293,000 332,100 455,200 631,500 822,900
Estimated saleable square
footage at year end for
Universal's stores - - - - 694,400
As of
December
31,
1994 1995 1996 1997 1998
Balance Sheet Data:
Working capital $24,713 $28,690 $58,822 $60,791 $110,510
Total assets 51,419 57,598 98,997 119,443 198,123
Long-term debt _ _ _ _ _
Capital lease obligation,
including current portion 10,548 9,977 9,366 8,709 8,260
Total shareholders' equity 30,811 35,558 76,505 96,308 164,366
(a) 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 operated by
the Company in 1995 and that store was closed in May 1995.
(b) In 1993, the Company provided a reserve of $3.1 million for estimated
litigation and interest costs. As a result of a settlement of this
litigation in 1995, $200,000 was charged to the reserve and the
remaining $2.9 million was included in income in 1994.
(c) Prior to May 1, 1996 the Company was treated as an S corporation for
federal and state income tax purposes. The presentation for 1993-1996
reflects a pro forma provision for income taxes as if the Company had
always been a C corporation, at an assumed effective tax rate of
41.0%, plus the effect of deferred taxes and tax credits.
(d) Diluted weighted average common equivalent shares in 1996 include
1,362,000 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.
(e) Includes retail operating data solely for the Company's 99 Cents Only
Stores.
(f) For the years 1993-1996, change in comparable stores net sales
compares net sales for stores open the entire two periods compared.
Commencing in 1997, change in comparable stores net sales compares net
sales for all stores open at least 15 months.
(g) Computed based upon estimated total saleable square footage of stores
open for the entire period.
(h) All earnings per share amounts have been restated to reflect the
adoption of SFAS No. 128, "Earnings per Share," effective December 15,
1997. For further discussion of the change in accounting, refer to
Note 4 of the Notes to the Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in connection
with "Item 6_Selected Financial Data," and "Item 8_Financial Statements."
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 has sold 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 25, 1999,
operates a chain of 66 deep-discount 99 Cents Only Stores and 69 Universal,
Only Deals and Odd's-N-End's stores. The Company's growth during the last
three years has come primarily from new store openings and growth in its
Bargain Wholesale division. The Company opened eight, ten and thirteen
stores in 1996, 1997 and 1998, respectively (seven, ten and eleven
respectively, net of relocated stores). The Company opened two stores in
the first three months of 1999, one in Los Angeles, California and one in
Van Nuys, California and plans to open an additional 11 net stores during
the remainder of the year. Of the additional stores planned for 1999, the
Company has secured sites for six additional store locations and has five
additional locations in escrow to acquire the leasehold interest.
Bargain Wholesale's growth over the three years ended December 31,
1998 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's net sales compared retail 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 increases in
operating expenses.
Comparable stores net sales improved in 1996, 1997 and 1998 after
declining during 1994 and 1995. The Company believes that this trend has
resulted in part from its expansion strategies. In the past, as part of its
strategy to expand retail operations, the Company has at times opened
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
migrated from the existing store to the larger new store. The Company
believes that this strategy has impacted its historical comparable sales
growth.
During the three years in the period from January 1, 1996 to
December 31, 1998, average net sales per estimated saleable square foot
(computed on 99 Cents Only Stores open for a full year) declined from $397
per square foot to $335 per square foot. This trend reflects the Company's
determination to target larger locations for new store development.
Existing stores average approximately 15,000 gross square feet. Since
January 1, 1995, the Company has opened 35 new stores (including two
relocations in 1995, one in 1996 and two in 1998) that average over 19,000
gross square feet. The Company currently targets new store locations
between 15,000 and 25,000 gross feet. Although it is the Company's
experience that larger stores generally have lower average net sales per
square foot than smaller stores, larger stores generally achieve higher
average annual store revenues and operating income.
99 Cents Only Stores has increased its net sales, operating income and
net income in each of the last five years. In 1998 it had net sales of
$323.3 million, operating income of $44.7 million and net income of $26.7
million, representing a 40.0%, 43.1% and 40.9% increase over 1997,
respectively. From 1994 through 1998, the Company had a CAGR in net sales,
operating income and net income of 25.5%, 42.0% and 35.5%, respectively.
Recent Developments
In November 1997 the Company acquired common stock of Universal equal
to 48% of the outstanding common stock. On September 16, 1998, the Company
acquired, pursuant to an exchange offer, an additional 4.3 million shares
or approximately 46% and now owns 94% of the outstanding Common Stock of
Universal. Pursuant to the exchange offer, the Company exchanged one share
of its common stock for every 16 outstanding shares of Universal plus the
associated common share purchase rights. The offer closed on September 16,
1998. In addition the Company acquired Odd's-N-End's by merger on September
30, 1998. Together, these two companies operate 42 retail stores in
Minnesota and the surrounding upper Midwest region, nine retail stores in
Texas and 22 retail stores in upper New York State. The Company issued
shareholders of Universal 336,986 shares of the Company's Common Stock and
paid approximately $843,243 to holders of Odd's-N-End's common stock.
Prior to September 16, 1998 the Company's ownership interest in
Universal was accounted for using the equity method. The impact of the
inclusion of Universal in the Company's financial statements for the nine
months ended September 30, 1998 was a charge of $1.4 million. As of
December 31, 1998, the Company consolidated the results of operations of
Universal with those of the Company for the period from September 17, 1998
to December 31, 1998. The Company recorded approximately $8.6 million in
goodwill on its balance sheet, which will be amortized over 30 years and
will result in increased amortization expense in future periods.
Universal's business is seasonal. Historically, all of its earnings have
been generated in the fourth quarter, and it has incurred losses during the
first three quarters of the calendar year. In conjunction with the
acquisition of Universal the Company retired Universal's revolving credit
line which totaled approximately $12.5 million. The Company continues to
support Universal by providing trade credit and other advances. Such
amounts are provided from the Company's ongoing cash flows from operations
and its existing working capital.
The Company has made in this Form 10-K forward-looking statements
within the meaning of Section 27A of the Securities Act concerning the
Company's operations, expansion plans, economic performance, financial
condition, store openings, purchasing abilities, sales per square foot and
comparable store net sales trends and capital requirements. Such
forward-looking statements may be identified by the use of words such as
"believe", "anticipate," "intend" and "expect". Such forward-looking
statements are subject to various risks and uncertainties, certain of which
are beyond the Company's control. 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 Company's ability to integrate
Universal and Odd's-N-End's and to operate their stores at multiple price
points and in different geographic locations, (iii) the orderly operation
of the Company's receiving and distribution process, (iv) inflation,
consumer confidence and other general economic factors, (v) the
availability of adequate inventory and capital resources, (vi) the risk of
a disruption in sales volume in the fourth quarter and other seasonal
factors as discussed in "_Seasonality and Quarterly Fluctuations,"
(vii) dependence on key personnel and control for the Company by existing
shareholders and (viii) increased competition from new entrants into the
deep-discount retail industry. The Company does not ordinarily make
projections of its future operating results and undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
The following table sets forth, for the periods indicated, certain
selected income statement data, including such data as a percentage of net
sales:
Years
Ended
Decemb
er 31,
1996 1997 1998
(Amoun
ts in
thousa
nds)
Net sales:
99 Cents Only Stores $143,1 78.0 $186,0 80.6 $238,8 73.9
63 % 24 % 67 %
Universal - - - - 31,107 9.6
Bargain Wholesale 40,480 22.0 44,831 19.4 53,299 16.5
Total 183,64 100. 230,85 100. 323,27 100.
3 0 5 0 3 0
Cost of sales 120,92 66.8 146,79 63.6 199,61 61.7
2 7 8
Gross profit 62,721 34.2 84,058 36.4 123,66 38.3
6
Selling, general and administrative
expenses:
Operating expenses 37,683 20.5 49,850 21.6 73,941 22.9
Depreciation and amortization 2,009 1.1 2,989 1.3 5,053 1.6
Total 39,692 21.6 52,839 22.9 78,994 24.5
Operating income 23,029 12.6 31,219 13.5 44,661 13.8
Interest (income) expense, net (126) - (855) (0.4 (1,403 (0.4
) ) )
Equity loss and minority interest - - - - 1,429 0.4
Income before provision for income 23,155 12.6 32,074 13.9 44,635 13.8
taxes
Provision for income taxes(a):
Pro forma 9,453 5.1 - - - -
Historical 2,418 1.3 13,124 5.7 17,942 5.5
Net income(a):
Pro forma $13,70 7.5% - - - -
2
Historical $20,73 11.3 $18,95 8.2% $26,69 8.3%
7 % 0 3
(a) Reflects a pro forma provision for federal income taxes in 1995 and
1996. Effective May 1, 1996 the Company changed in form from an S
corporation to a C corporation, a change that affected 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 1.5% of taxable income in 1995 and 1996.
Currently, the top federal tax rate for C corporations is 35% and the
corporate tax rate in California is 8.84%. The pro forma provision for
income taxes in the accompanying selected income statement data for
the Company shows results as if the Company had always been a C
corporation and had adopted Statement of Financial Accountings
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.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Total net sales increased $92.4 million, or 40.0%, from $230.9
million in 1997 to $323.3 million in 1998. 99 Cents Only Stores net sales
increased approximately $52.8 million, or 28.4%, from $186.0 million in
1997 to $238.9 million in 1998. Universal accounted for $31.1 million of
the $92.4 million increase in net sales from the date of acquisition
(September 16, 1998 to December 31, 1998). Bargain Wholesale net sales
increased approximately $8.5 million, or 18.9%, from $44.8 million in 1997
to $53.3 million in 1998. There were no other retail operations in 1998.
The increase in 99 Cents Only Stores net sales was attributed to the net
effect of 11 stores opened in 1998 and the full effect of 10 stores opened
in 1997. Comparable stores net sales increased 4.3%, or $7.1 million, from
1997 to 1998. The increase in Bargain Wholesale net sales was primarily
attributed to an increased focus on large international and domestic
accounts and expansion into new geographic markets. Offsetting these
positive developments was the adverse effect of the slow-down in shipments
to export brokers.
Gross profit. Gross profit, which consists of total net sales, less cost
of sales, increased approximately $40.0 million, or 47.1%, from $84.1
million in 1997 to $123.7 million in 1998. The increase in gross profit
dollars was primarily due to higher net sales. As a percentage of net
sales, gross profit improved from 36.4% in 1997 to 38.3% in 1998 reflecting
the effect of a 5 to 1 ratio in 1998 of retail sales, versus wholesale
sales. The ratio in 1997 was 4 to 1, retail versus wholesale. The
consolidation of Universal retail, during the fourth quarter of 1998 also
contributed to this increase.
Selling, general and administrative. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $26.2 million, or 49.5%, from $52.8 million in 1997
to $79.0 million in 1998. The consolidation of Universal during the fourth
quarter accounted for 46% of the dollar increase. The remaining dollar
increase over 1997 is associated with 1998 new store growth and the full
year effect of 1997 new stores. SG&A increased as a percentage of net sales
from 22.9% in 1997 to 24.4% in 1998. The increase as a percentage of net
sales is primarily all due to the consolidation of Universal for the full
fourth quarter. The retail operating costs including rent, freight and
advertising, for Universal are greater as a percentage of sales because of
the geographic dispersion of the retail stores. In addition, the minimum
wage in California increased to $5.75 per hour in March 1998.
Operating income. Operating income increased $13.4 million, or 43.1%,
from $31.2 million in the 1997 period to $44.7 million in 1998. Operating
income increased as a percentage of net sales from 13.5% in 1997 to 13.8%
in 1998 primarily due to the increase in gross margin as discussed above.
Interest (income) expense. Interest (income) expense relates to the
interest income on the Company's marketable securities, net of interest
expense on the Company's capitalized warehouse lease. The Company had no
bank debt during 1998. Interest income earned on the Company's marketable
securities was $2.2 million in 1998. At December 31, 1998, the Company held
$43.9 million in short-term investments and $2.7 million in long-term
investments. The Company's short-term investments are comprised primarily
of investment grade federal and municipal bonds and commercial paper, all
with short-term maturities. The Company generally holds investments until
maturity.
Equity loss and Minority Interest. The equity loss represents the
Company's share of Universal's loss from January 1, 1998 through September
16, 1998. During this time the Company had a 48 percent ownership interest
in Universal. On September 17, 1998 the Company increased its Universal
ownership to 94 percent. The minority interest represents the income
attributable to the 6 percent outside ownership of Universal.
Provision for income taxes. The provision for income taxes in 1998 was
$17.9 million, or 5.6% of net sales, compared to 13.1 million, or 5.7% of
net sales, in 1997. The effective combined federal and state rates of the
provision for income taxes were 40.2% and 40.9% in 1998 and 1997,
respectively. The effective combined federal and state rates are less than
the statutory rates in each period due to the benefit of certain tax-exempt
interest and other credits. See Note 5 of "Notes to Financial Statements."
Net income. As a result of the items discussed above, net income
increased $7.7 million, or 40.9%, from $19.0 million in 1997 to $26.7
million in 1998. Net income as a percentage of net sales was 8.2% in 1998
and 8.2% in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Total net sales increased $47.2 million, or 25.7%, from $183.6
million in 1996 to $230.9 million in 1997. 99 Cents Only Stores net sales
increased approximately $42.9 million, or 29.9%, from $143.2 million in
1996 to $186.0 million in 1997, and Bargain Wholesale net sales increased
approximately $4.4 million, or 10.7%, from $40.5 million in 1996 to $44.8
million in 1997. There were no other retail operations in 1997. The
increase in 99 Cents Only Stores net sales was attributed to the effect of
10 stores opened in 1997 and the full effect of seven stores opened in
1996. Comparable stores net sales increased 1.5%, or $2.8 million, from
1996 to 1997. The increase in Bargain Wholesale net sales was primarily
attributed to an increased focus on large international and domestic
accounts and expansion into new geographic markets. Offsetting these
positive developments was the adverse effect of the slow-down in the Asian
markets in which the Company markets its goods.
Gross profit. Gross profit, which consists of total net sales less cost
of sales, increased approximately $21.3 million, or 34.0%, from $62.7
million in 1996 to $84.1 million in 1997. The increase in gross profit was
primarily due to higher net sales. As a percentage of net sales, gross
profit improved from 34.2% in 1996 to 36.4% in 1997 reflecting favorable
merchandise cost and mix factors at its 99 Cents Only Stores and the effect
of a large percentage of net sales derived from 99 Cents Only Stores, which
typically operate at higher gross margins than Bargain Wholesale.
Selling, general and administrative. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $13.1 million, or 33.1%, from $39.7 million in 1996
to $52.8 million in 1997, primarily due to increased costs associated with
new store growth and increased executive compensation expense of
approximately $0.8 million. SG&A increased as a percentage of net sales
from 21.6% in 1996 to 22.9% in 1997. The increase as a percentage of net
sales was primarily due to increased payroll costs primarily resulting from
state and federally mandated increases in the minimum wage.
Operating income. Operating income increased $8.2 million, or 35.6%, from
$23.0 million in the 1996 period to $31.2 million in 1997. Operating income
increased as a percentage of net sales from 12.6% in 1996 to 13.5% in 1997
for the reasons discussed above.
Interest (income) expense. Interest (income) expense relates to the
interest income on the Company's marketable securities net of interest
expense on the Company's capitalized warehouse lease. The Company had no
bank debt during 1997. Interest income earned on the Company's marketable
securities was $1.6 million in 1997. At December 31, 1997, the Company held
$26.2 million in short-term investments. The Company's short-term
investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper, all with short-term maturities. The
Company generally holds investments until maturity.
Provision for income taxes. The provision for income taxes in 1997 was
$13.1 million, or 5.7% of net sales, compared to the pro forma provision of
$9.5 million, or 5.1% of net sales, in 1996. The effective combined federal
and state rates of the provision for income taxes were 40.9% and 40.8% in
1997 and 1996, respectively. The effective combined federal and state 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."
Net income. As a result of the items discussed above, net income
increased $5.2 million, or 38.3%, from pro forma $13.7 million in 1996 to
$19.0 million in 1997. Net income increased as a percentage of net sales
from 7.5% in 1996 to 8.2% in 1997.
Liquidity and Capital Resources
Since inception, the Company has funded its operations principally
from cash provided by operations, and has not generally relied upon
external sources of financing. The Company's capital requirement result
primarily from purchases of inventory, expenditures related to new store
openings and working capital requirements for new and existing stores. The
Company takes advantage of close-out and other special-situation
opportunities which frequently result 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 1996, 1997 and 1998, net cash provided by operations was $15.6
million, $13.7 million and $27.0 million, respectively. Net cash provided
by operations reflects increases in inventories in the amount of $2.6
million, $6.2 million and $7.1 million during 1996, 1997 and 1998,
respectively. During 1996, 1997 and 1998, net cash used in investing
activities for purchases of property and equipment was $7.3 million,
$9.4 million and $12.6 million, respectively. Cash used in investing
activities for the purchase of short-term investments was $27.6 million,
$5.0 and $26.3 million in 1996, 1997 and 1998 respectively. Net cash
provided by financing activities in 1996 $19.6 million, which included
$66.2 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 shareholders with respect to the net income of the Company prior to the
change of the corporate tax status from an S corporation to a C
corporation. In 1997, net cash used in financing activities was $0.2
million; these funds represented payments of capital lease obligations and
proceeds from the exercise of employee stock options. In 1998, net cash
provided by financing activities was $16.4 million, which included $27.2
million from the Company's secondary public offering. In addition, the
Company issued shares of common stock for the purchase of an additional 48%
million of outstanding shares of Universal (336,986 shares at $29.66). The
company received proceeds from the exercise of stock options of $2.5
million.
The Company does not maintain any credit facilities with any bank.
However, the Company maintains a surety bond of approximately $1.2 million
for self-insured workers compensation.
The Company leases its 880,000 square foot single level 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 7.0%. 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 plans to open new 99 Cents Only Stores at a targeted
annual rate of 20%. The average investment per new store opened in 1998,
including leasehold improvements, furniture, fixtures and equipment,
inventory and pre-opening expenses, was approximately $660,000. Pre-opening
expenses are not capitalized by the Company. The Company's cash needs for
new store openings are expected to total approximately $9 million in 1999
and $12 million in 2000. The Company's total planned expenditures in each
of 1999 and 2000 for additions to fixtures and leasehold improvements of
existing stores as well as for distribution expansion and replacement will
be approximately $5 million. The Company believes that its total capital
expenditure requirements (including new store openings) will increase to
approximately $14 million and $17 million in 1999 and 2000, respectively.
Capital expenditures in 1998 and 1999 are currently expected to be incurred
primarily for new store openings, improvements to existing stores and
system and general corporate infrastructure. The Company believes that cash
flow from operations will be sufficient to meet operating needs and capital
spending requirements for at least the next twelve months.
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. Further, the operations of Universal are
even more dependent upon results in the fourth quarter.
The following table sets forth, certain unaudited results of
operations for each quarter during 1997 and 1998 and such information as a
percentage of net sales. The unaudited information has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
report 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.
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quart Quart Quart Quart Quart Quart Quart Quart
er er er er er er er er
Year Year Ended December 31,
Ended 1998
Decem
ber
31,
1997
(Amou
nts
in
thous
ands)
Net sales:
99 Cents Only $39,1 $42,5 $46,9 $57,2 $51,4 $56,6 $59,1 $71,5
Stores 68 67 91 98 82 95 47 43
Universal - - - - - - 2,456 28,66
1
Bargain Wholesale 11,57 11,24 11,99 10,01 11,40 15,06 16,35 10,48
6 7 5 3 0 2 7 0
Total 50,74 53,81 58,98 67,31 62,88 71,75 77,96 110,6
4 4 6 1 2 7 0 74
Gross profit 17,41 19,31 21,19 26,13 23,04 25,32 28,09 47,19
6 3 2 7 3 1 5 6
Operating income 6,085 7,157 7,879 10,09 8,619 9,405 10,23 16,40
8 0 7
Net income 3,676 4,369 4,750 6,155 4,541 5,385 6,712 10,05
5
Earnings per common
share:
Basic $0.16 $0.19 $0.21 $0.26 $0.19 $0.22 $0.27 $0.42
Diluted $0.16 $0.18 $0.20 $0.26 $0.19 $0.22 $0.27 $0.41
(% of Net sales)
Net sales:
99 Cents Only 77.2% 79.1% 79.7% 85.1% 81.9% 79.0% 75.9% 64.6%
Stores
Universal - - - - - - 3.1 25.9
Bargain Wholesale 22.8 20.9 20.3 14.9 18.1 21.0 21.0 9.5
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit 34.3 35.9 35.9 38.8 36.6 35.3 36.0 42.6
Operating income 12.0 13.3 13.4 15.0 13.7 13.1 13.1 14.8
Net income 7.2% 8.1% 8.1% 9.1% 7.2% 7.5% 8.6% 9.1%
New Authoritative Pronouncements
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). Adoption of SFAS 130 has
not had a material impact on the Company's financial reporting.
In June 1997, the Financial Accounting Standard Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS 131). The Company adopted SFAS 131 in 1998 (see Note 11 of Notes to
Consolidated Financial Statements).
In 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in
2000 and management does not expect adoption of this standard to have a
material impact on the Company's financial reporting or results of
operations.
Risk Factors
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 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.
We Depend on New Store Openings for Future Growth
Our operating results depend largely on our ability to open and
operate new stores successfully and to manage a larger business profitably.
In 1996, 1997 and 1998, we opened eight, ten and thirteen of our 99 Cents
Only Stores, respectively (seven, ten and eleven stores, respectively, net
of relocated stores). From January 1, 1999 through March 26, 1999, we
opened two 99 Cents Only Stores and we expect to open at least eleven 99
Cents Only Stores in Southern California during the remainder of the year.
We plan to open new stores over the next several years at a rate of
approximately 20% [of the number of 99 Cents Only Stores we have] per year.
Our strategy depends on many factors, including our ability to identify
suitable markets and sites for our new stores, negotiate leases with
acceptable terms, refurbish stores, appropriately upgrade our financial and
management information systems and controls and manage our operating
expenses. In addition, we must be able to continue to hire, train,
motivate and retain competent managers and store personnel. Many of these
factors are beyond our control. As a result, we cannot assure you that we
will be able to achieve our expansion goals. Any failure by us to achieve
our expansion goals on a timely basis, obtain acceptance in markets in
which we currently have limited or no presence, attract and retain
management and other qualified personnel, appropriately upgrade our
financial and management information systems and control or manage
operating expenses could adversely affect our future operating results and
our ability to execute our business strategy.
We also cannot assure you that when we open new stores, we will
improve our results of operations. A variety of factors, including store
location, store size, rental terms, the level of store sales and the level
of initial advertising influence if and when a store becomes profitable.
Assuming that our planned expansion occurs as anticipated, our store base
will include a relatively high proportion of stores with relatively short
operating histories. We cannot assure you that our new stores will achieve
the sales per saleable square foot and store-level operating margins
currently achieved at our existing stores. If our new stores on average
fail to achieve these results, our planned expansion could produce a
decrease in our overall sales per saleable square foot and store-level
operating margins. Increases in the level of advertising and pre-opening
expenses associated with the opening of new stores could also contribute to
a decrease in our operating margins. Finally, the opening of new stores in
existing markets has in the past and may in the future reduce retail sales
of existing stores in those markets, negatively affecting comparable store
sales.
Risks Associated with Our Recent Acquisition
In September 1998, we acquired Universal International, Inc. and Odd's-
N-End's, Inc. Acquisitions involve various risks. For example:
- Assimilation of the operations and personnel of an acquired business
into our own business;
- Management information and accounting systems of an acquired business
must be integrated into our current systems;
- Our management must devote its attention to assimilating the acquired
business which diverts their attention from our other business
concerns;
- We might enter markets in which we have limited prior experience; and
- We might lose key employees of an acquired business.
The companies we acquired operate in a market where we had little prior
experience. We have devoted substantial time and resources to integrate
these recently acquired businesses, and we will be required to devote
substantial time and resources to integrate any other business we may
acquire in the future.
We intend to continue to evaluate potential acquisitions of companies
which we believe will complement or enhance our existing business. If we
acquire other companies in the future, it may result in the issuance of
equity securities that could dilute your stock ownership. We may also
incur additional debt and amortize expenses related to goodwill and other
tangible assets if we acquire another company, and this could negatively
impact our results of operations. We currently do not have any
arrangements or understandings to acquire any company or business, and we
cannot guarantee that we will be able to identify or complete any
acquisition in the future.
Our operations are mainly concentrated in Southern California
All of our 99 Cents Only Stores are currently located in Southern
California. In addition, our retail expansion plans anticipate that new
stores will be located in this region. As a result, our results of
operations and financial condition depend upon trends in the Southern
California economy. For example, this region experienced an economic
recession in the early 1990s. Although this recession had no material
effect on our business, between 1989 and 1993 most California counties,
particularly Los Angeles, recorded a significant decline in retail
spending. Recovery in these retail markets has continued from 1995
through 1997. However, this trend may not continue and retail spending
could decline in the future. In addition, Southern California historically
has been vulnerable to certain natural disasters and other risks, such as
earthquakes, fires, floods and civil disturbance. At times, these events
have disrupted the local economy. These events could also pose physical
risks to our properties. Although we maintain standard property and
business interruption insurance, we do not have earthquake insurance on our
properties.
With our acquisition of Universal and Odd's-N-End's, we now have
stores in the upper Midwest, upstate New York and Texas. These regions have
unique economic characteristics which we will need to become more familiar
with. In addition, unlike Southern California, extreme winter weather
conditions in the Midwest and New York may cause decreases in retail
spending during certain times of the year.
We could experience disruptions in receiving and distribution
We pick up substantially all our inventory for our 99 Cents Only
Stores directly from suppliers and deliver the inventory to our only
warehouse in Los Angeles, California. We distribute all inventory for our
New York, Texas and Upper Midwest stores through our only warehouse in
Minnesota. Our success depends upon whether our receiving and shipment
schedules are organized and well managed. As we continue to grow, we may
face unexpected demands on our warehouse operations that could cause delays
in delivery of merchandise to or from our warehouses to our stores. A
fire, earthquake or other disaster at our warehouses could hurt our
business, financial condition and results of operation, particularly
because much of our merchandise consists of close-outs and other
irreplaceable products. Although we maintain standard property and business
interruption insurance, we do not have earthquake insurance on our
properties.
Although we try to limit our risk of exposure to potential product
liability claims, we do not know if the limitations in our agreements are
enforceable. We maintain insurance covering damage from use of our
products. If any product liability claim is successful and large enough,
our business could suffer.
We depend upon our relationships with our suppliers and the availability of
close-out and special-situation merchandise
Our success depends in large part on our ability to locate and
purchase quality close-out and special-situation merchandise at attractive
prices. This helps us maintain a mix of name-brand and other merchandise
at the 99 Cents price point. We cannot be certain that such merchandise
will continue to be available in the future. Further, we may not be able to
find and purchase merchandise in quantities necessary to accommodate our
growth. Additionally, our suppliers sometimes restrict the advertising,
promotion and method of distribution of their merchandise. These
restrictions in turn may make it more difficult for us to quickly sell
these items from our inventory.
Although we believe our relationships with our suppliers are good, we
do not have long term agreements with any supplier. As a result, we must
continuously seek out buying opportunities from our existing suppliers and
from new sources. We compete for these opportunities with other
wholesalers and retailers, discount and deep-discount chains, mass
merchandisers, food markets, drug chains, club stores and various
privately-held companies and individuals. Although we do not depend on any
single supplier or group of suppliers and believe we can successfully
compete in seeking out new suppliers, a disruption in the availability of
merchandise at attractive prices could impair our business.
We purchase in large volumes and our inventory is highly concentrated
To obtain inventory at attractive prices, we take advantage of large
volume purchases, close-outs and other special situations. As a result, our
inventory levels are generally higher than other discount retailers. At
December 31, 1996, 1997 and 1998, we recorded net inventory of $36.9
million, $43.1 million and $78.4 million, respectively.
We periodically review the net realizable value of our inventory and
make adjustments to its carrying value when appropriate. The current
carrying value of our inventory reflects our belief that we will realize
the net values recorded on our balance sheet. However, we may not be able
to do so. If we sell large portions of our inventory at amounts less than
their carrying value or if we write down a significant part of our
inventory, our cost of sales, gross profits, operating income and net
income could suffer greatly during the period in which such event or events
occur.
We face strong competition
We compete in both the acquisition of inventory and sale of
merchandise with other wholesalers, discount and deep-discount stores,
single price point merchandisers, mass merchandisers, food markets, drug
chains, club stores and other retailers. Our industry competitors also
include many privately held companies and individuals. At times, these
competitors are also customers of our Bargain Wholesale division. In the
future, new companies may also enter the deep-discount retail industry.
Additionally, we currently face increasing competition for the purchase of
quality close-out and other special-situation merchandise. Some of our
competitors have substantially greater financial resources and buying power
than us. Our capability to compete will depend on many factors including
our ability to successfully purchase and resell merchandise at lower prices
than our competitors. We cannot assure you that we will be able to compete
successfully against our current and future competitors.
We are vulnerable to uncertain economic factors and changes in the minimum
wage
Our ability to provide quality merchandise at our 99 Cents price point
could be hindered by certain economic factors beyond our control, including
but not limited to:
- increases in inflation;
- increases in operating costs;
- increases in employee health care costs;
- increases in prevailing wage levels; and
- decreases in consumer confidence levels.
As a result, increases in federal and state minimum wage requirements
significantly affect our business. In California, the minimum wage
increased [in March 1997 from $4.75 to $5.00 per hour], in September 1997
from $5.00 to $5.15 per hour, in March 1998 to $5.75 per hour [and again in
January 1999 to $6.75 per hour.] The federal minimum wage increased in
September 1997 to $5.15 per hour. Congress has proposed a bill to increase
the minimum wage to $6.15 per hour beginning September 1, 1999, and $6.66
per hour beginning September 1, 2000, with later adjustments to reflect
increases in the Consumer Price Index. Since we provide consumers with
merchandise at a 99 Cents price point, we typically cannot pass on to them
any incremental costs. As a result, significant increases in the minimum
wage requirements could impair our business.
We face risks associated with international sales and purchases
Although international sales historically have not been important to
our consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales. In addition, some of the inventory we purchase is
manufactured outside the United States. There are many risks associated
with doing business internationally. Our international transactions may be
subject to risks such as:
- political instability;
- currency fluctuations;
- exchange rate controls;
- changes in import and export regulations;
- changes in tariff and freight rates.
The United States and other countries have also proposed various forms of
protectionist trade legislation. Any resulting changes in current tariff
structures or other trade policies could lead to fewer purchases of our
products and could adversely affect our international operations.
We could encounter risks related to transactions with our affiliates
We currently lease 13 of our 66, 99 Cents Only Stores and a parking
lot for one of these stores from certain members of the Gold family and
their affiliates. Our annual rental expense for these facilities totaled
approximately $1.8 million, $2.0 million and $2.2 million in 1996, 1997 and
1998, respectively. We believe that our lease terms are just as favorable
to us as they would be for an unrelated party. Under our current policy, we
enter into real estate transactions with our affiliates only for the
renewal or modification of existing leases and on occasions where we
determine that such transactions are in our best interests. Moreover, the
independent members of our Board of Directors must unanimously approve all
real estate transactions between us, and our affiliates. They must also
determine that such transactions are equivalent to a negotiated
arm's-length transaction with a third party. We cannot guarantee that we
will reach agreements with the Gold Family on renewal terms for the
properties we currently lease from them. Also, even if we agree to such
terms, we cannot be certain that our independent directors will approve
them. If we fail to renew one of these leases, we could be forced to
relocate or close the leased store. Any relocations or closures we
experience will be costly and could adversely affect our business.
We rely heavily on our management team
Our success depends substantially on David Gold, our Chief Executive
Officer. We also rely on the continued service of our executive officers
and other key management, particularly Helen Pipkin, our Senior Vice
President of Wholesale Operations. We have not entered into employment
agreements with any of our executive officers and we do not maintain key
person life insurance on them. As we continue to grow, our success will
depend on our ability to identify, attract, hire, train, retain and
motivate other highly skilled management personnel. Competition for such
personnel is intense, and we may not be able to successfully attract,
assimilate or retain sufficiently qualified candidates.
Our operating results may fluctuate and may be affected by seasonal buying
patterns
Historically, our highest net sales and operating income have occurred
during the fourth quarter, which includes the Christmas and Halloween
selling seasons. During 1996, 1997 and 1998, we generated approximately
28.8%, 29.2% and 34.2%, respectively, of our net sales and approximately
32.6%, 32.3% and 36.7%, respectively, of our operating income during the
fourth quarter. Furthermore, the operations of Universal and Odd's-N-End's
heavily depend upon fourth quarter results. Accordingly, any decrease in
net sales during the fourth quarter could reduce our profitability and
impair our results of operations for the entire year.
In addition to seasonality, many other factors may cause our results
of operations to vary significantly from quarter to quarter. Some of these
factors are beyond our control. The factors include:
- the number and timing of sales contributed to new stores;
- the level of advertising and pre-opening expenses associated with new
stores;
- the integration of new stores into our operations;
- general economic health of the deep-discount retail industry;
- changes in the mix of products sold;
- unexpected increases in shipping costs;
- ability to successfully manage our inventory levels;
- changes in our personnel;
- fluctuations in the amount of consumer spending; and
- the amount and timing of operating costs and capital expenditures
relating to the growth of our business.
We may need to modify our management information systems
Our business is currently supported by a standard accounting and
financial reporting system which uses a PC-based local area network (LAN)
and a separate partially customized inventory control system processed on a
Hewlett-Packard RISC-based computer. We believe that our accounting and
management information system and inventory control system meet our current
needs. We plan to continue updating and enhancing our systems to improve
our capabilities and provide for growth. If we grow faster than we expect,
we may need to install a new management information or inventory control
system or significantly modify our current systems to accommodate the
growth in our business.
We face year 2000 risks
Many existing computer programs use only two digits to identify a
year. These programs were designed and developed without addressing the
impact of the upcoming change in the century. If not corrected, many
computer software applications could fail or create erroneous results by,
at or beyond the year 2000.
We use software, computer technology and other services, that may fail
due to the year 2000 phenomenon. We have determined that we must modify or
replace portions of our software so that our computer systems will function
properly with respect to dates in the year 2000 and after. We expect to
complete our year 2000 improvements by mid-1999. Although we do not
expect the year 2000 problem to significantly affect our results of
operations, we could encounter unanticipated delays and other problems in
modifying our systems. Any difficulties we experience in becoming year
2000 compliant could hurt our ability to communicate with and effectively
purchase from our suppliers, and could adversely impact our business.
Based upon the results of this assessment, we will develop and
implement, if necessary, a remediation plan with respect to any software
and computer technology used by our vendors that may not be year 2000
compliant. At this time, we cannot determine the expenses associated with
this assessment and potential remediation plan. Our business could suffer
significantly if our suppliers' software and computer systems are not year
2000 compliant.
We are subject to environmental regulations
Under various federal, state and local environmental laws and
regulations, current or previous owners or occupants of property may become
liable for the costs of removing any hazardous substances found on the
property. These laws and regulations often impose liability without regard
to fault. We currently lease all but three of our stores, as well as our
warehouse and distribution facility (where our executive offices are
located). We have the option to purchase our warehouse and distribution
facility in December 2000, which we plan to do. However, in the future we
may be required to incur substantial costs for preventive or remedial
measures associated with the presence of hazardous materials. In addition,
we operate one underground diesel storage tank and one above-ground propane
storage tank at our warehouse. Although we have not been notified of, and
are not aware of, any current environmental liability, claim or
non-compliance, we could incur costs in the future related to our leased
properties and our storage tanks.
In the ordinary course of our business, we sometimes handle or dispose
of commonplace household products that are classified as hazardous
materials under various environmental laws and regulations. We have adopted
policies regarding the handling and disposal of these products, and we
train our employees on how to handle and dispose of them. We cannot assure
you that our policies and training will successfully help us avoid
potential violations of these environmental laws and regulations in the
future.
Anti-takeover Effect; We are controlled by our existing shareholders
In addition to some governing provisions in our Articles of
Incorporation and Bylaws, we are also subject to certain California laws
and regulations which could delay, discourage or prevent others from
initiating a potential merger, takeover or other change in our control,
even if such actions would benefit our shareholders and us. In addition,
David Gold, our Chairman and Chief Executive Officer, and members of his
immediate family and certain of their affiliates beneficially own
11,282,113 of the our voting stock. As a result, they have the ability to
control all matters requiring the vote of our shareholders, including the
election of our directors and most of our corporate actions. They can also
control our policies and prevent a change in our control. This could
adversely affect the voting and other rights of our other shareholders and
could depress the market price of our common stock.
Our stock price could fluctuate widely
The market price of our common stock has risen substantially since our
initial public offering on May 23, 1996. Trading prices for our common
stock could fluctuate significantly due to many factors, including:
- the depth of the market for our common stock;
- changes in expectations of our future financial performance,
including financial estimates by securities analysts and
investors;
- variations in our operating results;
- conditions or trends in our industry or in the industries of any of
our significant clients;
- additions or departures of key personnel; and
- future sales of our common stock.
Year 2000
General
The Year 2000 issue relates to the problems associated with many
computer systems (including computer chips and software) not being designed
to use dates for the Year 2000 and thereafter. Many of these systems
internally record only the last two digits for the year of dates, and will
not correctly distinguish between different years ending with the same two
digits (the years 2000 and 1900 would be recorded identically). Others of
these systems will not be able to accept, print, perform calculations, or
display dates greater than 12/31/1999. While others may cease to function
("crash"), produce miscalculations or produce other undesired results in
connection with such dates. The Year 2000 issues are a concern to the
Company due to potential impacts on the Company's systems and additionally
a concern for the potential impact to the systems of other entities
(vendors, service providers, utility providers, transportation, banks,
etc.) that provide products and services to the Company.
Although the Company believes that the Year 2000 issue will not pose
significant internal operational problems for the Company, if all Year 2000
issues are not properly identified, or assessment, remediation and testing
are not done, in a timely manner, with respect to the potential problems
that are identified, there can be no assurance that the Year 2000 issue
will not have a material adverse impact on the Company's results of
operations including, among other things, a temporary inability to process
credit sales transactions, record inventory transactions and engage in
similar normal business activities. Additionally, there is no assurance
that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or operations.
Year 2000 Status
General phases of the project include (1) cataloging Year 2000 issues;
(2) assigning priorities and materiality of the issues to the Company; (3)
implementing and testing the necessary modifications and replacements, and
(4) contingency planning.
The Company's use of computer systems consists of five major areas (1)
operating systems; (2) purchased standard software applications; (3)
internally developed software applications; (4) third party suppliers and
agents; and (5) embedded chips. Application software concerns include both
the conversion of software that is not Year 2000 compliant and or
replacement of software where applicable.
The Company's primary computer systems consist of standard accounting
and financial reporting packages utilizing a PC-based local area network
and a packaged inventory control system, customized for the Company's
needs, processed by a Hewlett Packard RISC-based system. Based on a review
of the hardware, system software, and application software comprising these
primary systems, the Company believes that, with some corrective measures,
these primary systems will not be materially impacted by Year 2000 issues.
Third party suppliers include merchandise vendors, outside payroll
processing, freight companies, banks, brokerage firms which hold the
company's securities in street names as well as the underlying institutions
issuing the securities, customer credit card and ATM authorization firms,
stock transfer agent, security alarm, fire prevention, phone services,
insurance companies, energy and other utility suppliers and various local,
state and federal governmental regulatory agencies.
99 Cents Only Stores year 2000 Project is proceeding substantially on
schedule. The Company has undertaken its year 2000 project internally and
has developed a plan to make the Company's business computer systems Year
2000 compliant. The Company has completed the assessment as to its
critical systems. The Company believes the risks associated with internal
systems are minimal. The customized internal modifications are being
scheduled, and will be complete in the last quarter of 1999.
The Company is in the process of upgrading their P.C. based financial
package to its most current release which has been certified Year 2000
compliant. Additionally testing of the Hewlett Packard RISC based system
will be completed by the end of the second quarter. The test will include
using the Companies backup Hewlett Packard and changing the calendar to the
Year 2000, so all core applications can be tested and confirmed Year 2000
ready.
Many of the Company's third party suppliers have been surveyed and
identified as to those having a direct interface level. Letters and
questionnaires are in the process of being sent to all critical entities
with which the Company does business to assess their Year 2000 readiness.
The Company anticipates that these activities will be on going for the
remainder of 1999 and will include follow up telephone interviews and on
site meetings. The Company is not currently aware of any single vendor or
other third party that may have a material impact on the Company. The
Company can provide no assurance that Year 2000 compliance will be
successfully completed by its third party suppliers in a timely manner.
Cost
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 compliance work has not
been established, but is not expected to be material.
Contingency Plan
The Company has not completed a comprehensive analysis for all the
operational problems and costs (including loss of revenue) that would be
reasonably likely to result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance
on a timely basis. A contingency plan has not been developed for dealing
with all the most likely worst case scenario. The Company believes that any
failures of its internal systems to be Year 2000 compliant will not alone
materially adversely affect the continuity of core retail business or to
receive and ship merchandise to its retail stores.
The Year 2000 compliance project is expected to reduce the level of
uncertainty about the effect of Year 2000 on the Company and the
preparedness of significant third party agents. The Company believes that
with the implementation and completion of the project, significant
interruptions of normal operations should be reduced. However, if all Year
2000 issues are not properly identified, or assessment, remediation and
testing are not affected in a timely manner with respect to problems that
are identified, there can be no assurance that Year 2000 issue will not
have a material adverse impact on the Company results of operations or
adversely affect the Company's relationships with suppliers, customers or
other third parties. Additionally, there can be no assurance that the Year
2000 issues of other entities will not have a material adverse impact on
the Company's systems or results of operations.
Readers are cautioned that forward-looking statements contained in
this Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Risk Factors" in the Company's Form 10-K
for the year ended December 31, 1997. Readers should understand that the
dates on which the Company believes the Year 2000 project will be completed
are based upon Management's best estimates, which were derived utilizing
numerous assumptions of future events, including the availability of
certain resources, third-party modifications plans and other factors.
However, there can be no guarantee that these estimates will be achieved,
or that there will not be a delay in, or increased costs associated with,
the implementation of the Company's Year 2000 compliance project. A delay
in specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost
of personnel trained in these areas, the ability to correct all relevant
computer code, timely responses to and corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third parties and the
inter-connection of national and international businesses, the Company
cannot ensure that its ability to timely and cost effectively resolve
problems associated with the Year 2000 issue may not affect its operations
and business, or expose it to third party liability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk for its investments in
marketable securities.
At December 31, 1998, the Company had $46,560,000 in marketable
securities maturing at various dates through June 2000. The Company's
investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds
investments until maturity. Any premium or discount recognized with
purchase of an investment is amortized over the term of the investment.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Pag
e
99 Cents Only Stores
Report of Independent Public Accountants 39
Consolidated Balance Sheets as of December 31, 1997 and 1998 40
Consolidated Statements of Income for the years ended December 31, 42
1996, 1997 and 1998
Consolidated Statements of Shareholders' Equity for the years ended 43
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 44
1996, 1997 and 1998
Notes to the Consolidated Financial Statements 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited the accompanying consolidated balance sheets of 99
Cents Only Stores (a California Corporation) and it's subsidiaries as of
December 31, 1997 and 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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 and it's subsidiaries as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 26, 1999
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(Amounts In Thousands, Except Share Data)
ASSETS
1997 1998
CURRENT ASSETS:
Cash $882 $4,516
Short-term investments 26,191 43,850
Accounts receivable, net of allowance for doubtful accounts
of $178 and $535 as of December 31, 1997 and 1998, 1,510 2,605
respectively
Inventories 43,114 78,392
Other 673 2,389
Total current assets 72,370 131,75
2
PROPERTY AND EQUIPMENT, at cost:
Land 8,072 9,590
Building and improvement 10,804 11,896
Leasehold improvements 10,986 19,179
Fixtures and equipment 8,473 16,860
Transportation equipment 558 1,014
Construction in progress 776 1,680
39,669 60,219
Less_Accumulated depreciation and amortization (10,228 (14,74
) 6)
29,441 45,473
OTHER ASSETS:
Deferred income taxes 5,947 6,422
Long term investments in marketable securities 6,393 2,710
Deposits 234 183
Receivable from affiliated entity 230 -
Investment in Universal International, Inc. 3,708 -
Goodwill - 8,617
Other 1,120 2,966
17,632 20,898
$119,44 $198,1
3 23
The accompanying notes are an integral part of these consolidated balance
sheets.
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1998
CURRENT LIABILITIES:
Current portion of capital lease obligation $704 $923
Accounts payable 5,534 13,856
Accrued expenses:
Payroll and payroll-related 1,352 1,976
Sales tax 1,467 2,299
Liability for claims 396 306
Other 824 510
Workers compensation 1,091 1,372
Income taxes payable 211 -
11,579 21,242
LONG-TERM LIABILITIES:
Deferred rent 1,476 2,091
Accrued interest 2,075 2,690
Capital lease obligation, net of current portion 8,005 7,337
11,556 12,118
MINORITY INTEREST - 398
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 23,223,449 at December 31, 1997
and 24,740,889 at December 31, 1998 66,207 107,571
Retained earnings 30,101 56,794
96,308 164,366
$119,44 $198,12
3 3
The accompanying notes are an integral part of these consolidated balance
sheets.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts In Thousands, Except Per Share Data)
1996 1997 1998
NET SALES:
99 Cents Only Stores $143,16 $186,02 $238,86
3 4 7
Universal - - 31,107
Bargain Wholesale 40,480 44,831 53,299
183,643 230,855 323,273
COST OF SALES 120,922 146,797 199,618
Gross profit 62,721 84,058 123,666
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses 37,683 49,850 73,941
Depreciation and amortization 2,009 2,989 5,053
39,692 52,839 78,994
Operating income 23,029 31,219 44,661
OTHER (INCOME) EXPENSE:
Interest income (890) (1,613) (2,186)
Interest expense 764 758 783
(126) (855) (1,403)
EQUITY LOSS AND MINORITY INTEREST - - 1,429
Income before proforma and historical provision
for income taxes: 23,155 32,074 44,635
PROVISION FOR INCOME TAXES:
Pro forma (unaudited) 9,453 _ _
Historical 2,418 13,124 17,942
NET INCOME:
Pro forma (unaudited) $13,702 - -
Historical $20,737 $18,950 $26,693
EARNINGS PER COMMON SHARE:
Pro forma_Basic (unaudited) $0.68 $- $-
Pro forma_Diluted (unaudited) $0.62 $- $-
Historical_Basic $1.03 $0.82 $1.11
Historical_Diluted $0.94 $0.81 $1.09
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Pro forma_Basic (unaudited) 20,129 - -
Pro forma_Diluted (unaudited) 21,999 - -
Historical_Basic 20,129 23,178 24,022
Historical_Diluted 21,999 23,445 24,562
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts In Thousands)
Share Amount Retain
s ed
Earnin
gs
Common
Stock
BALANCE, December 31, 1995 15,51 $195 $35,36
4 3
Net income - - 20,737
Cash distributions to shareholders - - (5,000
)
Distributions to shareholders in the form of notes - - (35,54
payable 9)
Distributions to shareholders in the form of - - (4,400
dividends payable )
Net proceeds from initial public offering 7,637 66,159 -
BALANCE, December 31, 1996 23,15 66,354 11,151
1
Net income - - 18,950
Tax benefit from exercise of stock options - 350 -
Proceeds from exercise of stock options 72 503 -
BALANCE, December 31, 1997 23,22 66,207 30,101
3
Net income 26,693
Tax benefit from exercise of stock options - 2,195 -
Proceeds from exercise of stock options 243 2,477 -
Net proceeds from secondary public offering 938 27,188 -
Shares issued in connection with acquisition of 337 9,504 -
Universal
BALANCE, December 31, 1998 24,74 $107,57 $56,79
1 1 4
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts in Thousands)
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $20,737 $18,950 $26,693
Adjustment to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 177 20 -
Depreciation and amortization 2,009 2,989 5,053
Loss on disposition of property and equipment 13 _ _
Equity loss and minority interest _ _ 1,429
Benefit for deferred income taxes (5,324) (245) (475)
Changes in asset and liabilities associated with
operating activities net of businesses acquired:
Accounts receivable (378) 31 (816)
Inventories (2,620) (6,181) (7,117)
Other assets 42 (1,470) (2,396)
Deposits (15) 12 -
Receivable from affiliated entity (58) (66) 230
Accounts payable 827 (1,043) 4,379
Accrued expenses 185 (843) (766)
Worker's compensation (438) 320 281
Income taxes payable 7 458 (211)
Deferred rent (52) 182 185
Accrued interest 535 575 524
Net cash provided by operating activities 15,647 13,690 26,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,308) (9,357) (12,600
)
Purchases of short-term investments (27,619 (4,966) (26,324
) )
Cash paid for Odd's-N-End's shares - - (843)
Investment in Universal International, Inc. - (1,708) -
Net cash used in investing activities (34,927 (16,030 (39,767
) ) )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation (612) (666) (758)
Retirement of revolving line of credit - - (12,500
)
Net proceeds from sale of stock 66,159 _ 27,188
Proceeds from exercise of stock options _ 503 2,477
Payment of notes payable to shareholders (35,549 _ _
)
Payment of dividend payable (4,400) _ _
Distributions to shareholders (5,000) _ _
Net cash provided (used in) financing 19,598 (153) 16,407
activities
NET INCREASE (DECREASE) IN CASH 318 (2,493) 3,634
CASH, beginning of period 3,057 3,375 882
CASH, end of period $3,375 $882 $4,516
The accompanying notes are an integral part of these consolidated financial
statements.
99 CENTS ONLY STORES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Line of Business
The Company, 99 Cents Only Stores and its subsidiaries (the Company,
including the operations of its 99 Cents Only Stores, Only Deals and Odd's-
N-End's retail locations and Bargain Wholesale) primarily retail various
consumable products and operated 53 and 139 stores at December 31, 1997 and
1998, respectively. The Company is also a wholesale distributor of various
consumable products.
2. Investment in Universal International, Inc.
On September 16, 1998, the Company completed its exchange offer to
purchase additional shares of the outstanding common stock of Universal.
The Company acquired an additional 46% of the outstanding common stock of
Universal in exchange for 336,986 shares of 99 Cents Only Stores common
stock. After the exchange the Company owns approximately 94% of the
outstanding shares of Universal's common stock. In addition the Company
completed a merger with Odd's-N-End's Inc. on September 30, 1998. The
Company paid $0.30 per share or $843,243 for all of the remaining
outstanding shares of Odd's-N-End's common stock. Included in 99 Cents Only
Stores' results of operations for the year ended December 31, 1998 is a
$1.4 million charge representing the Company's 48% share of the Universal
loss for the period from January 1, 1998 through September 16, 1998.
Universal's results of operations, including the results of Odd's-N-End's,
from September 17, 1998 through December 31, 1998 are consolidated with
that of the Company. Also during September 1998, the Company retired
Universal's secured revolving note payable of approximately $12.5 million.
Goodwill of $8.6 million associated with the acquisition of Universal is
being amortized over a 30-year period. During the period from January 1,
1998 to September 16, 1998, the date of the purchase of the additional 46%
interest in Universal common stock, the Company recorded wholesale sales to
Universal of $11,970,000.
The following unaudited pro forma results of operations for the years
ended December 31, 1997 and 1998 (in thousands, except per share data) have
been prepared as if the acquisitions of Universal and Odd's-N-End's
occurred on January 1, 1997.
Years Ended December 31,
1997 1998
Net Sales $299,560 $358,067
Net Income 14,726 25,813
Earnings per share:
Basic $0.62 $1.06
Diluted $0.62 $1.04
The pro forma financial information presented does not purport to be
indicative of the financial position or operating results which would have
been achieved had the transactions described above taken place at the dates
indicated and are not necessarily indicative of the Company's financial
position or results of operations for any future period.
3. Concentration of Operations in Southern California
Most of the Company's retail stores are located in Southern
California. In addition, the Company's current retail expansion plans
anticipate that 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. With the acquisition of Universal and Odd's-
N-End's, the Company also has retail stores in the upper Midwest, upstate
New York and Texas.
4. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of 99 Cents
Only Stores and its majority owned subsidiaries. All inter-company
transactions have been eliminated.
Use of Estimates
The preparation of consolidated 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
Goodwill, property and equipment are amortized and depreciated on the
straight-line basis over the following useful lives of the assets:
Goodwill 30 years
Building and improvements 30 - 27.5 years
Lesser of 5 years or
Leasehold improvements 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.
Stock Split
All common shares and per share amounts have been adjusted to give
retroactive effect for a five and four stock split effected in the form of
a stock dividend distributed on November 12, 1998 to holders of record on
November 5, 1998.
Earnings per share
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by
dividing net income by the total of the weighted average number of shares
outstanding plus the dilutive effect of outstanding stock options (applying
the treasury stock method).
A reconciliation of the basic weighted average number of shares
outstanding and the diluted weighted average number of shares outstanding
for each of the three years in the period ended December 31, 1998 follows:
1996 1997 1998
(Amou
nts
in
thous
ands)
Weighted average number of common shares
outstanding-Basic 20,12 23,17 24,02
9 8 2
Dilutive effect of outstanding stock options 168 267 540
Weighted average 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 1,702 - -
Weighted average number of common shares
outstanding-Diluted 21,99 23,44 24,56
9 5 2
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.
Concentration of Risk
The Company maintains cash and short-term investments with highly
qualified financial institutions. At various times such amounts may be in
excess of insured limits.
Pro Forma Statements of Income
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.
See Note 5 for explanation of pro forma provision for income taxes and
related pro forma net income.
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) and to continue to account for
stock options issued to employees under the provisions of APB 25.
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 $7,735,000, $12,911,000 and
$16,727,000 in 1996, 1997 and 1998, respectively. Interest payments totaled
approximately $228,000, $184,000 and $168,450 for the years December 31,
1996, 1997 and 1998, respectively.
New Authoritative Pronouncements
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). Adoption of SFAS 130 has
not had a material impact on the Company's financial reporting.
In June 1997, the Financial Accounting Standard Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS 131). The Company adopted SFAS 131 in 1998 (see Note 11).
In 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in
2000 and management does not expect adoption of this standard to have a
material impact on the Company's financial reporting or results of
operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform
to the current year's presentation.
5. Pro Forma and Historical Income Tax Provision
Effective May 1, 1996, the Company terminated its S corporation
election and became a C corporation. 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 tax 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 an 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 provisions for income taxes for the year ended December 31, 1996 is
as follows:
Year
ended
December
31,
(Amounts
in
thousands
)
1996
Current:
Federal $8,695
State 1,490
10,185
Deferred (732)
Pro forma provisions for income taxes $9,453
The historical provisions for income taxes for the years ended
December 31, 1996, 1997 and 1998 are as follows:
Years
Ended
Decembe
r 31,
(Amount
s in
thousan
ds)
1996 1997 1998
Current:
Federal $6,111 $10,678 $14,879
State 1,631 2,691 3,538
7,742 13,369 18,417
Deferred (5,324) (245) (475)
Provisions for income taxes $2,418 $13,124 $17,942
Differences between the pro forma provisions for income taxes and
income taxes at the statutory federal income tax rate for the year ended
December 31, 1996 is as follows:
Amoun Perce
t nt
Year ended
December 31,
1996
(Amounts in
thousands)
Income tax at statutory Federal $8,10 35%
rate 4
State income taxes, net of federal 1,389 6.0
income tax effect
Effect of permanent differences 60 0.2
LARZ and targeted jobs credits (100) (0.4)
$9,45 40.8%
3
Differences between the historical provisions for income taxes and
income taxes at the statutory federal income tax rate for the years ended
December 31, 1996, 1997 and 1998 are as follows:
Year
Ended
Decem
ber
31,
(Amou
nts
in
thous
ands)
1996 1997 1998
Amoun Perce Amoun Perce Amoun Perce
t nt t nt t nt
Income tax at statutory federal $6,12 26.4% $11,2 35.0% $15,6 35.0%
rate 2 26 22
State income taxes, net of
federal income tax effect 1,049 4.5 1,924 6.0 2,566 5.7
State income taxes as an S 85 0.4 _ _ _ _
corporation
Effect of permanent differences 31 0.1 (204) (0.6) (254) (0.5)
Effect of Universal equity losses _ _ _ _ 580 1.3
LARZ and targeted job credits (100) (0.4) (280) (0.9) (393) (0.9)
Change in tax status (4,57 (19.7 _ _ _
0) )
Other (199) (0.9) 458 1.4 (178) (0.4)
$2,41 10.4% $13,1 40.9% $17,9 40.2%
8 24 42
A detail of the Company's deferred tax asset as of December 31, 1997
and 1998 is as follows:
Years
Ended
December
31,
(Amounts
in
thousand
s)
1997 1998
Inventory $1,542 $1,061
Uniform inventory capitalization 886 1,712
Depreciation 1,666 1,566
Liability for claims 162 125
Workers' compensation 447 599
Deferred rent 605 755
LARZ credit 195 _
State taxes 511 724
Other, net (57) 369
Net operating loss carry-forward - 10,330
5,947 17,240
Net deferred tax liabilities - (488)
5,947 16,752
Valuation allowance - (10,330
)
$5,947 $6,422
In connection with the acquisition of Universal and Odd's-N-End's, the
Company has federal net operating loss carry-forwards of approximately
$29.5 million which it can use to offset Universal and Odd's-N-End's
income. Future use of these loss carry-forwards may be limited and expire
at various dates through 2012. Due to the uncertainty of the future use of
such loss carry-forwards, the Company has recorded a valuation allowance
equal to the tax effect of the loss carry-forward. In accordance with SFAS
109, any benefits realized from future use of these loss carry-forwards
will be recorded as a reduction of the goodwill generated from the
acquisition.
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." The Company's investments are comprised primarily of
investment grade federal and municipal bonds and commercial paper. The
Company generally holds investments until maturity. Any premium or discount
recognized in connection with the purchase of an investment is amortized
over the term of the investment. As of December 31, 1997 and 1998, the fair
value of investments approximated the carrying values and were invested as
follows:
(Amounts in thousands) 1997 Maturity 1998 Maturity
Withi 1 to Withi 1 to
n 1 2 n 1 2
year years year years
Federal bonds $1,50 $ $1,50 $1,50 $ $1,50
0 - 0 0 - 0
Municipal bonds 18,58 13,69 4,893 15,84 14,63 1,210
3 0 6 6
Commercial paper 12,50 12,50 - 29,21 29,21 -
1 1 4 4
$32,5 $26,1 $6,39 $46,5 $43,8 $2,71
84 91 3 60 50 0
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 7.0 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. In the event the option is not exercised, there is a $7.6 million
penalty.
Universal also has various capital lease obligations payable in
various monthly installments through August 2000, including interest at
5.0% and 11.1%.
Total minimum payments under the lease are as follows:
(Amounts
in
thousands
)
Year ending December 31:
1999 1,155
2000 11,566
12,720
Less_Amount representing interest (4,460)
Present value of minimum lease payment 8,260
Less_Current portion (923)
$7,337
8. Related-Party Transactions
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1.8
million, $2.0 million and $2.2 million in 1996, 1997 and 1998,
respectively.
During 1996, 1997 and 1998 the Company incurred legal fees of $82,000,
$61,000 and $60,000, respectively, to the law firm in which a director of
the Company is a partner.
9. Commitments and Contingencies
Credit Facility
The Company does not maintain any credit facilities with any bank.
However, the Company maintains a surety bond of approximately $1.2 million
for self-insured workers' compensation.
Lease Commitments
The Company leases various facilities under operating leases, which
expire at various dates through 2009. 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 1996, 1997 and 1998 was
approximately $5.6 million, $7.3 million and $10.6 million, respectively.
As of December 31, 1998, the minimum annual rentals payable under all
non-cancelable operating leases were as follows:
(Amounts
in
thousands
)
Year ending December 31:
1999 $14,467
2000 13,304
2001 10,547
2002 8,925
2003 7,918
Thereafter 15,549
$70,710
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, 1998 were approximately $30,000.
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. The Company provides for losses of
estimated known and incurred but not reported insurance claims. Known
claims are estimated and accrued when reported. At December 31, 1998, the
Company had accrued approximately $1.4 million 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 $1.2 million
surety bond.
The Company is named as a defendant in various legal matters arising
in the normal course of business. In management's opinion, none of these
matters will have a material effect on the Company's financial position or
its results of operations.
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
3,125,000 shares of common stock. Options may be granted to officers,
employees, directors and consultants. Grants may be at fair market value at
the date of grant or at a price determined by the compensation committee
consisting of three outside members of the board of directors (the
"Committee"). Options vest over a three year period, one third one year
from the date of grant and one third per year thereafter. Options expire
ten years from the date of grant.
The following table summarizes stock options available for grant.
Year Year Year
ended ended ended
December December December
31, 31, 31,
1996 1997 1998
Beginning Balance _ 861,173 16,500
Authorized 1,562,500 _ 1,562,500
Granted (798,124) (885,705) (917,284)
Cancelled 96,797 41,032 132,699
Available for future grant 861,173 16,500 794,415
A summary of the status of the Plan for the years ended December 31,
1997 and 1998 follows:
December 31, December 31, December 31,
1996 1997 1998
Weight Weight Weight
ed ed ed
Averag Averag Averag
Shares e Shares e Shares e
Exerci Exerci Exerci
se se se
Price Price Price
Outstanding at the beginning
of the year - $ - 701,327 $7.08 1,474,0 $11.18
44
Granted 798,124 7.07 885,705 14.12 917,284 31.29
Exercised - - (71,956 7.00 (242,95 8.75
) 4)
Cancelled (96,797 7.03 (41,032 10.87 (132,69 13.59
) ) 9)
Outstanding at the end of the 701,327 11.18 1,474,0 11.18 2,015,6 13.97
year 44 75
Exercisable at the end of the - - 166,894 $7.11 446,102 $11.59
year
Weighted average fair value of
options granted $3.62 $11.55 $31.29
The following table summarizes information about stock options
outstanding at December 31, 1998.
Weighted Weight Weight
Range of Average ed ed
Exercise Options Remaining Averag Options Averag
Prices Outstandi Contractual e Exercisab e
ng life Exerci le Exerci
se se
Price Price
$7.03_$8.56 442,490 7.3 $7.50 232,627 $7.05
$8.88- 13,751 6.9 9.20 9,688 9.33
$11.64
$14.08_$17. 679,552 8.3 14.09 166,270 14.08
04
$17.40_$21. 6,563 8.7 20.11 2,188 20.11
20
$26.85_$30. 753,912 9.3 30.10 18,750 26.85
20
$30.40_$32. 24,564 7.2 31.93 17,579 32.00
00
$41.00_$43. 94,843 9.9 41.14 - -
26
2,015,675 8.5 20.01 446,102 11.59
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" and accordingly, under SFAS No. 123, the expected
impact on the Company's financial statements is included in this expanded
footnote disclosure.
Had the Company applied the fair value based method of accounting,
which is not required, to all grants of stock options, under SFAS 123, the
Company would have recorded additional compensation expense and computed
pro forma net income and earnings per share amounts as follows for the
years ended December 31, 1997 and 1998 (amounts in thousands, except for
per share data):
December 31,
1996 1997 1998
Additional compensation expense $850 $3,11 $8,36
2 0
Pro forma net income 20,22 17,08 21,67
7 3 7
Pro forma earnings per share:
Basic $1.01 $0.74 $0.76
Diluted $0.92 $0.73 $0.75
These pro forma amounts were determined by estimating the fair value
of each option on its grant date using the Black-Scholes option-pricing
model with the following assumptions:
December 31,
1996 1997 1998
Risk free interest rate 5.0% 5.4% 4.9%
Expected life 5.6 10 8.8
years years years
Expected stock price volatility 28% 77% 67%
Expected dividend yield None None None
11. Operating Segments
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores and
Universal's, Only Deals and Odd's-N-End's retail stores. The majority of
the product offerings include recognized brand-name consumable merchandise,
regularly available for reorder. Bargain Wholesale sales the same
merchandise at prices generally below normal wholesale levels to local,
regional and national distributors and exporters.
The accounting policies of the segments are the same as those
described above in the summary of significant accounting policies. The
Company evaluates segment performance based on net sales and gross profit
of each segment. Management does not track segment data or evaluate segment
performance on additional financial information. As such, there are no
separately identifiable segment assets nor is there any separately
identifiable statements of income data (below gross profit) to be
disclosed.
The company accounts for inter-segment transfer at cost through its
inventory and inter-company accounts. All such transfers have been
eliminated in consolidation.
The Company had no customers representing more than 10 percent of
consolidated net sales. Substantially all of the Company's net sales were
to customers located in the United States.
Reportable segment information for the years ended December 31, 1996,
1997 and 1998 follows (in 000's).
Retail Wholesale Total
1996
Net sales $143,163 $40,480 $183,643
Gross Margin 54,607 8,114 62,721
1997
Net sales $186,024 44,831 230,855
Gross Margin 75,211 8,847 84,058
1998
Net sales $269,974 $53,299 $323,273
Gross Margin 113,617 10,038 123,666
12. 401(k) Plan
In 1998 the Company adopted a 401(k) Plan (the Plan). All full time
employees are eligible to participate in the plan after 3 months of
service. The Company does not match employee contributions. The Company may
elect to make a discretionary contribution to the Plan. For the year ended
December 31, 1998, no discretionary contributions were made.
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 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 1999 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 1999 Annual Meeting of Shareholders, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners 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 1999 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 1999 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 32 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 herein.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
are filed as part of, or incorporated by reference into, this report.
4. Reports on Form 8-K.
A Report on Form 8-K was filed on February 19, 1998 Item 5.
A Report on Form 8-K was filed on April 9, 1998 Item 5.
A Report on Form 8-K was filed on April 22, 1998 Item 5.
A Report on Form 8-K was filed on May 1, 1998 Item 5.
A Report on Form 8-K was filed on October 27, 1998 Item 5.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
99
CE
NT
S
ON
LY
ST
OR
ES
By
:
Eric Schiffer
Senior Vice President of Finance and
Operations
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934
this Annual Report on Form 10K 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
Chairman of the Board, Chief March 25,
David Gold Executive Officer and President 1999
Senior Vice President of March 25,
Howard Gold Distribution and Director 1999
Senior Vice President of Real March 25,
Jeff Gold Estate and Information Systems 1999
and Director
Senior Vice President of Finance March 25,
Eric Schiffer and Operations and Director 1999
March 25,
Andy Farina Chief Financial Officer 1999
March 25,
William Christy Director 1999
March 25,
Lawrence Glascott Director 1999
March 25,
Marvin L. Holen Director 1999
Ben Schwartz Director March 25,
1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of 99 Cents Only Stores
and it's subsidiaries included in this Form 10-K and have issued our report
thereon dated February 26, 1999. Our audits were made for the purpose of
forming an opinion on the basic consolidated 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 consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated 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 consolidated financial statements taken as a whole.
ARTHUR
ANDERSEN LLP
Los Angeles, California
February 26, 1999
99 ONLY STORES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For Each of the Three Years in the Period Ended December 31, 1998
Beginni End
ng Additio Reducti Other of
of Year n on Year
Amounts in Thousands
For the year ended December 31,
1998:
Allowance for doubtful account $178 $- $9 $366(a) $535
Inventory reserve 3,762 _ 1,173 _ 2,589
For the year ended December 31,
1997:
Allowance for doubtful account $211 $_ $33 $_ $178
Inventory reserve 4,052 _ 290 _ 3,762
For the year ended December 31,
1996:
Allowance for doubtful account $34 $237 $60 $_ $211
Inventory reserve 4,085 - 33 - 4,052
(a) Represents the allowance for doubtful accounts recorded in connection
with the acquisition of Universal International, Inc.
Exhibit Index
Exhib Exhibit Description
it
Numbe
r
3.1 Amended and Restated Articles of Incorporation of the
Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen certificate evidencing Common Stock of the Registrant.(1)
10.1 Form of Indemnification Agreement and Schedule of Indemnified
Parties.(1)
10.2 [Reserved]
10.3 Form of Tax Indemnification Agreement, between and among the
Registrant and the Existing Shareholders.(1)
10.4 1996 Stock Option Plan.(1)
10.5 Lease for 730 West Foothill Boulevard, Azusa, California, dated as
of December 1, 1995, by and between the Registrant as Tenant and
HKJ Gold, Inc. as Landlord, as amended(1).
10.6 Lease for 13023 Hawthorne Boulevard, Hawthorne, California, dated
April 1 1994, by and between the Registrant as Tenant and HKJ Gold,
Inc. as Landlord, as amended.(1)
10.7 Lease for 6161 Atlantic Boulevard, Maywood, California, dated
November 11, 1985, by and between the Registrant as Lessee and
David and Sherry Gold, among others, as Lessors.(1)
10.8 Lease for 14139 Paramount Boulevard, Paramount, California, dated
as of March 1 1996, by and between the Registrant as Tenant and
14139 Paramount Properties as Landlord, as amended.(1)
10.9 Release Agreement, dated March 25, 1996, regarding 11382 Beach
Boulevard, Stanton, California, by and between the Registrant and
11382 Beach Partnership.(1)
10.10 Lease for 6124 Pacific Boulevard, Huntington Park, California,
dated January 31, 1991, by and between the Registrant as Tenant and
David and Sherry Gold as the Landlord, as amended.(1)
10.11 Lease for 14901 Hawthorne Boulevard, Lawndale, California, dated
November 1, 1991, by and between Howard Gold, Karen Schiffer and
Jeff Gold, dba 14901 Hawthorne Boulevard Partnership as Landlord
and the Registrant as Tenant, as amended.(1)
10.12 Lease for 5599 Atlantic Avenue, North Long Beach, California, dated
August 13, 1992, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended.(1)
10.13 Lease for 1514 North Main Street, Santa Ana, California, dated as
of November 12, 1993, by and between the Registrant as Tenant and
Howard Gold, Jeff Gold, Eric J. Schiffer and Karen R. Schiffer as
Landlord, as amended.(1)
10.14 Lease for 6121 Wilshire Boulevard, Los Angeles, California, dated
as of July 1, 1993, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended; and lease for 6101 Wilshire
Boulevard, Los Angeles, California, dated as of December 1, 1995,
by and between the Registrant as Tenant and David and Sherry Gold
as Landlord, as amended.(1)
10.15 Lease for 8625 Woodman Avenue, Arlets, California, dated as of July
8, 1993, by and between the Registrant as Tenant and David and
Sherry Gold as Landlord, as amended.(1)
10.16 Lease for 2566 East Florence Avenue, Walnut Park, California, dated
as of April 18, 1994, by and between HKJ Gold, Inc. as Landlord and
the Registrant as Tenant, as amended.(1)
10.17 Lease for 3420 West Lincoln Avenue, Anaheim, California, dated as
of March 1, 1996, by and between the Registrant as Tenant and HKJ
Gold, Inc. as Landlord, as amended.(1)
10.18 Master Lease for 4000 East Union Pacific Avenue, City of Commerce,
. California ("Warehouse and Distribution Facility Lease"), dated as
of December 20, 1993, by and between the Registrant as Lessee and
TBC Realty II Corporation ("TBC") as Lessor, together with Lease
Guaranty ("Lease Guaranty"), dated December 20, 1993, by and
between Sherry and David Gold and TBC with respect thereto and
Letter Agreement, dated December 15, 1993, among Registrant, The
Mead Corporation, TBC and Citicorp Leasing, Inc. with respect to
the Lease Guaranty.(1)
10.10 Hawaiian Gardens Indemnity Agreement, dated as of March 25, 1996,
by and between the Registrant and HKJ Gold, Inc.(1)
10.20 North Broadway Indemnity Agreement, dated as of May 1, 1996, by and
between HKJ Gold, Inc. and the Registrant.(1)
10.21 Lease for 2606 North Broadway, Los Angeles, California, dated as of
May 1, 1996, by and between HKJ Gold, Inc. as Landlord and the
Registrant as Tenant.(1)
10.22 Grant Deed concerning 8625 Woodman Avenue, Arleta, California,
dated May 2, 1996, made by David Gold and Sherry Gold in favor of
Au Zone Investments #2, L.P., a California limited partnership.(1)
10.23 Grant Deed concerning 6101 Wilshire Boulevard, Los Angeles,
California, dated May 2, 1996, made by David Gold and Sherry Gold
in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.24 Grant Deed concerning 6124 Pacific Boulevard, Huntington Park,
California, dated May 2, 1996, made by David Gold and Sherry Gold
in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.25 Grant Deed concerning 14901 Hawthorne Boulevard, Lawndale,
California, dated May 2, 1996, made by Howard Gold, Karen Schiffer
and Jeff Gold in favor of Au Zone Investments #2, L.P., a
California limited partnership.(1)
11.1 Statements Regarding Computation of Per Share Earnings*
21.1 Subsidiaries of the Registrant. Universal International Inc., Only
Deals, Inc., Odd's-N-End's Inc.
23.1 Consent of Arthur Andersen LLP.*
27.1 Financial Data Schedule*
* Filed herewith
(1)Incorporated by reference from the Company's Registration Statement on
Form S-1
as filed with the Securities and Exchange Commission on May 21, 1996.
Exhibit 11.1
99 CENTS ONLY STORES
STATEMENTS REGARDING COMPUTATION OF
PER SHARE EARNINGS
(Amounts in Thousands, Except Per Share Data)
1996 1997 1998
Decem
ber
31,
Net Income $20,7 $18,9 $26,6
37 50 93
Common Stock:
Shares outstanding from beginning of period 15,51 23,15 23,22
4 1 3
Pro-rata shares_stock issuance 4,615 27 799
Basic weighted average number of common shares 20,12 23,17 24,02
outstanding 9 8 2
Pro-rata common shares to fund distribution to 1,702 - -
shareholders
Common stock equivalents 168 267 540
Diluted weighted average number of common shares 21,99 23,44 24,56
outstanding 9 5 2
Earnings per Common Share:
Basic $1.03 $0.82 $1.11
Diluted $0.94 $0.81 $1.09
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statement File No. 33-66729.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 24, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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
CE
NT
S
ON
LY
ST
OR
ES
By
:
Eric Schiffer
Senior Vice President of Finance and
Operations
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934
this Registration Statement 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
David Gold Chairman of the Board, Chief March 25,
Executive Officer and President 1999
Howard Gold Senior Vice President of March 25,
Distribution and Director 1999
Jeff Gold Senior Vice President of Real March 25,
Estate and Information Systems 1999
and Director
Eric Schiffer Senior Vice President of Finance March 25,
and Operations and Director 1999
Andy Farina Chief Financial Officer March 25,
1999
William O. Christy Director March 25,
1999
Lawrence Glascott Director March 25,
1999
Marvin L. Holen Director March 25,
1999
Ben Schwartz Director March 25,
1999
EXHIBIT 27.1
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[CASH] 4,516
[SECURITIES] 46,560
[RECEIVABLES] 2,605
[ALLOWANCES] (535)
[INVENTORY] 78,392
[CURRENT-ASSETS] 131,752
[PP&E] 60,219
[DEPRECIATION] (14,746)
[TOTAL-ASSETS] 198,123
[CURRENT-LIABILITIES] 21,242
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 107,571
[OTHER-SE] 56,794
[TOTAL-LIABILITY-AND-EQUITY] 198,123
[SALES] 323,273
323,273
[CGS] 199,618
[TOTAL-COSTS] 78,994
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (1,403)
[INCOME-PRETAX] 44,635
[INCOME-TAX] 17,942
[INCOME-CONTINUING] 26,693
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 26,693
[EPS-PRIMARY] 1.11
[EPS-DILUTED] 1.09
[FN]
Retained Earnings