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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, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2411605
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or 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 |_|
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. |_|
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 25, 2002 was $1,924,659,968 based on a $27.61 closing price
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,
69,708,800 Shares as of March 25, 2002
Portions of Part III of this report have been incorporated by reference
from the Company's Proxy Statement for the 2002 Annual Shareholders meeting.
TABLE OF CONTENTS
Part I PAGE
----
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 13
Item 3. Legal Proceedings............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Part II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters........................................ 14
Item 6. Selected Financial Data....................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 32
Item 8. Financial Statements and Supplementary Data................... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 50
Part III
Item 10. Directors and Executive Officers of the Registrant............ 50
Item 11. Executive Compensation........................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 50
Item 13. Certain Relationships and Related Transactions................ 50
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................ 51
Page 2
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Exchange Act and Section
27A of the Securities Act. The words "expect," "estimate," "anticipate",
"predict," "believe" and similar expressions and variations thereof are intended
to identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of 99 Cents Only Stores (the " Company"), its directors or
officers with respect to, among other things (a) trends affecting the financial
condition or results of operations of the Company and (b) the business and
growth strategies of the Company. The shareholders of the Company are cautioned
not to put undue reliance on such forward-looking statements. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and actual results may differ materially from those
projected in this Report, for the reasons, among others, discussed in the
Sections - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors." The Company undertakes no obligation
to publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q and any Current Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
99 Cents Only Stores (the "Company") 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 2001, 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. As
of March 28, 2002, the Company operated 132 retail stores, 112 in Southern
California, eight in Central California, six in Las Vegas, Nevada and six in
Phoenix, Arizona. These stores have an average size of approximately 20,000
square feet. The Company's 99 Cents Only Stores generated average net sales per
estimated saleable square foot of $319, which the Company believes is among the
highest in the deep-discount convenience store industry, and average net sales
per store of $4.6 million for stores open the full year in 2001.
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. In line with the
Company's business strategy, the Company has significantly increased its rate of
store expansion over the last five fiscal years. The Company expanded its 99
Cents Only Stores from 36 stores and 332,100 estimated saleable square feet at
December 31, 1995 to 123 stores and 1,892,949 estimated saleable square feet at
December 31, 2001, representing a compound annual growth rate ("CAGR") of 23%
and 34%, 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 2002, the Company opened nine stores and plans to open an additional
22 net new stores during the remainder of the year. The Company intends to
continue its planned store expansion over
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the next several years at a targeted growth rate of approximately 25% per year.
The Company estimates that the Southern and Central California market and the
Nevada and Arizona markets have the potential for over 250 99 Cents Only Stores.
The Company intends to continue to expand in both Arizona and Nevada in 2002 and
believes that the Arizona and Nevada markets have the potential for 35 and 15 99
Cents Only Stores, respectively.
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. Bargain Wholesale represented 9.7% of the Company's net sales in 2001.
INDUSTRY
The Company participates primarily in the deep-discount retail industry,
with its 99 Cents Only 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 2001, the Company
purchased merchandise from more than 999 suppliers, including Colgate-Palmolive
Company, The Dial Corp., Eveready Battery Company Inc., General Electric
Company, Gerber Products Company, 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 including frozen and deli items, 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
Page 4
products and clothing. 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 at 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, re-orderable
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 OPERATION. 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 Bargain Wholesale
division grew from $44.8 million in 1997 to $56.3 million in 2001, primarily due
to an increased focus on large domestic and international accounts and expansion
into new geographic markets. The Company maintains showrooms in New York City
and Chicago 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
132 existing 99 Cents Only Stores average approximately 20,000 gross square
feet. From January 1, 1997 through December 31, 2001, the Company has opened 87
new stores with an average of approximately 20,000 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 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
Page 5
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, which significantly contributes to the
success of the Company and its operations. Accordingly, all members of the
Company's management (other than David Gold, the Company's Chief Executive
Officer, Howard Gold, Senior Vice President of Distribution, Jeff Gold, Senior
Vice President of Real Estate and Information Systems, Eric Schiffer, President
and Karen Schiffer, Senior Buyer) and all employees with tenure of more than six
months with the Company receive an annual grant of stock options. As of December
31, 2001, the Company's employees held options to purchase an aggregate of
5,193,169 shares, or 7.4% 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:
THE WESTERN UNITED STATES HAS SIGNIFICANT POTENTIAL FOR GROWTH. The
Company's 99 Cents Only Stores are located primarily in Southern and Central
California, Nevada and Arizona. By focusing its near-term growth in its current
market, 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 has
plans to open at least 31 net new 99 Cents Only Stores in 2002. The 2002 store
additions will be located in Southern and Central California, Las Vegas, Nevada
and Phoenix, Arizona. The Company will have opened nine new stores in the first
three months of 2002, six stores in California, one in Las Vegas, Nevada and two
in Phoenix, Arizona. The Company plans to open an additional 22 net new stores
during the remainder of 2002. The Company has secured sites for seven additional
store locations and has signed twelve letters of intent to lease prospective
store sites. Generally, the Company expects that at least 50% of the letters of
intent will become store sites. The Company intends to continue its planned
store expansion over the next several years at a targeted rate of approximately
25% per year. The Company estimates that the Southern and Central California
market, the Clark County, Nevada area, and Phoenix, Arizona, have the potential
for over 250, 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. In November 1999, the Company
opened its first 99 Cents Only Stores outside the state of California in Las
Vegas, Nevada and opened additional stores both in Las Vegas, Nevada and
Phoenix, Arizona in 2001.
ACQUISITIONS. The Company considers lease 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, primarily for
the purpose of acquiring favorable lease locations.
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.
Page 6
The following table sets forth relevant information with respect to the growth
of the Company's existing 99 Cents Only Store operations (dollar amounts in
thousands, except sales per square foot):
YEAR ENDED DECEMBER 31,
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
99 Cents Only Stores, net
retail sales.......................... $186,024 $238,868 $312,306 $402,071 $522,019
99 Cents Only Stores annual
net sales growth rate................. 29.9% 28.4% 30.7% 28.7% 29.8%
99 Cents Only Stores store count
at beginning of year.................. 43 53 64 78 98
New stores............................ 10 13 18 20 26
Stores closed......................... - 2(a) 4(a) - 1(a)
Total store count at year-end......... 53 64 78 98 123
Average 99 Cents Only Stores
net sales per store open the
full year(b).......................... $3,750 $4,147 $4,433 $4,487 $4,647
Estimated saleable square footage
at year-end for 99 Cents Only Stores.. 631,500 822,900 1,102,369 1,424,280 1,892,949
Average net sales per estimated
saleable square foot(b)............... $354 $335 $332 $318 $319
Change in comparable 99 Cents Only
Stores net sales...................... 1.5% 4.3% 6.1% 2.0% 5.9%
(a) Stores closed due to relocation to a larger nearby site.
(b) For stores open for the entire fiscal year for 99 Cents Only Stores.
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 retail elsewhere from $1.19 to $9.99, for only 99 cents per item or group
of items. Each store typically carries over five thousand different stock
keeping units (SKU). The merchandise sold in the Company's stores primarily
consists of a wide variety of basic consumer items such as food, including
frozen and deli, beverages, health and beauty aids and household products
(cleaning supplies, paper goods, etc.). The stores also carry house-wares
(glassware, kitchen items, etc.), hardware, stationary and party goods, seasonal
goods, baby products and toys, giftware, pet products and clothing.
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 closeout purchasing strategy in 1976, the Company
has not experienced difficulty in obtaining name brand closeouts as well as
re-orderable 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
Page 7
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. As of March 28, 2002, the Company had
132, 99 Cents Only Stores. The stores include 112 locations in Southern
California, eight stores in Central California, six stores located in Las Vegas,
Nevada and six stores in Phoenix, Arizona. The stores average approximately
20,000 gross square feet. Since January 1, 1997, the Company has opened 87 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. 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.
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 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 106 of its 123 99 Cents Only Stores retail locations
in operation at December 31, 2001. The Company typically seeks leases with an
initial five-year to ten-year term and with one or more five-year renewal
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. 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 11 relocations to larger
stores, 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 24 district managers and two regional 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 two regional
managers that report to the Company's Vice President of Retail
Page 8
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 cashier's 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 $2.4 million, $2.7 million
and $3.4 million for 1999, 2000 and 2001, respectively, or 0.7%, 0.6% and 0.6%
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 2001, Bargain Wholesale sold merchandise to over 999 customers,
including other wholesalers, small local retailers, large regional and national
retailers and exporters. During 2001, no single customer accounted for more than
8.3% of Bargain Wholesale's net sales. 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 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 re-orderable
and private label merchandise within its wholesale operations. Bargain Wholesale
continues 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
Page 9
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 thirteen 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 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 2.3% of
the Company's total purchases in 2001. During 2001, the Company purchased
merchandise from more than 999 suppliers, including Colgate-Palmolive Company,
The Dial Corp., Eveready Battery Company Inc., General Electric Company, Gerber
Products Company, The Gillette Company, Hershey Foods 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
2001 was close-out or special-situation merchandise. The Company has developed
strong relationships with many manufacturers and distributors who recognize that
their special-situation merchandise can be moved quickly through the Company's
retail and wholesale distribution channels. The sale of closeout or
special-situation merchandise 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 2001, re-orderable 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 re-orderable name-brand goods at discounted
wholesale prices. The Company focuses its purchases of re-orderable 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 re-orderable merchandise. The Company imports products from various
European, South American and Asian countries with
Page 10
the single largest supplier coming from Europe. Merchandise directly imported by
the Company accounted for approximately 3.2% of total merchandise purchased in
2001. The Company primarily imports merchandise in product categories, which are
not brand sensitive to consumers such as kitchen items, house-wares, toys,
seasonal products, pet-care and hardware.
WAREHOUSING AND DISTRIBUTION
The Company owns an 880,000 square feet, single level warehouse and
distribution facility located on approximately 23 acres in the City of Commerce,
California. The Company's headquarters are located in this facility. The Company
also leases an additional 80,000 square foot of warehouse storage space adjacent
to its main distribution facility and 15,000 square feet of deli and frozen
product storage space. All of the three sites are located near downtown Los
Angeles and have close access to the Southern California freeway and rail
systems and the ports of Los Angeles and Long Beach. The main distribution
facility 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 64 tractors and 128 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. The Company optimizes the utilization of 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 facilities will be able to support distribution to approximately
200 stores in California and areas within a 450 mile radius. 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
In 2001, the Company installed a financial, accounting, human resource
and payroll system utilizing an INFORMIX database to run on an IBM UNIX
operating system. The Company also operates a separate IBM UNIX based in-house
developed inventory control system. The Company's store ordering system was
upgraded in 2000 and 2001 utilizing a radio frequency hand held scanning device.
This system also is a customized system and has improved the overall order
processing turn around time as well as improving the inventory availability to
the stores. This system is processed from a back office PC system at each retail
location. The Company has installed a Wide Area Network (WAN) to improve voice
and data communications among the stores, the warehouse and the administrative
functions. In 2001, the Company started the roll-out of its Point of Sale System
(POS) to all 99 Cents Only Stores and completed the roll-out in February of
2002. It is expected that the system will expedite the customer check-out
process and provide product category sales data necessary to better service the
Company's customers.
The Company's Information Systems staffing is comprised of 15 employees.
The Company believes that its management information systems and inventory
control systems along with the initiatives indicated above will be adequate to
support the Company's current needs. The Company intends to continue to enhance
its systems to support its future planned store growth and to take advantage of
new proven technology.
COMPETITION
The Company faces competition in both the acquisition of inventory and
sale of merchandise from other wholesalers, discount stores, single price point
merchandisers,
Page 11
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, 2001, the Company had 5,674 employees: 4,997 in its
retail operation, 452 in its warehouse and distribution facility, 205 in its
corporate offices and 20 in its Bargain Wholesale division. 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, 401(k) benefits to its full time employees
and an executive deferred compensation plan. All members of management (other
than David Gold, the Company's Chief Executive Officer, Howard Gold, Senior Vice
President of Distribution, Jeff Gold, Senior Vice President of Real Estate and
Information Systems, Eric Schiffer, President and Karen Schiffer, Senior Buyer)
and all full-time employees, hired before January 1, 2002 receive an annual
grant of stock options.
TRADEMARKS AND SERVICE MARKS
"99 Cents Only Stores" and "99 Cents" are registered service marks of
the Company and are listed on the United States Patent and Trademark Office
Principal Register. "Bargain Wholesale" is a service mark used by the Company.
Management believes that the Company's trademarks, service marks and trade names
are an important but not critical element of the Company's merchandising
strategy.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws and
regulations, a current or previous owner or occupant of real property may become
liable for the costs of removal or remediation of hazardous substances at such
real property. Such laws and regulations often impose liability without regard
to fault. As of March 28, 2002 the Company leased 113 of its 132 existing stores
and the Company owned its warehouse and distribution facilities (where its
executive offices are located). The Company also owns a warehouse facility in
Eagan, Minnesota that is currently leased to Universal International. 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.
Page 12
ITEM 2. PROPERTIES
As of March 28, 2002, the Company leased 113 of its 132 store locations.
The Company currently leases 12 store locations and a parking lot associated
with one of these stores from the Gold Family. Our annual rental expense for
these facilities totaled approximately $1.9 million, $1.9 million and $1.9
million in 1999, 2000 and 2001, respectively.
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 December 31, 2001, information
relating to the expiration dates of the Company's current retail stores leases:
EXPIRING EXPIRING EXPIRING EXPIRING
2003 2004-2006 2007-2009 2010 AND BEYOND
5(a) 47 29 25
(a) Includes two stores leased on a month-to-month basis.
The Company has purchased 17 locations, one opened in 1996, two in 1997,
one in 1998, three in 1999, three in 2000, six in 2001 and one existing store.
The Company also has escrow deposits on 5 additional locations for future
openings.
The Company owns its main warehouse, distribution and executive office
facility, located in the City of Commerce, California. The Company had been
leasing this facility since December 1993. At that time, the Company entered
into a seven year, triple net lease agreement with a purchase option, which was
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 exercised its option to purchase the building in December
2000 for $10.5 million. The Company funded the acquisition of this facility from
its investments in marketable securities. The Company also leases an additional
80,000 square feet of warehouse storage space adjacent to its main distribution
facility and 15,000 square feet of deli and frozen product storage space which
is also located in the vicinity.
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.
Page 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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. All stock prices have been restated to
reflect a four-for-three stock split effected in the form of a stock dividend to
be distributed on April 3, 2002.
PRICE RANGE
HIGH LOW
2000:
First Quarter.......................... $19.63 $11.63
Second Quarter......................... 21.54 17.01
Third Quarter.......................... 27.66 19.72
Fourth Quarter......................... 25.10 10.26
2001:
First Quarter.......................... $19.93 $13.35
Second Quarter......................... 23.04 16.28
Third Quarter.......................... 27.38 20.03
Fourth Quarter......................... 29.86 23.52
2002:
First Quarter through March 28, 2002... $28.76 $24.87
The closing price as reported on March 25, 2002 on the New York Stock
Exchange is set forth on the cover page of this Form 10-K. As of March 28, 2002,
the Company had approximately 13,642 holders of the Common Stock including 472
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.
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 9,250,500
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.
Page 14
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
income data for each of the three years ended December 31, 1999, 2000, and 2001,
and the balance sheet data as of December 31, 2000 and 2001 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 income data
for the years ended December 31, 1997 and 1998, and the balance sheet data as of
December 31, 1997, 1998 and 1999 are derived from financial statements audited
by Arthur Andersen LLP not included herein. The following information should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data" of the Company and notes thereto included elsewhere in
this report.
YEAR ENDED DECEMBER 31,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
Statements of Income Data:
Net sales:
99 Cents Only Stores................. $186,024 $238,868 $312,306 $402,071 $522,019
Bargain Wholesale(e)................. 44,831 53,202 47,652 49,876 56,250
--------- --------- --------- --------- ---------
Total Sales......................... 230,855 292,070 359,958 451,947 578,269
Cost of sales............................ 146,797 183,044 218,496 275,395 350,421
--------- --------- --------- --------- ---------
Gross profit............................. 84,058 109,026 141,462 176,552 227,848
Selling, general and
administrative expenses:
Operating expenses................... 49,850 62,424 80,089 107,981 141,544
Depreciation and amortization........ 2,989 4,506 5,927 8,666 12,354
--------- --------- --------- --------- ---------
Total operating expenses............ 52,839 66,930 86,016 116,647 153,898
Operating income......................... 31,219 42,096 55,446 59,905 73,950
Other (income) expense, net.............. (855) (1,428) (1,059) (3,617) (5,931)
--------- --------- --------- --------- ---------
Income from continuing operations
before provision for income taxes........ 32,074 43,524 56,505 63,522 79,881
Provision for income taxes............... 13,124 17,032 22,367 24,664 31,438
--------- --------- --------- --------- ---------
Income from continuing operations........ $18,950 $26,492 $34,138 $38,858 $48,443
--------- --------- --------- --------- ---------
Income (loss) from discontinued
operation net of income tax
provision of $910 in 1998 and
income tax benefit of $2,111 and
$700 in 1999 and 2000 respectively....... - 201 (3,167) (1,050) -
Loss on disposal of discontinued
operation including a provision of
$1,200 for operating losses during
phase-out period, net of income tax
benefit of $2,613........................ - - (9,000) - -
--------- --------- --------- --------- ---------
Net Income............................... $18,950 $26,693 $21,971 $37,808 $48,443
========= ========= ========= ========= =========
Page 15
(CONTINUED FROM PREVIOUS PAGE)
AS OF DECEMBER 31,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
Earnings per common share from
continuing operations (d):
Basic................................. $0.31 $0.41 $0.51 $0.58 $0.70
Diluted................................ $0.30 $0.40 $0.50 $0.56 $0.69
Earnings (loss) per common share from
discontinued operations(d):
Basic.................................. - - ($0.05) ($0.02) -
Diluted................................ - - ($0.05) ($0.02) -
Earnings (loss) per common share from
disposal of discontinued operations(d):
Basic.................................. - - ($0.13) - -
Diluted................................ - - ($0.13) - -
Earnings per common share (d):
Basic.................................. $0.31 $0.42 $0.33 $0.56 $0.70
Diluted................................ $0.30 $0.41 $0.32 $0.55 $0.69
Weighted average number of common shares
outstanding:
Basic.................................. 61,793 64,075 66,487 67,650 68,815
Diluted................................ 62,504 65,486 67,954 68,945 70,009
COMPANY OPERATING DATA:
Sales Growth
99 Cents Only Stores................... 29.9% 28.4% 30.7% 28.7% 29.8%
Bargain Wholesale(e)................... 10.7 18.7 (10.4) 4.7 12.8
Total Company sales.................... 25.7 26.5 23.2 25.6 28.0
Gross margin............................... 36.4 37.3 39.3 39.1 39.4
Operating margin........................... 13.5 14.4 15.4 13.3 12.8
Income from continuing operations:......... 8.2 9.1 9.5 8.6 8.4
RETAIL OPERATING DATA(A):
99 Cents Only Stores at end of period...... 53 64 78 98 123
Change in comparable stores
Net sales (b).............................. 1.5% 4.3% 6.1% 2.0% 5.9%
Average net sales per store open
the full year.............................. $3,750 $4,147 $4,433 $4,487 $4,647
Average net sales per estimated
saleable square foot(c).................... $354 $335 $332 $318 $319
Estimated saleable square footage
at year end................................ 631,500 822,900 1,102,369 1,424,280 1,892,949
Page 16
(CONTINUED FROM PREVIOUS PAGE)
AS OF DECEMBER 31,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
Balance Sheet Data:
Working capital........................ $60,791 $81,439 $105,637 $166,779 $194,302
Total assets........................... 119,443 194,167 224,015 277,285 352,158
Capital lease obligation, including
current portion........................ 8,709 8,005 7,251 - 1,677
Total shareholders' equity............. $96,308 $164,365 $195,540 $253,533 $319,643
(a) Includes retail operating data solely for the Company's 99 Cents Only
Stores.
(b) Change in comparable stores net sales compares net sales for all stores open
at least 15 months.
(c) Computed based upon estimated total saleable square footage of stores open
for the entire period.
(d) All earnings per share amounts have been restated to reflect the adoption of
SFAS No. 128, "Earnings per Share," effective December 15,1997 and the
four-for-three stock split to be distributed on April 3, 2002.
(e) In 1998, Bargain Wholesale sales includes $12.0 million inter-company sales
to Universal billed at cost. In 2001 Bargain Wholesale sales include $4.7
million of sales to Universal billed at a 10% mark-up.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis should be read in
connection with "Item 6. Selected Financial Data," and "Item 8. Financial
Statements and Supplementary Data."
GENERAL
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company 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 28, 2002, operated a chain of 132
deep-discount 99 Cents Only Stores. The Company's growth during the last three
fiscal years has come primarily from new store openings and growth in its
Bargain Wholesale division. The Company opened eighteen, twenty and twenty-six
stores in 1999, 2000 and 2001, respectively (fourteen, twenty and twenty five,
respectively, net of relocated stores). The Company opened nine stores through
March 28, 2002 (three stores in Southern California, three in Central
California, one in Las Vegas, Nevada and two in Phoenix, Arizona). The Company
plans to open an additional 22 net new stores during the remainder of the year,
including stores in Las Vegas, Nevada and Phoenix, Arizona. The Company has
secured sites for seven additional store locations.
Bargain Wholesale sales over the three years ended December 31, 2001
were primarily focused on large domestic and international accounts and local
and regional independent retailers. The Company generally realizes a lower gross
profit margin on Bargain Wholesale's net sales compared to its 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.
Page 17
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
store. 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 ending December 31, 2001, average
net sales per estimated saleable square foot (computed on 99 Cents Only Stores
open for a full year) declined from $332 per square foot to $319 per square
foot. This trend reflects the Company's determination to target larger locations
for new store development. Existing stores average approximately 20,000 gross
square feet. Since January 1, 1999 through December 31, 2001, the Company opened
64 new stores (including four relocations in 1999 and one relocation in 2001)
that average approximately 20,000 gross square feet. The Company currently
targets new store locations between 15,000 and 25,000 gross square 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
income from continuing operations in each of the last five years. In 2001, it
had net sales of $578.3 million, operating income of $74.0 million and income
from continuing operations of $48.4, representing a 28.0%, 23.4% and 24.7%
increase over 2000, respectively. From 1997 through 2001, the Company had a CAGR
in net sales, operating income and income from continuing operations of 25.8%,
24.1% and 26.4%, respectively.
We currently lease 12 of our 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
$1.9 million, $1.9 million and $1.9 million in 1999, 2000 and 2001,
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect reported earnings. The estimates and
assumptions are evaluated on an on-going basis and are based on historical
experience and on other factors that management believes are reasonable.
Estimates and assumptions include, but are not limited to, the areas of customer
receivables, inventories, income taxes, self-insurance reserves, and commitments
and contingencies.
The Company believes that the following represent the areas where more
critical estimates and assumptions are used in the preparation of the financial
statements:
Investments: The Company records its investments, which are comprised primarily
of investment grade federal and municipal bonds and commercial paper, at fair
value. The Company generally holds investments until maturity. Any premium or
discount recognized in
Page 18
connection with the purchase of an investment is amortized over the term of the
investment.
Long-lived asset impairments: The Company records impairments when the
carrying amounts of long-lived assets are determined not to be recoverable.
Impairment is assessed and measured by an estimate of future cash flows expected
to result form the use of the asset and its eventual disposition. Changes in
market conditions can impact estimated future cash flows from use of these
assets and additional impairments may be required should such changes occur.
Self-insurance reserves: The Company is self-insured in relation to
worker's compensation claims. The Company carries excess worker's compensation
insurance, which covers any individual claims up to the policy deductible
amount. The Company provides for losses of estimated known and incurred but not
reported insurance claims. These estimates are based on reported claims and
actuarial valuations. Should a greater amount of claims occur compared to what
was estimated, reserves recorded may not be sufficient and additional expense
could be incurred.
UNIVERSAL INTERNATIONAL
In December 1999, the Company determined it would be in its best
interest, and that of its shareholders, to focus its efforts on increasing the
growth rate of 99 Cents Only Stores. In conjunction with its revised growth
strategy, the Company decided to sell its Universal International, Inc. and
Odd's-n-End's, Inc. subsidiaries (together "Universal"). Universal operated a
multi-price point variety chain, with 65 stores located in the Midwest, Texas
and New York, under the trade names Only Deals and Odd's-N-End's. Among other
factors, the Company also considered its successful opening of its first 99
Cents Only Store outside the state of California, in Las Vegas, Nevada. Given
the success to date of the Las Vegas, Nevada stores, the Company believes that
the 99 Cents Only Stores concept is portable to areas outside the state of
California. As a result, the Company has focused greater management resources to
increase its store growth rate and expand more rapidly in Nevada and into
Arizona.
The Company also adopted a definitive plan to sell Universal within one
year, as set forth by guidelines for the accounting treatment of discontinued
operations. The Company engaged an investment-banking firm to evaluate and
identify potential buyers for the Universal business and expected to sell
Universal within the one-year time frame. The investment banking firm's
marketing process focused upon selling the business as a going concern. From
June 2000 through August 2000, sales presentations were delivered to both
strategic buyers and financial buyers. This process did not generate the
expected interest level from potential buyers that had been anticipated. The
highest offer for the Universal business was significantly less than the
Company's expectations. As a result of the difficulties encountered in trying to
sell Universal and the necessity to complete the process by December 31, 2000,
it was decided by the Board of Directors to be in the Company's and the
shareholders' best interest to sell Universal for the Company's carrying value
as of the close of business on September 30, 2000 to Universal Deals, Inc. and
Universal Odd's-n-End's, Inc., both of which are owned 100% by David and Sherry
Gold, both significant shareholders of 99 Cents Only Stores. Mr. Gold is also
Chairman and CEO of 99 Cents Only Stores. The sale was effective as of the close
of business on September 30, 2000. The purchase price for Universal was paid in
cash and was equal to the Company's carrying book value of the assets of
Universal at September 30, 2000 or $33.9 million. The net assets at September
30, 2000 included $29.2 million in inventory, net fixed assets of $7.6 million
and $0.6 million of other assets. These assets were offset by $3.5 million of
accounts payable, accrued and other liabilities. In connection with this
transaction, 99 Cents Only Stores provided certain ongoing administrative
services to Universal in 2000 and 2001 pursuant to a service agreement for a
management fee of 6% of Universal sales revenues. During fiscal year 2000, the
Company recorded an additional net loss from discontinued operations of $1.1
million, net of tax benefit of $0.7 million, for operating losses incurred
through the date of sale, in excess of the amounts originally provided in 1999.
In the fourth quarter of 2000, the Company received $1.3
Page 19
million in management fees under the service agreement with Universal. The
Company also received $0.4 million in lease payments for rental of a
distribution facility to Universal. During 2001, the Company received $3.7
million in fees under the service agreement, $1.4 million in lease payments and
sold $4.7 million in merchandise at a 10% mark-up. Subsequent to December 31,
2001, Universal ceased operations and closed its business. It is expected that
Universal will terminate its service agreement and lease arrangement with 99
Cents Only Stores some time during the first half of 2002.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
CONTRACTUAL OBLIGATIONS
The following table summarizes our consolidated contractual obligations
as of December 31, 2001. These should be read in conjunction with "Note 8
Commitments and Contingencies"
THERE-
Contractual Obligations 2002 2003 2004 2005 2006 AFTER TOTAL
------- ------- ------- ------- ------- ------- --------
Cap. Lease Obligations $169 $169 $169 $169 $169 $1,568 $2,413
Opr. Lease Obligations 18,284 18,319 17,116 14,517 11,837 32,434 112,507
------- ------- ------- ------- ------- ------- --------
$18,453 $18,488 $17,285 $14,686 $12,006 $34,002 $114,920
======= ======= ======= ======= ======= ======= ========
LEASE COMMITMENTS
The Company leases various facilities under operating lease except for
two, which were classified as capital leases and will expire at various dates
through 2017. 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 1999,
2000 and 2001 was approximately $11.0 million, $15.6 million and $19.4 million,
respectively. The Company typically seeks leases with an initial five-year to
ten-year term and with one or more five-year renewal options. See "Item 2
Properties." Most leases have renewal options ranging from three to ten years.
COMMITMENTS AND CONTINGENCIES
None
Page 20
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 DECEMBER 31,
1999 2000 2001
----------------- ------------------- ------------------
(Amounts in thousands)
Net Sales:
99 Cents Only Store.................. $312,306 86.8% $402,071 89.0% $522,019 90.3%
Bargain Wholesale.................... 47,652 13.2 49,876 11.0 56,250 9.7
-------- ------ -------- ------ -------- -----
Total................................ 359,958 100.0 451,947 100.0 578,269 100.0
Cost of sales........................ 218,496 60.7 275,395 60.9 350,421 60.6
-------- ------ -------- ------ -------- -----
Gross Profit......................... 141,462 39.3 176,552 39.1 227,848 39.4
Selling, general and
administrative expenses:
Operating expenses................... 80,089 22.3 107,981 23.9 141,544 24.5
Depreciation and amortization........ 5,927 1.6 8,666 1.9 12,354 2.1
-------- ------ -------- ------ -------- -----
Total................................ 86,016 23.9 116,647 25.8 153,898 26.6
Operating Income..................... 55,446 15.4 59,905 13.3 73,950 12.8
Other (income) expense, net.......... (1,059) (0.3) (3,617) (0.8) (5,931) (1.0)
-------- ------ -------- ------ -------- -----
Income from continuing operations
before provision for income taxes.... 56,505 15.7 63,522 14.1 79,881 13.9
Provision for income taxes........... 22,367 6.2 24,664 5.5 31,438 5.4
-------- ------ -------- ------ -------- -----
Income from continuing operations.... 34,138 9.5 38,858 8.6 48,443 8.4
Income (loss) from discontinued
operation, net of income tax
benefit of $2,111 and $700 in
1999 and 2000........................ (3,167) (0.9) (1,050) (0.2) - -
Loss from disposal of discontinued
operations including a provision
of $1,200 for operating losses
during the phase-out, net of
income tax benefit of $2,613......... (9,000) (2.5) - - - -
-------- ------ -------- ------ -------- -----
Net Income........................... $21,971 6.1% $37,808 8.4% $48,443 8.4%
======== ====== ======== ====== ======== =====
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES. Total net sales increased $126.4 million, or 28.0%, from
$451.9 million in 2000 to $578.3 million in 2001. 99 Cents Only Stores net sales
increased approximately $119.9 million, or 29.8%, from $402.1 million in 2000 to
$522.0 million in 2001. Bargain Wholesale net sales increased approximately $6.4
million, or 12.8%, from $49.9 million in 2000 to $56.3 million in 2001. The
increase in 99 Cents Only Stores net sales was attributed to the net effect of
25 net new stores opened in 2001 and the full year effect of 20 stores opened in
2000. Comparable stores net sales increased 5.9% from 2000 to 2001. Net sales in
2002 are expected to be favorably impacted by the full year effect of the 25 net
new stores opened in 2001 (constituting an increase in 469,000 saleable square
feet) and the estimated 32 new 99 Cents Only Stores expected to be opened in
2002. The increase in Bargain Wholesale net sales was primarily attributed to
$4.7 million in shipments to Universal.
GROSS PROFIT. Gross profit, which consists of total net sales, less cost
of sales, increased approximately $51.2 million, or 29.0%, from $176.6 million
in 2000 to $227.8 million in 2001. The increase in gross profit dollars was
primarily due to higher sales volume. As a percentage of net sales, gross profit
was 39.4% in 2001 versus 39.1% in 2000. This 0.3% variation results from the
ratio of retail versus wholesale sales. The
Page 21
retail gross margin increased to 41.6% of sales in 2001 versus 41.3% in 2000.
This was due to product cost and mix factors. The wholesale margin was 19.3% in
2001 versus 21.0% in 2000. This change results from the $4.7 million in
shipments to Universal at a contract margin of 10%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $37.3 million, or 32.0%, from $116.6 million in 2000 to
$153.9 million in 2001. The increase over 2000 is associated with year 2001 new
store growth and the full year effect of 2000 new stores additions and an
incremental provision for workers compensation of $1.8 million. SG&A increased
as a percentage of net sales from 25.8% in 2000 to 26.6% in 2001. The increase
in SG&A expenses in 2001 were offset by $3.7 million in management fees from
Universal (see Universal International above). The increases in SG&A in 2001
were directly attributable to 25 net new store openings and to increases in
utility costs, minimum wage increases and the additional field and corporate
support staff hired to support the future new store growth and expansion outside
of the state of California. Additional key staff positions were filled in retail
management, information systems, real estate, distribution, human resources and
buying.
OPERATING INCOME. Operating income increased $14.1 million, or 23.5%,
from $59.9 million in the 2000 period to $74.0 million in 2001. Operating income
as a percentage of net sales was 13.3% in 2000 and 12.8% in 2001 primarily due
to the increase in the operating costs discussed above.
OTHER (INCOME) EXPENSE. Other (income) expense relates primarily to the
interest income on the Company's marketable securities, net of interest expense
on the Company's capitalized leases. Interest expense was $0.7 million in 2000
and $0.1 in 2001. The Company had no bank debt during 2001 or 2000. Interest
income earned on the Company's marketable securities was $4.6 million in 2001
and $4.0 million in 2000. At December 31, 2001, the Company held $147.6 million
in short-term investments and $0.5 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. Also
included in 2001 and 2000 is $1.4 million and $0.4 million respectively, of
income under a lease agreement with Universal for a distribution facility.
PROVISION FOR INCOME TAXES. The provision for income taxes in 2001 was
$31.4 million, or 5.4% of net sales, compared to $24.7 million, or 5.5% of net
sales in 2000. The effective combined federal and state rates of the provision
for income taxes were 39.4% and 38.8% in 2001 and 2000, 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 welfare to
work tax credits. See Note 4 of "Notes to Financial Statements."
INCOME FROM CONTINUING OPERATIONS. As a result of the items discussed
above, net income from continuing operations increased $9.5 million, or 24.4%,
from $38.9 million in 2000 to $48.4 million in 2001. Income from continuing
operations as a percentage of net sales was 8.4% in 2001 and 8.6% in 2000.
DISCONTINUED OPERATIONS. The Board of Directors approved the sale of
Universal for an amount equal to the carrying value of the Company's investment,
$33.9 million, as of the close of business on September 30, 2000 (see "Recent
Developments" above). The Company recorded an additional loss from discontinued
operations of $1.1 million, net of tax benefit of $0.7 million, for Universal
and Odd's-n-End's operating losses incurred through the date of sale, in excess
of the amounts originally provided in 1999.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES. Total net sales increased $91.9 million, or 25.6%, from
$360.0 million in 1999 to $451.9 million in 2000. 99 Cents Only Stores net sales
increased approximately $89.8 million, or 28.8%, from $312.3 million in 1999 to
$402.1 million in 2000. Bargain
Page 22
Wholesale net sales increased approximately $2.2 million, or 4.6%, from $47.7
million in 1999 to $49.9 million in 2000. The increase in 99 Cents Only Stores
net sales was attributed to the effect of 20 net new stores opened in 2000 and
the full year effect of 14 net new stores opened in 1999. Comparable stores net
sales increased 2.0% from 1999 to 2000. 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.
GROSS PROFIT. Gross profit, which consists of total net sales, less cost
of sales, increased approximately $35.1 million, or 24.8%, from $141.5 million
in 1999 to $176.6 million in 2000. The increase in gross profit dollars was
primarily due to higher sales volume. As a percentage of net sales, gross profit
was 39.1% in 2000 versus 39.3% in 1999. This 0.2% variation results from product
cost and mix factors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $30.6 million, or 35.6%, from $86.0 million in 1999 to
$116.6 million in 2000. The increase over 1999 is associated with year 2000 new
store growth and the full year effect of 1999 new stores. SG&A increased as a
percentage of net sales from 23.9% in 1999 to 25.8% in 2000. The increase in
SG&A expenses is directly attributable to 20 net new store openings and to the
additional field and corporate support staff hired to support the future new
store growth and expansion outside of the state of California. Key staff
positions were added in risk management, information systems, real estate,
distribution, human resources and buying. This increase was offset by $1.3
million in management fees from Universal.
OPERATING INCOME. Operating income increased $4.5 million, or 8.1%, from
$55.4 million in the 1999 period to $59.9 million in 2000. Operating income as a
percentage of net sales was 15.4% in 1999 versus 13.3% in 2000 primarily due to
the increase in the operating costs discussed above.
OTHER (INCOME) EXPENSE. Other (income) expense relates primarily to the
interest income on the Company's marketable securities, net of interest expense
on the Company's capitalized warehouse lease. Interest expense was $0.7 million
in 2000 and in 1999. The Company had no bank debt during 2000 or 1999. Interest
income earned on the Company's marketable securities was $4.0 million in 2000
and $1.8 million in 1999. At December 31, 2000, the Company held $109.4 million
in short-term investments and $2.9 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. Also
included in 2000 is $0.4 million of income under a lease agreement with
Universal for a distribution facility.
PROVISION FOR INCOME TAXES. The provision for income taxes in 2000 was
$24.7 million, or 5.5% of net sales, compared to $22.4 million, or 6.2% of net
sales in 1999. The effective combined federal and state rates of the provision
for income taxes were 38.8% and 39.6% in 2000 and 1999, 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 welfare to
work tax credits. See Note 4 of "Notes to Financial Statements."
INCOME FROM CONTINUING OPERATIONS. As a result of the items discussed
above, net income from continuing operations increased $4.9 million, or 14.4%,
from $34.1 million in 1999 to $39.0 million in 2000 before a charge of $1.1
million from the discontinued operation. Income from continuing operations as a
percentage of net sales was 8.6% in 2000 and 9.5% in 1999.
DISCONTINUED OPERATIONS. The Board of Directors approved the sale of
Universal for an amount equal to the carrying value of the Company's investment,
$33.9 million, as of the close of business on September 30, 2000 (see "Recent
Developments" above). The Company recorded an additional loss from discontinued
operations of $1.1 million, net of tax benefit of $0.7 million, for Universal
and Odd's-n-End's operating losses incurred through the date of sale, in excess
of the amounts originally provided in 1999.
Page 23
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 requirements 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.
Net cash provided by operations during 2000 and 2001 was $50.4 and $67.2
million, consisting primarily of $54.8 and $64.2 million of net income adjusted
for non-cash items. In 2000, the Company used $4.4 million in working capital
and other activities and in 2001, the Company provided $3.0 million in working
capital and other activities. Net cash used in working capital and other
activities primarily reflects the increases in inventories in the amount of $9.8
million and $2.8 million, respectively.
Net cash used in investing activities during 2000 and 2001 was $55.0 and
$87.4 million. Net cash used in investing activities represents the following:
In 2000, the Company used $26.7 million (including $7.0 million used to purchase
of distribution facility which is currently leased to Universal), the Company
also used $1.5 million to repurchase 129 thousand shares of its outstanding
stock under its stock repurchase program, the Company received $33.9 million for
the sale of Universal and used $52.7 million for the purchase of short-term
marketable securities. In 2001, the Company used $46.9 million for the purchase
of property and equipment (including $8.7 million for the purchase of new store
locations added in 2001 and $9.2 million for the purchase of properties for
future openings), $4.7 million in investments in two partnerships for the
purpose of obtaining leases on two store locations and $35.8 million for the
purchase of short-term investments. The Company did not repurchase any of its
shares under its stock repurchase program in 2001, which expired during the next
year.
Net cash provided by financing activities during 2000 and 2001 was $5.7
and $11.4 million, which represents the proceeds from the exercise of
non-qualified stock options. The Company does not maintain any credit facilities
with any bank. However, the Company maintains a surety bond of approximately
$1.6 million for self-insured workers compensation.
The Company plans to open new 99 Cents Only Stores at a targeted annual
rate of 25%. The average investment per new store opened in 2001, including
leasehold improvements, furniture, fixtures and equipment, inventory and
pre-opening expenses, was approximately $660,000. The Company does not
capitalize pre-opening expenses. The Company's cash needs for new store openings
are expected to total approximately $35.0 million in 2002 including acquired
properties. The Company's total planned expenditures in 2002 for additions to
fixtures and leasehold improvements of existing stores as well as for
distribution, systems, expansion and replacement will be approximately $10.0
million. The Company believes that its total capital expenditure requirements
(including new store openings) will approximate $45.0 million in 2002. The
Company intends to fund its liquidity requirements in 2002 out of net cash
provided by operations, short-term investments and cash on hand.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience some seasonal fluctuations 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.
Page 24
The following table sets forth, certain unaudited results of operations for each
quarter during 2000 and 2001. 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. All earnings per share amounts have been restated to reflect the
four-for-three stock split to be distributed on April 3, 2002.
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2000 2001
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales:
99 Cents Only Stores... $87,563 $96,407 $98,096 $120,005 $110,212 $122,522 $130,799 $158,486
Bargain Wholesale...... 13,239 11,540 11,336 13,761 14,758 13,852 13,223 14,417
Total................ 100,802 107,947 109,432 133,766 124,970 136,374 144,022 172,903
Gross profit.............. 39,502 41,615 42,440 52,995 48,071 53,179 56,271 70,327
Operating income.......... 12,722 14,410 13,173 19,600 14,605 16,465 16,763 26,117
Income from continuing
operations................ 8,011 9,084 8,575 13,188 9,964 10,929 11,168 16,382
(Loss) from discontinued
operations................ - - (1,050) - - - - -
Net Income................ $8,011 $9,084 $7,525 $13,188 $9,964 $10,929 $11,168 $16,382
Earnings per common share
from continuing
operations:
Basic.................. $0.12 $0.14 $0.13 $0.19 $0.14 $0.16 $0.16 $0.24
Diluted................ $0.12 $0.13 $0.12 $0.19 $0.14 $0.16 $0.16 $0.23
(Loss) per common share
from discontinued
operations:
Basic.................. - - ($0.02) - - - - -
Diluted................ - - ($0.01) - - - - -
Net earnings per share:
Basic.................. $0.12 $0.14 $0.11 $0.19 $0.14 $0.16 $0.16 $0.24
Diluted................ $0.12 $0.13 $0.11 $0.19 $0.14 $0.16 $0.16 $0.23
Shares Outstanding
Basic.................. 66,789 67,279 68,051 68,399 68,403 68,506 68,995 69,325
Diluted................ 68,000 69,922 69,568 69,400 69,183 69,499 70,369 70,780
Percent of Net sales
Net sales:
99 Cents Only Stores... 86.9% 89.3% 89.6% 89.7% 88.2% 89.8% 90.8% 91.7%
Bargain Wholesale...... 13.1 10.7 10.4 10.3 11.8 10.2 9.2 8.3
Total............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit.............. 39.2 38.6 38.8 39.6 38.5 39.0 39.1 40.7
Operating income.......... 12.6 13.3 12.0 14.7 11.7 12.1 11.7 15.1
Income from continuing
operations................ 7.9% 8.4% 7.8% 9.9% 8.0% 8.0% 7.8% 9.5%
Page 25
NEW AUTHORITATIVE PRONOUNCEMENTS
In June 2001, the FASB approved two final statements: SFAS No. 141,
"Business Combinations," which provides guidance on the accounting for business
combinations and SFAS 142, "Goodwill and Other Intangible Assets," which defines
when and how goodwill and other intangible assets are amortized. These
statements are effective as of January 1, 2002. Management does not expect that
the adoption of SFAS 141 and SFAS 142 will have an impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" (SFAS143). This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement cost. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not expect that the adoption of SFAS 143 will have a
material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 is effective
for the financial statements issued for fiscal years beginning after December
15, 2001 and interim periods with those fiscal years. Management does not expect
that the adoption of SFAS 144 will have a material impact on the Company's
financial position or results of operations.
RISK FACTORS
TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE ADVERSE EFFECT ON OUR OPERATING
RESULTS.
Terrorist attacks, such as the attacks that occurred in New York and
Washington D.C. on September 11, 2001, the response by the United States
initiated on October 7, 2001 and other acts of violence or war may affect the
market on which our common stock will trade, the markets in which we operate and
our operations and profitability. Further terrorist attack on the United States
or the United States business may occur. The potential near-term and long-term
effects these markets may have for our customers, the market for our common
stock, the markets for our products and the United States economy are uncertain.
The consequence of any terrorist attack, or any armed conflicts which may
result, are unpredictable, and we may not be able to foresee events that could
have an adverse effect on our markets or our business.
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 "We are vulnerable to
uncertain economic factors and changes in the 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 1999,
2000 and 2001, we opened eighteen, twenty and twenty six 99 Cents Only Stores,
respectively (fourteen stores in 1999 and twenty five 2001, respectively, net of
relocated stores). As of March 28, 2002, we opened nine stores and expect to
open at least 22 additional stores in 2002.
Page 26
We plan to open new stores over the next several years at a rate of
approximately 25% 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.
OUR OPERATIONS ARE MAINLY CONCENTRATED IN SOUTHERN CALIFORNIA
All but twelve of our 99 Cents Only Stores are currently located in
Southern and Central California. The Company currently has six stores in Las
Vegas, Nevada and six stores in Arizona. Accordingly, our results of operations
and financial condition largely 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 since 1995. 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.
WE COULD EXPERIENCE DISRUPTIONS IN RECEIVING AND DISTRIBUTION
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 operations, particularly because much of our merchandise consists of
closeouts and other irreplaceable products. Although we maintain standard
property and business interruption insurance, we do not have earthquake
insurance on our properties. Although we maintain standard property and business
interruption insurance, we do not have earthquake insurance.
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.
Page 27
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, 1999, 2000 and 2001, we recorded net inventory of $53.9 million, $63.7
million and $66.5 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
profit, 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;
Page 28
- increases in prevailing wage levels; and
- decreases in consumer confidence levels.
In January 2001, California enacted a minimum wage increase of $0.50 per
hour with an additional $0.50 increase required in January 2002. The Company
believes that annual payroll expenses could increase approximately less than
1.0% over this two-year period as a result. Because we provide consumers with
merchandise at a 99 cents fixed price point, we typically cannot pass on cost
increases to our customers. However the Company believes that the increased
minimum wage will result in incremental customer spending in our stores.
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; and
- 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 12 of our 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
$1.9 million, $1.9 million and $1.9 million in 1999, 2000 and 2001,
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 and Eric Schiffer, our
Chief Executive Officer and President, respectively. 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.
Page 29
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 2000 and 2001, we generated approximately 29.6% and 29.9%,
respectively, of our net sales and approximately 32.7% and 35.3%, respectively,
of our operating income during the fourth quarter. If for any reason the
Company's net sales were to fall below norms during the fourth quarter it could
have an adverse impact on our profitability and impair our results of operations
for the entire year. Adverse weather conditions or other disruptions during the
peak holiday season could also affect our net sales and profitability for the
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. These factors include:
- the number of new stores and timing of new store openings;
- 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 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
lease all but 17 of our stores at December 31, 2001. In December 2000, the
Company exercised its option to purchase its main warehouse and distribution
facility (where our executive offices are located) for $10.5 million. 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. Moreover David Gold, our Chairman and
Chief Executive Officer, and members of his immediate family and certain of
their affiliates beneficially own 31,091,571 shares of our voting stock. As a
result, they have the ability to influence 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 potentially prevent a change in
our control. This
Page 30
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.
Page 31
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, 2001, the Company had $148,099,000 in
marketable securities maturing at various dates through January 2003. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity, and therefore should not bear any interest risk due to early
disposition. We do not enter into any derivative or interest rate hedging
transactions. Any premium or discount recognized with purchase of an investment
is amortized over the term of the investment. At December 31, 2001, the fair
value of investments approximated the carrying value.
Page 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
99 CENTS ONLY STORES
Report of Independent Public Accountants.................................. 34
Balance Sheets as of December 31, 2000 and 2001........................... 35-36
Statements of Income for the years ended December 31, 1999,
2000 and 2001........................................................... 37
Statements of Shareholders' Equity for the years ended December 31
1999, 2000 and 2001..................................................... 38
Statements of Cash Flows for the years ended December 31, 1999,
2000 and 2001........................................................... 39
Notes to Financial Statements............................................. 40
Page 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF 99 CENTS ONLY STORES:
We have audited the accompanying balance sheets of 99 Cents Only Stores
(a California Corporation) as of December 31, 2000 and 2001 and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of 99 Cents Only Stores
as of December 31, 2000 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 20, 2002
(Except for the matters
discussed in Note 13,
as to which the date is
March 9, 2002)
Page 34
99 CENTS ONLY STORES
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
2000 2001
-------- --------
CURRENT ASSETS:
Cash........................................................ $ 9,034 $ 232
Short-term investments...................................... 109,430 147,566
Accounts receivable, net of allowance for doubtful
accounts of $113 and $165 as of December 31, 2000
and 2001, respectively...................................... 3,569 3,523
Income tax receivable....................................... - 1,384
Inventories................................................. 63,693 66,528
Other....................................................... 2,663 3,886
-------- --------
Total current assets...................................... 188,389 223,119
PROPERTY AND EQUIPMENT, at cost:
Land........................................................ 17,781 20,715
Building and improvements................................... 17,357 24,007
Leasehold improvements...................................... 34,026 50,602
Fixtures and equipment...................................... 19,533 28,421
Transportation equipment.................................... 2,250 2,836
Construction in progress.................................... 5,091 17,856
-------- --------
Total properties, fixtures and equipment.................. 96,038 144,437
Accumulated depreciation and amortization................... (28,636) (40,798)
-------- --------
Total net properties...................................... 67,402 103,639
OTHER ASSETS:
Deferred income taxes....................................... 12,841 15,688
Long term investments in marketable securities.............. 2,867 533
Deposits.................................................... 308 296
Long term investments in partnerships....................... - 4,702
Other assets................................................ 5,478 4,181
-------- --------
Total other assets....................................... 21,494 25,400
-------- --------
TOTAL ASSETS................................................ $277,285 $352,158
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
Page 35
99 CENTS ONLY STORES
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 2001
-------- --------
CURRENT LIABILITIES:
Current portion of capital lease obligation..................... $ - $ 40
Accounts payable................................................ 12,622 15,244
Accrued expenses:
Payroll and payroll-related.................................. 2,530 2,771
Sales tax.................................................... 2,802 3,011
Other........................................................ 340 562
Due to shareholders.......................................... - 1,655
Worker's compensation........................................ 2,764 5,534
Income taxes payable......................................... 552 -
-------- --------
Total current liabilities................................. 21,610 28,817
LONG-TERM LIABILITIES:
Deferred rent............................................... 2,142 2,061
Capital lease obligation, net of current portion............ - 1,637
-------- --------
Total non-current liabilities............................. 2,142 3,698
COMMITMENTS AND CONTINGENCIES: (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized-1,000,000 shares
Issued and outstanding-none
Common stock, no par value
Authorized-100,000,000 shares
Issued and outstanding 68,407,520 at December 31, 2000
and 69,506,103 at December 31, 2001......................... 138,487 156,154
Retained earnings........................................... 115,046 163,489
-------- --------
Total shareholder's equity................................. 253,533 319,643
-------- --------
Total liabilities and shareholder's equity................. $277,285 $352,158
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
Page 36
99 CENTS ONLY STORES
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 2000 2001
-------- -------- --------
NET SALES:
99 Cents Only Stores..................................... $312,306 $402,071 $522,019
Bargain Wholesale........................................ 47,652 49,876 56,250
-------- -------- --------
Total Sales............................................ 359,958 451,947 578,269
COST OF SALES............................................... 218,496 275,395 350,421
-------- -------- --------
Gross profit............................................. 141,462 176,552 227,848
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses....................................... 80,089 107,981 141,544
Depreciation and amortization............................ 5,927 8,666 12,354
-------- -------- --------
Total SG&A............................................. 86,016 116,647 153,898
-------- -------- --------
Operating income......................................... 55,446 59,905 73,950
OTHER (INCOME) EXPENSE:
Interest income.......................................... (1,805) (3,969) (4,583)
Interest expense......................................... 746 712 92
Other.................................................... - (360) (1,440)
-------- -------- --------
Total Other (Income) Expense........................... (1,059) (3,617) (5,931)
-------- -------- --------
Income from continuing operations before
Tax Provision.............................................. 56,505 63,522 79,881
PROVISION FOR INCOME TAX.................................... 22,367 24,664 31,438
-------- -------- --------
Income from continuing operations........................... 34,138 38,858 48,443
Income (loss) from discontinued operation net
of income tax benefit of $2,111 and $700 in 1999
and 2000, respectively...................................... (3,167) (1,050) -
Loss from disposal of discontinued operation
including a provision of $1,200 for operating
losses during the phase-out period, net of
income tax benefit of $2,613................................ (9,000) - -
-------- -------- --------
NET INCOME.................................................. $21,971 $37,808 $48,443
-------- -------- --------
EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS:
Basic.................................................... $0.51 $0.58 $0.70
Diluted.................................................. $0.50 $0.56 $0.69
EARNINGS (LOSS) PER COMMON SHARE FROM DISCONTINUED
OPERATION:
Basic.................................................... ($0.05) ($0.02) -
Diluted.................................................. ($0.05) ($0.01) -
(LOSS) PER COMMON SHARE FROM DISPOSAL OF DISCONTINUED
OPERATION:
Basic.................................................... ($0.13) - -
Diluted.................................................. ($0.13) - -
NET EARNINGS FOR COMMON SHARE:
Basic.................................................... $0.33 $0.56 $0.70
Diluted.................................................. $0.32 $0.55 $0.69
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.................................................... 66,487 67,650 68,815
Diluted.................................................. 67,954 68,945 70,009
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 37
99 CENTS ONLY STORES
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS)
RETAINED
SHARES AMOUNT EARNINGS
---------- ---------- ---------
Common Stock
BALANCE, December 31, 1998....................................... 65,960 $107,571 $56,794
Net income.................................................... - - 21,971
Tax benefit from exercise of stock options.................... - 4,229 -
Proceeds from exercise of stock options....................... 874 4,975 -
---------- ---------- ---------
BALANCE, December 31, 1999....................................... 66,834 $116,775 $78,765
Net income.................................................... - - 37,808
Tax benefit from exercise of stock options.................... - 8,223 -
Proceeds from exercise of stock options....................... 1,684 12,961 -
Compensation expense in connection with
Cash-less exercise.......................................... 19 528 -
Shares repurchased under stock
Buyback program............................................. (129) - (1,527)
---------- ---------- ---------
BALANCE, December 31, 2000....................................... 68,408 $138,487 $115,046
Net income.................................................... - - 48,443
Tax benefit from exercise of stock options.................... 6,205 -
Proceeds from exercise of stock options....................... 1,098 11,462 -
---------- ---------- ---------
BALANCE, December 31, 2001....................................... 69,506 $156,154 $163,489
========== ========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 38
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS)
1999 2000 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 21,971 $ 37,808 $ 48,443
Adjustment to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations................................... 3,167 1,050 -
Provision for loss on disposal of
discontinued operation......................................... 9,000 - -
Depreciation and amortization.................................... 5,927 8,666 12,354
Compensation expense for cash-less exercise of stock options..... - 528 -
Tax benefit from exercise of non qualified employee
stock options.................................................. 4,229 8,223 6,205
Benefit from deferred income taxes............................... (4,976) (1,523) (2,847)
Changes in asset and liabilities associated with operating
activities net of businesses acquired:
Accounts receivable.............................................. (901) (213) 46
Inventories...................................................... (4,298) (9,761) (2,835)
Other assets..................................................... (2,888) (1,525) 74
Deposits......................................................... (31) (94) 12
Due to Shareholders.............................................. - - 1,655
Accounts payable................................................. (3,316) 3,612 2,622
Accrued expenses................................................. 1,158 855 672
Accrued worker's compensation.................................... 723 669 2,770
Income taxes..................................................... (4,647) 5,226 (1,936)
Deferred rent.................................................... 202 190 (81)
Accrued interest................................................. 660 (3,350) -
-------- -------- --------
Net cash provided by operating activities...................... 25,980 50,361 67,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (17,953) (26,646) (46,888)
Purchases of short-term investments.............................. (13,011) (52,726) (35,802)
Investments in Partnerships...................................... - - (4,702)
Repurchase of Company stock...................................... - (1,527) -
Net assets of discontinued operations............................ 6,048 (8,031) -
Proceeds from sale of Universal International, Inc............... - 33,909 -
-------- -------- --------
Net cash used in investing activities.......................... (24,916) (55,021) (87,392)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation............................. (754) (7,251) (26)
Proceeds from exercise of stock options.......................... 4,975 12,961 11,462
Net cash provided by financing activities...................... 4,221 5,710 11,436
NET INCREASE (DECREASE) IN CASH..................................... 5,285 1,050 (8,802)
CASH, beginning of period........................................... 2,699 7,984 9,034
-------- -------- --------
CASH, end of period................................................. $ 7,984 $ 9,034 $ 232
======== ======== ========
NON CASH INVESTING AND FINANCING ACTIVITIES
Asset acquired under capital lease......................................................... $1,703
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Page 39
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. LINE OF BUSINESS
99 Cents Only Stores (the Company) is incorporated in the State of
California. The Company retails various consumable products through its 98 and
123 stores at December 31, 2000 and 2001, respectively. The Company is also a
wholesale distributor of various consumable products.
2. 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 most
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 California. The
Company also has six stores in Las Vegas, Nevada and six stores in Arizona as of
March 28, 2002.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories are priced at the lower of cost (first in, first out) or
market.
DEPRECIATION AND AMORTIZATION
Property and equipment are amortized and depreciated on a straight-line
basis over the following useful lives of the assets:
Building and improvements............. 27.5 - 30 years
Leasehold improvements................ Lesser of 5 years or
remaining lease term
Fixtures and equipment................ 5 years
Transportation equipment.............. 3 years
The Company follows the policy of capitalizing expenditures that
materially increase asset lives and charging ordinary repairs and maintenance to
operations as incurred.
EARNINGS PER SHARE
"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).
Page 40
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, 2001 follows:
1999 2000 2001
------- ------- -------
(AMOUNTS IN THOUSANDS)
Weighted average number of common shares
Outstanding-Basic................................... 66,487 67,650 68,815
Dilutive effect of outstanding stock options.......... 1,467 1,295 1,194
------- ------- -------
Weighted average number of common shares
Outstanding-Diluted................................. 67,954 68,945 70,009
======= ======= =======
CONCENTRATION OF RISK
The Company maintains cash and short-term investments with highly
qualified financial institutions. At various times, such amounts are in excess
of insured limits.
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.
SHIPPING AND HANDLING COSTS
The Company follows the provisions of Emerging Issues Task Force Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling are included as
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the
opening of new retail stores.
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 $21,756,000, $12,474,425 and
$25,260,277 in 1999, 2000 and 2001, respectively. Interest payments totaled
approximately $86,000, $31,000 and $92,000 for the years December 31, 1999, 2000
and 2001, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, short-term and
long-term investments, short-term trade receivables and payables. The carrying
value for all such instruments, considering the terms, appropriate fair value at
December 31, 2000 and 2001, respectively.
Page 41
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events
or changes indicate that the carrying amount of an asset or group of assets may
not be recoverable. No impairment losses were recorded during the years ended
December 31, 1999, 2000 or 2001.
NEW AUTHORITATIVE PRONOUNCEMENTS
In June 2001, the FASB approve two final statements: SFAS No. 141,
"Business Combinations," which provides guidance on the accounting for business
combinations and SFAS 142, "Goodwill and Other Intangible Assets," which defines
when and how goodwill and other intangible assets are amortized. These
statements are effective as of January 1, 2002. Management does not expect that
the adoption of SFAS 141 and SFAS 142 will have an impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" (SFAS 143). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement cost. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002. Management does not expect that the adoption of SFAS 143 will have an
impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 is effective
for the financial statements issued for fiscal years beginning after December
15, 2001 and interim periods with those fiscal years. Management does not expect
that the adoption of SFAS 144 will have an impact on the Company's financial
position or results of operations.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
the current year's presentation.
4. INCOME TAX PROVISION
The provisions for income taxes from continuing operations for the years
ended December 31, 1999, 2000 and 2001 are as follows:
YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
1999 2000 2001
------- -------- -------
Current:
Federal..................... $20,192 $20,917 $29,340
State....................... 2,885 5,270 7,558
------- -------- -------
23,077 26,187 36,898
Deferred......................... (710) (1,523) (5,460)
------- -------- -------
Provisions for income taxes...... $22,367 $24,664 $31,438
======= ======== =======
Page 42
Differences between the provisions for income taxes and income taxes at
the statutory federal income tax rate for the years ended December 31, 1999,
2000 and 2001 are as follows:
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
1999 2000 2001
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- -------- -------
Income tax at statutory
federal rate........................ $19,777 35.0% $22,232 35.0% $27,959 35.0%
State income taxes, net of
federal income tax effect........... 3,012 5.3 3,386 5.3 4,258 5.3
Effect of permanent differences..... (64) (0.1) (291) (0.5) (404) (0.5)
Welfare to work, LARZ and
other job credits................... (380) (0.6) (663) (1.0) (375) (0.4)
Other............................... 22 - - - - -
--------- ------- --------- ------- -------- -------
$22,367 39.6% $24,664 38.8% $31,438 39.4%
========= ======= ========= ======= ======== =======
Page 43
A detail of the Company's deferred tax asset as of December 31, 2000 and
2001 is as follows:
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
2000 2001
AMOUNT AMOUNT
-------- --------
Inventory......................... $ 516 $ 494
Uniform inventory
capitalization.................... 1,026 1,771
Depreciation...................... 3,018 6,141
Liability for claims.............. 112 112
Workers' compensation............. 1,114 2,231
Deferred rent..................... 840 831
State taxes....................... 1,839 2,575
Other, net........................ 308 (2,109)
Net operating loss carry-forward..
8,608 8,182
-------- --------
$17,381 $20,228
Valuation allowance............... (4,540) (4,540)
-------- --------
$12,841 $15,688
======== ========
In connection with the acquisition and subsequent sale of Universal and
Odd's-N-End's, the Company has remaining federal net operating loss carry-
forwards of approximately $24.6 million which it can use to offset income.
Future use of this loss carry-forwards may be limited and expire at various
dates through 2013. 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 that may not be realizable.
5. INVESTMENTS
Investments 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, 2000 and 2001, the fair value of investments
approximated the carrying values and were invested as follows:
(AMOUNTS IN THOUSANDS)
MATURITY 1 YEAR MATURITY 1 YEAR
WITHIN 1 OR WITHIN 1 OR
2000 YEAR MORE 2001 YEAR MORE
-------- -------- ------- -------- -------- ------
Municipal bonds............... $65,621 $62,754 $2,867 $113,075 $112,542 $533
Corporate Securities.......... 2,000 2,000 - 981 981 -
Commercial paper.............. 44,676 44,676 - 34,043 34,043 -
-------- -------- ------- -------- -------- ------
$112,297 $109,430 $2,867 $148,099 $147,566 $533
======== ======== ======= ======== ======== ======
6. PURCHASE OF FACILITY
In December 2000, the Company exercised its option to purchase its main
warehouse, distribution and corporate office facility (approximately 880,000
square feet) for $10.5 million. Included in property and equipment is
approximately $13.7 million of land and building, at cost, related to this
property.
Page 44
7. RELATED-PARTY TRANSACTIONS
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1.9
million, $1.9 million and $1.9 million in 1999, 2000 and 2001, respectively.
Effective September 30, 2000, the Company sold its discontinued
operation, Universal International, Inc. to a Company owned 100% by Dave and
Sherry Gold, both significant shareholders of 99 Cents Only Stores (see note
12). Mr. Gold is also an executive officer and director. In the fourth quarter
of 2000, the Company received $1.3 million in management fees under the service
agreement with Universal. The Company also received $0.4 million in lease
payments for rental of a distribution facility to Universal. During 2001, the
Company received $3.7 million in fees under the service agreement, $1.4 million
in lease payments and sold $4.7 million in merchandise at a 10% mark-up.
Subsequent to December 31, 2001, Universal ceased operations and closed its
business. It is expected that Universal will terminate its service agreement and
lease arrangement with 99 Cents Only Stores some time during the first half of
2002.
8. COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY
The Company does not maintain any credit facilities with any bank.
LEASE COMMITMENTS
The Company leases various facilities under operating lease except for
two, which were classified as a capital lease and will expire at various dates
through 2017. 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 1999,
2000 and 2001 was approximately $11.0 million, $15.6 million and $19.4 million,
respectively.
As of December 31, 2001, the minimum annual rentals payable under all
non-cancelable operating leases were as follows: (Amounts in thousands)
YEAR ENDING DECEMBER 31: OPERATING CAPITAL
LEASES LEASES
--------- --------
2002..................................... $18,284 $169
2003..................................... 18,319 169
2004..................................... 17,116 169
2005..................................... 14,517 169
2006..................................... 11,837 169
Thereafter............................... 32,434 1,568
--------- --------
Future Minimum lease payment............. $112,507 $2,413
Less amount representing interest........ (736)
--------- --------
Present value of future lease payments... $1,677
========
In addition, the Company also leases certain retail facilities on a
month-to-month basis. The aggregate monthly rental payment for month-to-month
leases at December 31, 2001 was approximately thirteen thousand dollars. In
2001, the Company incurred $0.2 million in interest and depreciation relating to
two stores in which the properties were classified as a capital lease.
Page 45
Interest paid in relation to capital leases aggregated $0.1, $0.0 and
$0.1 million for fiscal years ended 1999, 2000 and 2001 respectively.
In 2001, the Company incurred $0.1 million of depreciation related to
two stores in which the properties were classified as capital leases.
WORKER'S COMPENSATION
Effective August 11, 1993, the Company became self-insured as to
worker's compensation claims. The Company carries excess worker's 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, 2000 and 2001, the Company had accrued approximately
$2.8 million and $5.5 million, respectively, for estimated worker's compensation
claims.
In connection with the self-insurance of worker's compensation, the
Company is required, by the State of California, to maintain a $1.6 million
surety bond.
LEGAL MATTERS
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.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses
were $2.4 million, $2.7 million and $3.4 million for 1999, 2000 and 2001,
respectively.
9. STOCK-BASED COMPENSATION PLANS
The Company has one stock option plan, the 1996 Stock Option Plan.
Option may be granted as incentive or non-statutory stock options. The Company
accounts for its stock option plan under APB Opinion No. 25, under which no
compensation cost has been recognized in fiscal 1999, 2000 and fiscal 2001
respectfully. All share amounts have been restated to reflect the four-for-three
stock split to be distributed on April 3, 2002
The following table summarizes stock options available for grant:
YEAR ENDED DECEMBER
1999 2000 2001
----------- ----------- -----------
Beginning Balance................ 2,118,648 4,469,005 3,478,532
Authorized....................... 4,000,200 - -
Granted.......................... (1,946,129) (1,654,804) (1,178,491)
Cancelled........................ 296,286 664,331 163,020
Available for future grant....... 4,469,005 3,478,532 2,463,061
Page 46
A summary of the status of the Company's stock option plan at December
31, 1999, December 31, 2000 and December 31, 2001 and changes during the years
then ended is presented in the table and narrative below:
YEAR ENDED DECEMBER 31,
1999 2000 2001
SHARES WTD AVG SHARES WTD AVG SHARES WTD AVG
EX PRICE EX PRICE EX PRICE
------------------- ---------------------- -----------------------
Outstanding at the beginning
of the year.................. 5,195,383 $7.68 5,970,422 $10.68 5,277,176 $13.06
Granted...................... 1,946,129 17.60 1,654,805 17.00 1,178,491 20.40
Exercised.................... (874,804) 7.59 (1,683,720) 7.94 (1,097,918) 10.89
Cancelled.................... (296,286) 12.67 (664,331) 14.49 (163,020) 18.88
Outstanding at the end of
the year..................... 5,970,422 10.68 5,277,176 13.06 5,194,729 15.00
Exercisable at the end of
the year..................... 2,282,854 5.92 2,319,656 8.77 2,587,947 11.36
Weighted average fair value
of options granted........... $11.34 $12.09 $13.80
The weighted average fair value at the date of grant for options granted
during fiscal 2001, 2000 and 1999 were estimated using black-scholes pricing
model with the following assumptions: weighted average risk-free interest rate
of 5.44%, 5.70% and 5.50%; weighted average volatility of 49.09%, 54.00% and
67.00%; expected life of 10 years; and weighted average dividend yield of 0.0%.
The following table summarized information about stock options
outstanding at December 31, 2001:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- -------- ----------- ---------
$3.51-$4.46 326,296 4.4 $2.69 326,296 $2.69
$5.82-$8.70 521,457 5.3 5.28 521,457 5.28
$10.60-$15.69 707,773 6.4 11.28 703,773 11.28
$16.00-$23.50 2,496,710 7.8 17.17 1,036,421 17.19
$24.12-$31.86 1,142,493 9.3 20.52 - -
----------- ----------- -------- ----------- ---------
5,194,729 7.5 $15.00 2,587,947 $11.36
=========== =========== ======== =========== =========
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, 1999, 2000 and 2001 (amounts in thousands, except for per share data):
Page 47
DECEMBER 31,
1999 2000 2001
------- ------- ------
Additional compensation expense....... $16,071 $11,888 $9,818
Pro forma net income.................. 5,900 25,920 38,625
Pro forma earnings per share:
Basic................................. $0.09 $0.38 $0.56
Diluted............................... $0.09 $0.38 $0.55
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,
1999 2000 2001
-------- -------- --------
Risk free interest rate............ 5.50% 5.70% 5.44%
Expected life...................... 10 years 10 years 10 Years
Expected stock price volatility.... 67% 54% 49%
Expected dividend yield............ None None None
10. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The majority of the product offerings include recognized
brand-name consumable merchandise, regularly available for reorder. Bargain
Wholesale sells 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 the 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 or separately identifiable statements of income data (below gross
profit) to be disclosed.
The Company accounts for inter-segment transfer at cost through its
inventory accounts.
The Company had no customers representing more than 10 percent of 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, 1999,
2000 and 2001 follows (in 000's):
RETAIL WHOLESALE TOTAL
1999
Net sales............ $312,306 $47,652 $359,958
Gross Margin......... 130,317 11,145 141,462
2000
Net sales............ $402,071 $49,876 $451,947
Gross Margin......... 166,054 10,498 176,552
2001
Net sales............ $522,019 $56,250 $578,269
Gross Margin......... 217,015 10,833 227,848
Page 48
11. 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 years ended December 31, 1999,
2000 and 2001, no discretionary contributions were made.
12. DISCONTINUED OPERATIONS
On March 4, 2000, the Board of Directors approved the disposition of
Universal International, Inc. and Odd's-n-End's, Inc., which comprises the
retail operations of Odds-n-Ends, Inc. and Only Deals, Inc.
The Company engaged an investment-banking firm in May 2000 to evaluate
and identify potential buyers for the Universal business and expected to sell
Universal within the one-year time frame. The investment banking firm's
marketing process focused upon selling the business as a going concern. From
June 2000 through August 2000, sales presentations were delivered to both
strategic buyers and financial buyers. This process did not generate the
expected interest level from potential buyers that had been anticipated. The
highest offer for the Universal business was significantly less than the
Company's expectations. As a result of the difficulties encountered in trying to
sell Universal and the necessity to complete the process by December 31, 2000 it
was decided by the Board of Directors to be in the Company's and the
shareholders' best interest to sell Universal for the Company's carrying value
as of the close of business on September 30, 2000 to, Universal Deals, Inc., a
limited liability company owned 100% by David and Sherry Gold, both significant
shareholders of 99 Cents Only Stores. Mr. Gold is also Chairman and CEO of 99
Cents Only Stores. The sales price for Universal was the Company's carrying
value as of the close of business on September 30, 2000, which was $33.9
million. The net assets at September 30, 2000 included $29.2 million in
inventory, net fixed assets of $7.6 million and $0.6 million of other assets.
These assets were offset by $3.5 million of accounts payable, accrued and other
liabilities. In connection with this transaction 99 Cents Only Stores is
providing certain ongoing administrative and other services to Universal
pursuant to a Services Agreement. The management fee is based on 6% of
Universal's sales volume.
The net losses of these operations for all periods are included in the
consolidated statements of income under "discontinued operations." Revenues from
such operations were $83,264 in 1999. The provisions for loss on discontinued
operations reflected in the statement of income, includes the write-down of the
assets of Universal operations to estimate net realizable values and the
estimated cost of disposing these operations along with the estimated loss of
$1.2 million through the estimated date of disposal, less the expected tax
benefits of approximately $2,613 applicable thereto.
In the fourth quarter of 2000, the Company received $1.3 million in
management fees under the service agreement with Universal. The Company also
received $0.4 million in lease payments for rental of a distribution facility to
Universal. During 2001, the Company received $3.7 million in fees under the
service agreement, $1.4 million in lease payments and sold $4.7 million in
merchandise at a 10% mark-up. Subsequent to December 31, 2001, Universal ceased
operations and closed its business. It is expected that Universal will terminate
its service agreement and lease arrangement with 99 Cents Only Stores some time
during the first half of 2002.
13. STOCK SPLIT
On March 9, 2002, the Company's Board of Directors approved a
four-for-three stock split to be distributed on April 3, 2002 to shareholders of
record on March 25, 2002. The accompanying financial statements have been
adjusted to give retroactive effect to this stock split as if it had occurred at
the beginning of all periods presented.
Page 49
On February 17, 2001, the Company's Board of Directors approved a
three-for-two stock split to be distributed on March 20, 2001 to shareholders of
record on May 14, 2001.
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 and Executive Officers 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 2002 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 2002 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 2002 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 2002 Annual Meeting of Shareholders, and is incorporated herein by
reference.
Page 50
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
Financial Statements set forth in item 8 on page 34 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.
Page 51
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 CENTS ONLY STORES
By : /s/ Eric Schiffer
--------------------
President
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
/s/ David Gold Chairman of the Board and March 28, 2002
- ---------------------- Chief Executive Officer
/s/ Howard Gold Senior Vice President of March 28, 2002
- ---------------------- Distribution and Director
/s/ Jeff Gold Senior Vice President of Real March 28, 2002
- ---------------------- Estate and Information
Systems and Director
/s/ Eric Schiffer President and Director March 28, 2002
- ----------------------
/s/ Andy Farina Chief Financial Officer March 28, 2002
- ----------------------
/s/ William Christy Director March 28, 2002
- ----------------------
/s/ Lawrence Glascott Director March 28, 2002
- ----------------------
/s/ Marvin L. Holen Director March 28, 2002
- ----------------------
/s/ Ben Schwartz Director March 28, 2002
- ----------------------
/s/ John Shields Director March 28, 2002
- ----------------------
Page 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of 99 Cents Only Stores:
We have audited in accordance with auditing standards generally accepted
in the United States, the financial statements of 99 Cents Only Stores in this
Form 10-K and have issued our report thereon dated February 20, 2002 (except for
the matters discussed in Note 13, as to which date is March 9, 2002). Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 20, 2002
(Except for the matters
discussed in Note 13,
as to which the date
is March 9, 2002)
Page 53
99 CENTS ONLY STORES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
BEGINNING END OF
OF YEAR ADDITION REDUCTION OTHER YEAR
--------- -------- --------- ----- ------
For the year ended December 31, 2001:
Allowance for doubtful accounts $113 177 125 - $165
Inventory reserve $1,279 179 234 $1,224
For the year ended December 31, 2000:
Allowance for doubtful accounts $140 - $27 - $113
Inventory reserve 1,503 - 224 - 1,279
For the year ended December 31, 1999:
Allowance for doubtful accounts 169 - 29 - 140
Inventory reserve 2,589 - 1,086 - 1,503
Page 54
Exhibit Index
Exhibit Description
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, Arleta, 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)
Page 55
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)
10.26 Services Agreement, dated as of December 28, 2000, by and between
Universal International, Inc. and the registrant.
23.1 Consent of Arthur Andersen LLP.*
99.1 Registrant Letter to Securities and Exchange Commission.*
* 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.
Page 56