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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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
NONE
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, No Par Value, 69,511,987 Shares as of August 6, 2004
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
------------- --------------
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . ($2,176) $ 318
Short-term investments. . . . . . . . . . . . . . . . . . . 97,887 145,670
Accounts receivable, net of allowance for doubtful accounts
of $143 as of June 30, 2004 and December 31, 2003 . . . . 2,156 2,245
Income tax receivable . . . . . . . . . . . . . . . . . . . 7,186 841
Deferred income taxes . . . . . . . . . . . . . . . . . . . 15,927 15,927
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 126,459 107,409
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,815 2,717
------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . 252,254 275,127
PROPERTY AND EQUIPMENT, at cost:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,566 35,680
Building and improvements . . . . . . . . . . . . . . . . . 60,765 53,590
Leasehold improvements. . . . . . . . . . . . . . . . . . . 116,633 100,666
Fixtures and equipment. . . . . . . . . . . . . . . . . . . 60,522 56,124
Transportation equipment. . . . . . . . . . . . . . . . . . 3,448 3,217
Construction in progress. . . . . . . . . . . . . . . . . . 23,277 35,279
------------- --------------
Total property and equipment. . . . . . . . . . . . . . . 308,211 284,556
Accumulated depreciation and amortization . . . . . . . . . (97,279) (81,991)
------------- --------------
Total net property and equipment. . . . . . . . . . . . . 210,932 202,565
OTHER ASSETS:
Deferred income taxes . . . . . . . . . . . . . . . . . . . 9,717 9,717
Long-term investments in marketable securities. . . . . . . 60,112 52,789
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 628 534
Long-term investments in partnerships . . . . . . . . . . . - 4,366
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,231 8,140
------------- --------------
77,688 75,546
------------- --------------
$ 540,874 $ 553,238
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
2
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
2004 2003
------------ -------------
CURRENT LIABILITIES:
Current portion of capital lease obligation. . . . . . . . $ 40 $ 40
Accounts payable . . . . . . . . . . . . . . . . . . . . . 19,966 27,903
Accrued expenses:
Payroll and payroll-related. . . . . . . . . . . . . . . 4,112 3,592
Sales tax. . . . . . . . . . . . . . . . . . . . . . . . 2,498 4,749
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 11,640 4,622
Worker's compensation. . . . . . . . . . . . . . . . . . . 20,363 16,319
------------ -------------
Total current liabilities. . . . . . . . . . . . . . . . 58,619 57,225
------------ -------------
LONG-TERM LIABILITIES:
Deferred compensation liability. . . . . . . . . . . . . . 2,446 2,114
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . 2,580 2,460
Capitalized lease obligation, net of current portion . . . 1,530 1,553
------------ -------------
Total long-term liabilities. . . . . . . . . . . . . . . 6,556 6,127
------------ -------------
COMMITMENTS AND CONTINGENCIES: . . . . . . . . . . . . . . . - -
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized-1,000,000 shares
Issued and outstanding-none. . . . . . . . . . . . . . . - -
Common stock, no par value
Authorized-200,000,000 shares
Issued and outstanding - 70,116,787 at June 30, 2004 and
72,032,788 at December 31, 2003 . . . . . . . . . . . . 212,040 210,893
Retained earnings. . . . . . . . . . . . . . . . . . . . . 263,659 278,993
------------ -------------
475,699 489,886
------------ -------------
$ 540,874 $ 553,238
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ------------ ------------ ------------
NET SALES:
99 Cents Only Stores . . . . . . . . . . . . $ 226,931 $ 195,052 $ 445,743 $ 379,764
Bargain Wholesale. . . . . . . . . . . . . . 10,335 11,981 21,573 23,691
----------- ------------ ------------ ------------
237,266 207,033 467,316 403,455
COST OF SALES. . . . . . . . . . . . . . . . . 151,399 124,230 289,816 241,254
----------- ------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . 85,867 82,803 177,500 162,201
OPERATING COSTS:
Selling, general and administrative expenses 73,589 54,251 144,106 105,601
Depreciation and amortization. . . . . . . . 7,868 5,483 15,321 10,617
----------- ------------ ------------ ------------
81,457 59,734 159,427 116,218
----------- ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . 4,410 23,069 18,073 45,983
OTHER (INCOME) EXPENSE:
Investment (income) expense. . . . . . . . . 144 (503) (1,483) (1,370)
Interest expense . . . . . . . . . . . . . . 30 31 62 63
Other. . . . . . . . . . . . . . . . . . . . - (360) - (720)
----------- ------------ ------------ ------------
174 (832) (1,421) (2,027)
----------- ------------ ------------ ------------
Income before provision for income taxes . . 4,236 23,901 19,494 48,010
PROVISION FOR INCOME TAXES . . . . . . . . . . 1,656 9,065 7,629 18,565
----------- ------------ ------------ ------------
NET INCOME . . . . . . . . . . . . . . . . . . $ 2,580 $ 14,836 $ 11,865 $ 29,445
=========== ============ ============ ============
NET EARNINGS PER COMMON SHARE:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.21 $ 0.17 $ 0.42
Diluted. . . . . . . . . . . . . . . . . . . $ 0.04 $ 0.21 $ 0.16 $ 0.41
SHARES USED IN COMPUTATION OF NET EARNINGS
PER COMMON SHARE
Basic. . . . . . . . . . . . . . . . . . . . 71,437 71,038 71,751 70,754
Diluted. . . . . . . . . . . . . . . . . . . 71,828 72,346 72,270 71,942
The accompanying notes are an integral part of these consolidated financial statements.
4
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Amounts in Thousands)
(Unaudited)
JUNE 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . $ 11,865 $ 29,445
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 15,321 10,617
Tax benefit from exercise of non-qualified
employee stock options . . . . . . . . . . . . 194 5,801
Changes in assets and liabilities associated with
operating activities:
Accounts receivable . . . . . . . . . . . . . . 89 207
Inventories . . . . . . . . . . . . . . . . . . (19,050) (11,786)
Other assets. . . . . . . . . . . . . . . . . . (952) (1,637)
Accounts payable. . . . . . . . . . . . . . . . (7,937) (633)
Accrued expenses. . . . . . . . . . . . . . . . 5,287 (1,453)
Worker's compensation . . . . . . . . . . . . . 4,044 609
Income taxes. . . . . . . . . . . . . . . . . . (6,345) (12,575)
Deferred rent . . . . . . . . . . . . . . . . . 120 130
Due from shareholders . . . . . . . . . . . . . - (238)
--------- ---------
Net cash provided by operating activities . . . . . 2,636 18,487
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . (20,796) (47,736)
Net sales of short-term and long-term investments 40,460 19,398
Investment in partnerships. . . . . . . . . . . . 1,475 86
--------- ---------
Net cash provided by (used in) investing activities 21,139 (28,252)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation. . . . . . . (23) (22)
Repurchase of Company stock.. . . . . . . . . . . (27,199) -
Proceeds from exercise of stock options . . . . . 953 14,267
--------- ---------
Net cash (used in) provided by financing activities (26,269) 14,245
--------- ---------
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . (2,494) 4,480
CASH, beginning of period . . . . . . . . . . . . . 318 7,985
--------- ---------
CASH, end of period . . . . . . . . . . . . . . . . ($2,176) $ 12,465
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
99 CENTS ONLY STORES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. However, certain information and footnote disclosures
normally included in financial statements prepared in conformity with accounting
principles generally accepted in the United States of America have been omitted
or condensed pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). These statements should be read in conjunction with
the Company's December 31, 2003 audited financial statements and notes thereto
included in the Company's Form 10-K filed March 15, 2004. In the opinion of
management, these interim consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
statement of the consolidated financial position and results of operations for
each of the periods presented. The results of operations and cash flows for such
periods are not necessarily indicative of results to be expected for the full
year.
CONCENTRATION OF OPERATIONS
As of June 30, 2004, 99 Cents Only Stores had 208 stores in operation.
There were 152 stores located in California, 10 stores in Nevada, 18 stores in
Arizona and 28 stores in Texas. The Company expects that it will continue to
open additional stores in California as well as in Nevada, Arizona and Texas.
Consequently, the Company's results of operations and financial condition are
substantially dependent upon general economic trends and various environmental
factors in these regions.
2. EARNINGS PER COMMON SHARE
"Basic" earnings per share is computed by dividing net income by the
weighted average number of shares outstanding for the fiscal period. "Diluted"
earnings per share is computed by dividing net income by the total of the
weighted average number of shares outstanding plus the dilutive effect of
outstanding stock options (applying the treasury stock method).
A reconciliation of the basic weighted average number of shares outstanding
and the diluted weighted average number of shares outstanding for the three
month and six month periods ended June 30, 2004 and 2003 follows (amounts in
thousands):
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2004 2003 2004 2003
------- ------- ------- -------
Weighted average number of common shares
outstanding-Basic. . . . . . . . . . . . . . . . 71,437 71,038 71,751 70,754
Dilutive effect of outstanding stock options . . . 391 1,308 519 1,188
------- ------- ------- -------
Weighted average number of common shares
outstanding-Diluted. . . . . . . . . . . . . . . 71,828 72,346 72,270 71,942
======= ======= ======= =======
The Company has elected to continue to measure compensation costs
associated with its stock option plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," had the
Company applied the fair value based method of accounting, which is not
required, to all grants of stock options, the Company would have recorded
additional compensation expense and pro forma net income and earnings per share
amounts as follows for the three month and six month periods ended June 30, 2004
and 2003:
6
(Amounts in thousands, except for per share data)
3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net income, as reported . . . . $ 2,580 $ 14,836 $ 11,865 $ 29,445
Additional compensation
Expense . . . . . . . . . . . . 1,991 1,687 4,152 2,601
--------- --------- --------- ---------
Pro forma net income. . . . . . $ 589 $ 13,149 $ 7,713 $ 26,624
========= ========= ========= =========
Earnings per share:
Basic-as reported . . . . . . . $ 0.04 $ 0.21 $ 0.17 $ 0.42
Basic-pro forma . . . . . . . . $ 0.01 $ 0.19 $ 0.11 $ 0.38
Diluted-as reported . . . . . . $ 0.04 $ 0.21 $ 0.16 $ 0.41
Diluted-pro forma . . . . . . . $ 0.01 $ 0.19 $ 0.11 $ 0.37
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:
3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Risk free interest rate . . . . . 4.74% 3.35% 4.74% 3.35%
Expected life . . . . . . . . . . 10 Years 10 Years 10 Years 10 Years
Expected stock price volatility . 48.7% 50.2% 48.7% 50.2%
Expected dividend yield . . . . . None None None None
3. INVESTMENTS
Investments in debt and equity securities are recorded as required by SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as
trading securities. The Company's investments are comprised primarily of
investment grade federal and municipal bonds and commercial paper. As of June
30, 2004 and December 31, 2003, the fair value of investments equal the carrying
values and were invested as follows (amounts in thousands):
MATURITY MATURITY
--------- ---------
JUNE 30, WITHIN 1 1 YEAR OR DEC. 31, WITHIN 1 1 YEAR OR
--------- --------- ---------- --------- --------- ----------
2004 YEAR MORE 2003 YEAR MORE
--------- --------- ---------- --------- --------- ----------
Municipal Bonds and
Federal Agency
Bonds . . . . . . . . . . $ 78,002 $ 38,914 $ 39,088 $ 89,010 $ 59,271 $ 29,739
Corporate Securities. . . 42,029 21,005 21,024 39,451 16,401 23,050
Commercial Paper. . . . . 37,968 37,968 - 69,998 69,998 -
--------- --------- ---------- --------- --------- ----------
$ 157,999 $ 97,887 $ 60,112 $ 198,459 $ 145,670 $ 52,789
========= ========= ========== ========= ========= ==========
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In January 2004, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 establishes a new and far-reaching consolidation
accounting model. Although FIN No. 46 was initially focused on special purpose
entities, the applicability of FIN No. 46 goes beyond such entities, regardless
of whether the Company has voting or ownership control of such entities. In
response to a number of comment letters and implementation questions, in
December 2003 the FASB issued FIN No. 46R, which delayed the effective date of
FIN No. 46 for certain entities until March 31, 2004, and provided clarification
regarding other implementation issues. The Company adopted FIN No. 46 in its
quarter ending March 31, 2004. Adoption of FIN No. 46 has not had a significant
impact on the Company's financial position or results of operations.
On March 31, 2004, the FASB ratified the consensus reached by the Task
Force on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments ("Issue No. 03-1"). Issue 03-1
provides guidance for determining when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of an
impairment loss. The guidance also includes accounting considerations subsequent
to the recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Issue No. 03-1 is applicable for investments
in (a) debt and equity securities that are within the scope of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and (b)
equity securities not subject to SFAS No. 115 and not accounted for under the
equity method of Accounting Principles Board Opinion No. 18, "The Equity Method
of Accounting for Investments in Common Stock" (considered "cost method
investments"). For each category of investment disclosed in accordance with SFAS
No. 115, disclosures are required in the annual financial statements of the
aggregate amount of unrealized losses and the related fair value of those
investments with unrealized losses, segregated by those investments in a
continuous unrealized loss position for less than 12 months and those in such
position for 12 months or longer. Additional information must be provided to
allow financial statement users to understand the information considered in
reaching a conclusion that any impairments are not other-than-temporary.
Additional disclosures are required for cost method investments. The guidance in
Issue No. 03-1 for evaluating whether an investment is other-than-temporarily
impaired is effective for reporting periods beginning after June 15, 2004. For
investments accounted for pursuant to SFAS No. 115, the disclosure requirements
under Issue No. 03-1 discussed above are effective for annual financial
statements for fiscal years ending after December 15, 2003. For all other
investments within the scope of Issue No. 03-1, the disclosures are effective in
annual financial statements for fiscal years ending after June 15, 2004.
Accordingly, the Company will reflect the disclosures required by Issue No. 03-1
in its annual financial statements for the year ended December 31, 2004. The
adoption of Issue No. 03-1 is not expected to have a material impact on the
Company's consolidated financial statements.
7
5. RELATED-PARTY TRANSACTIONS
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1.9
million, $2.2 million, and $2.1 million in 2001, 2002 and 2003, respectively. In
addition, one of the Company's outside directors is a trustee of a trust that
owns a property on which a single 99 Cents Only Store is located. Rent expense
on this store amounted to $0.3 million in each of 2001, 2002 and 2003.
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. The sale price consisted
of $33.9 million in cash and was collected at closing. These proceeds were
invested in the Company's investment accounts. Mr. Gold is also CEO and
Chairman of 99 Cents Only Stores. In connection with this sale a management
services and lease agreement was entered into between Universal and the Company.
The service agreement provided for the Company to render certain administrative
services to Universal, including information technology support, accounting,
buying and human resource functions. The Company charged Universal management
fees for these services. The lease agreement involved the property that served
as Universal's primary warehouse and distribution facility. The lease was
structured on a triple net basis and provided for rental payments of $120,000
per month. Resolution of Universal post closing business issues required the
extension of the service agreement and lease arrangement with 99 Cents Only
Stores to December 2003. The service and lease agreements with Universal ended
as of December 15, 2003 and there are no remaining amounts due to or from
Universal under these agreements. In 2004, the Company has not engaged in any
transactions with Universal.
The following is a summary of the transactions between the Company and
Universal for 2001, 2002, and 2003 and a reconciliation of amounts due to/from
shareholder resulting from such transactions (amounts in thousands):
BALANCE (TO)
INVENTORY INVENTORY FROM
MANAGEMENT RENTAL SALES TO PURCHASES FROM PAYMENTS SHAREHOLDER END
YEAR FEES INCOME UNIVERSAL UNIVERSAL RECEIVED OF PERIOD
2001 $ 3,695 $ 1,440 $ 4,693 - ($11,483) ($1,655)
2002 $ 1,500 $ 1,440 - ($460) $ 407 $ 1,232
2003 $ 1,440 $ 1,380 - - ($4,052) -
6. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores retail stores.
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 described in the summary of
significant accounting policies noted in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. 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 nor is there any separately identifiable statements of income data (below
gross profit) to be disclosed.
The Company accounts for inter-segment transfer at cost through its
inventory accounts.
At June 30, 2004, the Company had no customers representing more than 4.0%
of Bargain Wholesale's net sales. Substantially all of the Company's net sales
were to customers located in the United States.
Reportable segment information for the three and six month periods ended
June 30, 2004 and 2003 follows (amounts in thousands):
8
THREE MONTHS ENDED
JUNE 30 RETAIL WHOLESALE TOTAL
-------- ---------- --------
2004
----
Net sales. . . . . $226,931 $ 10,335 $237,266
Gross margin . . . 83,813 2,054 85,867
2003
----
Net sales. . . . . $195,052 $ 11,981 $207,033
Gross margin . . . 80,436 2,367 82,803
SIX MONTHS ENDED
JUNE 30 RETAIL WHOLESALE TOTAL
-------- ---------- --------
2004
----
Net sales. . . . . $445,743 $ 21,573 $467,316
Gross margin . . . 173,219 4,281 177,500
2003
----
Net sales. . . . . $379,764 $ 23,691 $403,455
Gross margin . . . 157,520 4,681 162,201
7. CONTINGENCIES
In view of the inherent difficulty of predicting the outcome of legal
matters of the nature identified below, the Company cannot state with confidence
what the eventual outcome of these matters will be. Based on current knowledge,
these matters are not presently expected to have a material adverse effect on
the Company's financial condition or liquidity, but each could have a material
adverse effect on the Company's results of operations for the accounting period
or periods in which they might be resolved.
Gillette Company vs. 99 Cents Only Stores. (Los Angeles Superior Court).
The trial in the lawsuit filed by the Gillette Company against 99 Cents Only
Stores, arising out of a dispute over the interpretation of a contract between
the parties, has concluded. Gillette was suing for breach of contract, alleging
that the Company owes Gillette an additional principal sum of approximately $2.1
million (apart from the approximately $1 million already paid to Gillette), and
the Company cross-complained against Gillette, alleging breach of contract,
fraud and unfair business acts. The jury's verdict resulted in a net liability
to the Company of the principal sum of approximately $0.3 million. It is
expected that this decision will be the subject of post-trial motions and
appeals.
Melgoza vs. 99 Cents Only Stores (Los Angeles Superior Court); Ramirez vs.
99 Cents Only Stores (Los Angeles Superior Court). On May 7, 2003, Melgoza, a
former Store Manager, filed a putative class action on behalf of himself and
others similarly situated. The suit alleges that the Company improperly
classified Store Managers in the Company's California stores as exempt from
overtime requirements as well as meal/rest period and other wage and hour
requirements imposed by California law. Each store typically has one Store
Manager and two or three Assistant Store Managers. Pursuant to the California
Labor Code, the suit seeks to recover unpaid overtime compensation, penalties
for failure to provide meal and rest periods, waiting time penalties for former
employees, interest, attorney fees, and costs. The suit also charges, pursuant
to California's Business and Professions Code section 17200, that the Company
engaged in unfair business practices by failing to make such payments, and seeks
payment of all such wages (in the form of restitution) for the four-year period
preceding the filing of the case through the present.
On June 9, 2004, Ramirez, a former Assistant Manager who is represented by
the same counsel as Melgoza, filed a putative class action complaint that makes
the same allegations with respect to current and former Assistant Managers at
our stores that are named in the Melgoza action with respect to our current and
former Store Managers. The Ramirez complaint also added claims for additional
penalties on behalf of all purported class members under California's new Labor
Code Private Attorney General Act of 2004.
We are in final settlement negotiations to resolve the Melgoza and Ramirez
cases via one consolidated settlement. The Company provided a reserve of $6.0
million for this matter in the quarter ended March 31, 2004.
Ortiz and Perese vs. 99 Cents Only Stores (U.S. District Court, Southern
District of Texas). On July 23, 2004, the plaintiffs filed a putative
collective action under the federal Fair Labor Standards Act alleging that Store
Managers and Assistant Managers in the Company's Arizona, California, Nevada and
Texas stores were misclassified as exempt employees under federal law and
seeking to recover allegedly unpaid overtime wages for these employees.
9
On June 15, 2004, David Harkness filed a class action suit against the
Company and certain of its executive officers in the United States District
Court for the Central District of California. Harkness, who seeks to represent
all who purchased shares of the Company's common stock between March 11 and June
10, 2004, alleges that the Company's public statements during the class period
violated the Securities Exchange Act of 1934 by failing adequately to describe
various aspects of the Company's operations and prospects. Two other
plaintiffs, Ralph Schwartz and Samuel Toovy, filed complaints in the same court
on June 24 and July 2, 2004, respectively, making substantially the same
allegations against the same defendants and seeking to represent the same
putative class. On June 16, 2004, another alleged shareholder, Paul Doherty,
filed a shareholder derivative suit in Los Angeles County Superior Court,
repeating the allegations of the Harkness complaint and demanding, purportedly
on behalf of the Company, damages and other relief against certain of the
Company's executive officers and directors for alleged breaches of fiduciary and
other duties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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. The majority of the Company's
product offerings are comprised of recognizable name-brand merchandise and are
regularly available for reorder.
99 Cents Only Stores increased its net sales, operating income and income
from continuing operations in each year from 1999 to 2002. In 2003, 99 Cents
Only Stores had net sales of $862.5 million, operating income of $87.4 million
and net income of $56.5 million. Sales increased 20.8% over 2002. Operating
income and net income decreased 3.4% and 4.1% respectively from 2002. From 2000
through 2003, the Company had a compound annual growth rate in net sales,
operating income and net income of 24.0%, 13.4% and 14.3%, respectively. For the
three months ended June 30, 2004, 99 Cents Only Stores had net sales of $237.3
million, operating income of $4.4 million and net income of $2.6 million.
Operating income and net income decreased 80.9% and 82.6%, respectively, for the
second quarter of 2004 compared to the second quarter of 2003. For the six
months ended June 30, 2004, 99 Cents Only Stores had net sales of $467.3
million, operating income of $18.1 million and net income of $11.9 million.
Operating income and net income decreased 60.7% and 59.7%, respectively, for the
six months ended June 30, 2004 compared to the six months ended June 30, 2003.
During the three-year period ending December 31, 2003, average net sales
per estimated saleable square foot (computed for 99 Cents Only Stores open for
the full year) declined from $318 per square foot to $308 per square foot. This
trend reflects the Company's efforts during this period to target larger
locations for new store development. Existing stores average approximately
21,700 gross square feet. From January 1, 2001 through June 30, 2004, the
Company opened 113 net new stores that average approximately 21,600 gross square
feet. The Company has targeted new store locations between 16,000 and 28,000
gross square feet. It is the Company's experience that larger stores generally
have lower average net sales per square foot than smaller stores. During the
three years ending December 31, 2003, average net sales per store (computed for
99 Cents Only Stores open for the full year) increased from $4.5 million to $4.9
million.
The Company's management believes that future growth will primarily result
from new store openings facilitated by growth in our existing territories and
expansion into new territories. The Company has stores in California, Texas,
Nevada and Arizona. The Company believes that its concept of consistently
offering a broad selection of name-brand consumables, at value pricing, in a
10
convenient store format is portable to other densely populated areas of the
country. The Company considers lease acquisitions or purchase opportunities as
they become known 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 store locations. See Risk Factor "We depend
mainly on new store openings outside of our traditional core market of Southern
California for future growth."
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, long-lived asset impairments, 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:
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 undiscounted future cash
flows expected to result from 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 impairment charges may be required should such changes occur.
SELF-INSURANCE RESERVES: The Company is self-insured for its worker's
compensation claims in California. The Company provides for losses based on the
total estimated cost of actual claims reported and an estimate of incurred but
not reported claims incorporating the latest available actuarially determined
information. If current claims or spending trends differ from historical trends
used in the last actuarial evaluation, the Company may be required to record
adjustments to its workers' compensation reserve, which could materially impact
future results. The Company does not discount for the time value of money in its
projected future cash outlays for its existing workers compensation claims.
UNIVERSAL INTERNATIONAL (DISCONTINUED OPERATIONS)
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 at that time,
the Company considered its successful opening of its first 99 Cents Only Stores
outside of Southern California, in Las Vegas, Nevada. Given the success of the
Las Vegas, Nevada stores, the Company believed that the 99 Cents Only Stores
concept was portable to areas outside of Southern California. As a result, the
Company focused greater management resources to increasing its store growth rate
and expanding aggressively into Nevada, Arizona and, in 2003, Texas.
The Company 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 from when the Company classified Universal as a
discontinued operation. 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
11
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 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. In 2003
the Company received $1.5 million in management fees under the service agreement
from Universal and $1.4 million in lease payments. It also purchased $0.4
million of closeout inventory from Universal. During 2003 the Company received
$1.4 million in management fees under the service agreement from Universal and
$1.4 million in lease payments. The service and lease agreements with Universal
ended as of December 15, 2003 and there are no remaining amounts due to or from
Universal under these agreements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
NET SALES: Net sales increased $30.2 million, or 14.6%, to $237.3 million
in the second quarter of 2004, from $207.0 million in the second quarter 2003.
Retail sales increased $31.9 million to $226.9 million in the 2004 period from
$195.1 million in the 2003 period. The new stores opened in 2004 contributed
$14.7 million of the increase. Sales from comparable stores were down 2.5% or
$4.8 million based in part on a very strong 9.8% comp store sales performance in
the 2003 period, along with a shorter Easter selling season in the 2004 period.
Sales from all other non-comparable stores were up $22.0 million. Bargain
Wholesale second quarter 2004 net sales were $10.3 million versus $12.0 million
in the quarter ended June 30, 2003. This decline in the wholesale business
results from generally weaker sales and economic conditions for the Company's
small regional retail customers.
GROSS PROFIT: Gross profit dollars increased approximately $3.1 million, or
3.7%, to $85.9 million in the 2004 period from $82.8 million in the 2003 period.
Overall gross profit margin was 36.2% in the 2004 period versus 40.0% in the
2003 period. Retail gross margin was 36.9% versus 41.2% in the second quarter of
2003. Retail gross margin was impacted by 3.6% as a result of an $8.2 million
inventory shrinkage provision recorded in the second quarter of 2004. The
Company has engaged a consulting firm to review and document selected inventory
management processes and controls and identify potential weaknesses to assist
with reduction of inventory shrinkage, including those associated with
perishable products. The remaining 0.7% difference in the retail gross margin is
primarily attributed to growth in the grocery segment of the sales mix and
higher costs of commodities such as milk. The wholesale gross margin was
consistent with prior quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses increased by $19.3 million, or 35.6%, to $73.6 million
in the second quarter of 2004 from $54.3 million in the second quarter of 2003.
Selling, general and administrative expenses in the second quarter of 2004 were
31.0% of sales compared to 26.2% in the second quarter of 2003. The Company
provided an additional $4 million or 1.7% of sales for its California workers
compensation reserve. Wage and benefit costs as a percent of sales increased
0.85%, due primarily to increases in retail labor; an additional 0.75% for
professional, legal and audit fees; 0.3% for store delivery costs; 0.9% for
retail store rent; 0.2% for advertising in new markets and 0.1% for other costs.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $2.4
million on the addition of 44 more stores over the number of stores at the end
of June 30, 2003 and the addition of the Texas warehouse and the new frozen and
refrigerated warehouse facility in Los Angeles.
OPERATING INCOME: As a result of the items discussed above, operating
income was $4.4 million in the 2004 period, a decrease of $18.7 million over the
same period in 2003. Operating margin was 1.9% in the 2004 period versus 11.1%
in the 2003 period.
12
OTHER INCOME (EXPENSE): Other income (expense) includes the interest income
on the Company's marketable securities and interest expense on the Company's
capitalized leases. The Company recorded a net loss of $0.1 million from its
marketable securities in the current period compared to income of $0.5 million
in the 2003 period. This difference in net interest and other income results
from valuation losses on certain of its bonds due to fluctuation of the market
rate of interest and the corresponding effect on bond values. The Company had no
bank debt during the three months ended June 30, 2004 and 2003, respectively. At
June 30, 2004, the Company held $97.9 million in short-term investments and
$60.1 million in long-term investments. The Company's short-term and long-term
investments are comprised primarily of investment grade federal and municipal
bonds and commercial paper. Also included in the 2003 period is $0.4 million of
income under a lease agreement with Universal International, Inc., for a
distribution facility. The lease agreement expired as of December 15, 2003.
PROVISION FOR INCOME TAXES: The provision for income taxes was $1.7 million
in the 2004 period compared to $9.1 million in the 2003 period. The effective
rate of the provision for income taxes was approximately 39.1% in 2004 and 37.9%
in 2003. This rate variation results from fluctuations in the Company's
available tax credits and municipal tax-exempt interest.
NET INCOME: As a result of the items discussed above, net income decreased
$12.2 million to $2.6 million in the 2004 period from $14.8 million in the 2003
period. Net income as a percentage of sales was 1.1% in the 2004 period and 7.2%
in the 2003 period.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
NET SALES: Net sales increased $63.9 million, or 15.8%, to $467.3 million
in the first six months of 2004, from $403.5 million in the first six months of
2003. Retail sales increased $66.0 million to $445.7 million in the 2004 period
from $379.8 million in the 2003 period. The new stores opened in the 2004 period
contributed $19.7 million of the increase. Sales from comparable stores were
down 1.1% or $4.0 million. The Company believes the same store sales comparison
while being negative were in comparison to a strong 7.4% comp store sales
performance in the prior year. Sales from all other non-comparable stores were
up $49.1 million. Bargain Wholesale sales for the six months ended June 30, 2004
were $21.6 million versus $23.7 million in the 2003 period. This decline in the
wholesale business results from generally weaker sales and economic conditions
for the Company's small regional retail customers.
GROSS PROFIT: Gross profit dollars increased approximately $15.3 million,
or 9.4%, to $177.5 million in the 2004 period from $162.2 million in the 2003
period. Overall gross profit margin was 38.0% in the 2004 period versus 40.2% in
the 2003 period. Retail gross margin was 38.9% versus 41.5% in the first six
months of 2003. Retail gross margin was impacted by 1.8% as a result of an $8.2
million inventory shrinkage provision recorded in the second quarter of 2004.
The company has engaged a consulting firm to review and document selected
inventory management processes and controls and identify potential weaknesses to
assist with reduction of inventory shrinkage, including those associated with
perishable products. The remaining 0.8% difference in the retail gross margin is
primarily attributed to growth in the grocery segment of the sales mix and
higher costs of commodities such as eggs and milk. The wholesale gross margin
percentage is consistent with prior quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses increased by $38.5 million, or 36.5%, to $144.1 million
in the first six months of 2004 from $105.6 million in the first six months of
2003. Selling, general and administrative expenses in the quarter were 30.8% of
sales compared to 26.2% in the first six months of 2003. The Company provided an
additional $4.0 million or 0.9% of sales for its California workers compensation
reserve. Distribution costs increased 0.6% of sales primarily due to
overcapacity of the Company's Los Angeles distribution center and fuel and
transportation costs. Legal and professional fee cost increased 1.7% of sales or
$8.1 million, including 1.3% or $6.0 million for a litigation reserve; 0.7% for
retail store rent; 0.1% for advertising in new markets and 0.6% for other costs.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased $4.7
million on the addition of 44 more stores over the number of stores at the end
of June 30, 2003 and the addition of the Texas warehouse and the frozen and
refrigerated warehouse facility in Los Angeles.
13
OTHER INCOME (EXPENSE): Other income (expense) includes the interest income
on the Company's marketable securities and interest expense on the Company's
capitalized leases. The Company recorded net interest income of $1.5 million
from its marketable securities in the first six months of 2004 compared to
income of $1.4 million in the 2003 period. This difference in net interest
income results from valuation losses in the second quarter of 2004 on certain of
its bonds due to fluctuation of the market rate of interest and the
corresponding effect on bond values. The Company had no bank debt during the six
months ended June 30, 2004 and 2003, respectively. At June 30, 2004, the Company
held $97.9 million in short-term investments and $60.1 million in long-term
investments. The Company's short-term and long-term investments are comprised
primarily of investment grade federal and municipal bonds and commercial paper.
Also included in the 2003 period is $0.7 million of income under a lease
agreement with Universal International, Inc., for a distribution facility. The
lease agreement expired as of December 15, 2003.
PROVISION FOR INCOME TAXES: The provision for income taxes was $7.6 million
in the six month period ended 2004 compared to $18.6 million in the 2003 period.
The effective rate of the provision for income taxes was approximately 39.1% in
2004 and 38.7% in 2003. This rate variation results from fluctuations in the
Company's available tax credits and municipal tax-exempt interest.
NET INCOME: As a result of the items discussed above, net income decreased
$17.6 million to $11.9 million in the 2004 period from $29.4 million in the 2003
period. Net income as a percentage of sales was 2.5% in the 2004 period and 7.3%
in the 2003 period.
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 the first six months of 2004 and
2003 was $2.6 million and $18.5 million, respectively, consisting primarily of
$11.9 million and $29.4 million of net income, respectively, adjusted for
non-cash items. In the first six months of 2004, the Company used $24.7 million
in working capital and other activities and in the first six months of 2003 the
Company used $27.4 million in working capital and other activities. Net cash
used in working capital and other activities primarily reflects the Company's
increases in inventories of $19.1 million in 2004 and $11.8 million in 2003, net
payment of income taxes of $6.3 million and $12.6 million respectively in 2004
and 2003 and net reduction of accounts payable of $7.9 million in 2004 and $0.6
million in 2003.
Net cash provided by investing activities during the first six months of
2004 was $21.1 million. In 2003, net cash used in investing activities was $28.3
million. In the first six months of 2004, the Company used $20.8 million for the
purchase of property and equipment. Also in the first six months of 2004, the
Company sold $40.5 million of marketable securities. In the same period in 2003,
the Company used $47.7 million for the purchase of property and equipment
(including $23.0 million used for the purchase of a new distribution center in
Houston, Texas), and sold marketable securities of $19.4 million.
Net cash used in financing activities in the first six months of 2004 was
$26.3 million. The Company used $27.2 million for the purchase of its common
stock and received $1.0 million from the exercise of non-qualified stock
options. During the first six months of 2003, net cash provided by financing
activities was $14.2 million, which represents the proceeds from the exercise of
non-qualified stock options. The Company does not maintain any credit facilities
with any bank.
The Company opened 21 new stores and closed 2 stores in the first six
months of 2004. The Company plans to open 17 to 21 additional new stores in the
remainder of 2004, with 9 planned in the third quarter and 8 to 12 planned in
the fourth quarter. The Company is also currently in the process of
reconsidering the size, the number and the location of stores that it will open
in 2005. The average investment per new store opened in 2004, including
leasehold improvements, furniture, fixtures and equipment, inventory and
pre-opening expenses, was approximately $1.1 million and includes 2 stores that
14
were purchased. The Company does not capitalize pre-opening expenses. The
Company's remaining cash needs for new store openings including acquired
properties are expected to total approximately $20.0 to $26.0 million in 2004.
The Company's planned capital expenditures in 2004 for additions to fixtures and
leasehold improvements of existing stores and for distribution and
transportation equipment, information systems, expansion and replacement will be
approximately $25.0 million and includes a warehouse facility in Los Angeles for
which the Company currently is in escrow. The Company believes that its total
capital expenditure requirements (including new store openings) will approximate
$70.0 million in 2004. The Company intends to fund its liquidity requirements in
2004 out of net cash provided by operations, short-term investments and cash on
hand.
CONTRACTUAL OBLIGATIONS
The following table summarizes our consolidated contractual obligations (in
thousands) as of June 30, 2004.
Less More
------- --------
than 1-3 3-5 than
------- ------- ------- --------
Contractual obligations Total 1 Year Years Years 5 Years
-------- ------- ------- ------- --------
Capital lease obligations $ 1,570 $ 40 $ 490 $ 438 $ 602
Operating lease obligations 217,838 32,276 62,425 50,325 72,812
Other long-term liabilities
reflected on the Company's
balance sheet 2,446 - - - 2,446
-------- ------- ------- ------- --------
Total $221,854 $32,316 $62,915 $50,763 $ 75,860
======== ======= ======= ======= ========
LEASE COMMITMENTS
The Company leases various facilities under operating leases except for
two, which were classified as capital leases and will expire at various dates
through 2020. 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 for the
three-month period ended June 30, 2004 and 2003 were $11.1 million and $7.6
million, respectively. Rental expense charged to operations for the six-month
periods ended June 30, 2004 and 2003 were $20.5 million and $15.0 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. Most leases have
renewal options ranging from three to ten years.
RISK FACTORS
INFLATION MAY AFFECT OUR ABILITY TO SELL MERCHANDISE AT THE 99 CENTS PRICE POINT
Our ability to provide quality merchandise at the 99 cents price point is
subject to certain economic factors, which are beyond our control, including
inflation. Inflation could have a material adverse effect on our business and
results of operations, especially given the constraints on our ability to pass
on any incremental costs due to price increases or other factors. We believe
that we 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 our selection of merchandise. Nevertheless, a sustained trend of
significantly increased inflationary pressure could require us to abandon our
single price point of 99 cents per item, which could have a material adverse
effect on our business and results of operations. Recently the Company has
encountered inflationary pressure that has negatively impacted the cost and
corresponding margins of certain of its products. See also "We are vulnerable to
uncertain economic factors, changes in the minimum wage and workers'
compensation and healthcare costs" for a discussion of additional risks
attendant to inflationary conditions.
15
WE DEPEND MAINLY ON NEW STORE OPENINGS OUTSIDE OF OUR TRADITIONAL CORE MARKET OF
SOUTHERN CALIFORNIA FOR FUTURE GROWTH
Our sales and operating income growth results depend largely on our ability
to open and operate new stores outside of our traditional core market of
Southern California successfully and to manage a larger business profitably. 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, successfully compete against local competition, 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 at further distances
from the Company's headquarters. 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 controls 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 we will improve our results of operations
when we open new stores. A variety of factors, including store location, store
size, rental terms, competition, 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. The opening of new stores in
existing and in new markets has in the past and may in the future be less
profitable in both new areas outside its core Southern California market and/or
reduce retail sales of existing stores in those markets, negatively affecting
comparable store sales.
OUR OPERATIONS ARE CONCENTRATED IN CALIFORNIA
As of June 30, 2004, all but 56 of our 208, 99 Cents Only Stores are
located in California. We operate 10 stores in Las Vegas, Nevada, 18 stores in
Arizona and 28 stores in Texas. We expect that we will continue to open
additional stores in California, as well as in Nevada, Arizona and Texas.
Accordingly, our results of operations and financial condition largely depend
upon trends in the California economy. If retail spending declines due to an
economic slow-down or recession in California, we cannot assure you that our
operations will not be negatively impacted.
In addition, 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, as well as unexpected demands on our
transportation network, which could cause delays in delivery of merchandise to
or from our warehouses to our stores. Such demands and delays have recently
occurred at the Company's distribution center in Los Angeles. Collective
bargaining efforts relative to discussions with representatives of truck drivers
employed at the Los Angeles distribution center could give rise to labor unrest.
A fire, earthquake or other disaster at our warehouses could also 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 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.
16
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 at a price that will be consistent with historical
costs. 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. There is
increasing competition 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 as
the deep discount retail segment continues to expand outside and within existing
retail channels. 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 and from time to time
this can result in an over capacity situation in the warehouse and place stress
on the Company's warehouse and distribution operations. Our store and warehouse
inventory approximated $126.5 million and $107.4 million at June 30, 2004 and
December 31, 2003, 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 or otherwise dispose of 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. Margins could also be negatively affected should the grocery category
sales continue to expand in importance and become a larger percentage of total
sales in the future.
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. 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 we do. 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, CHANGES IN THE MINIMUM WAGE AND
WORKERS' COMPENSATION AND HEALTHCARE COSTS
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 healthcare costs;
- - increases in workers' compensation benefits;
- - increases in prevailing wage levels;
- - increases in legal costs;
- - increases in government regulatory cost;
- - decreases in consumer confidence levels;
- - increases in fuel costs and
- - increases in minimum wage costs.
Our self-insured workers' compensation reserves are subject to actuarial
reviews, which could increase the overall cost of workers' compensation
benefits. The California Assembly has passed a bill to increase the minimum wage
by $0.50 in January 2005 and an additional $0.50 January 2006. Certain
17
municipalities have enacted or are considering "living wage" laws, which often
mandate wage levels in excess of present federal and state minimum wages and/or
enhanced benefits. Because we provide consumers with merchandise at a 99 cents
fixed price point, we typically cannot pass on cost increases to our customers.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND PURCHASES
Although international sales historically have not been important to our
overall net sales, they have contributed to historical 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 $2.2 and
$2.1 million in each of 2002 and 2003. In addition, one of our directors, Ben
Schwartz, is a trustee of a trust that owns a property on which a single 99
Cents Only Store is located. 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 the Company 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. We have
not entered into employment agreements with any of our executive officers and we
do not maintain key person life insurance on them. As we continue to grow, our
success will depend on our ability to identify, attract, hire, train, retain and
motivate other highly skilled management personnel. Competition for such
personnel is intense, and we may not be able to successfully attract, assimilate
or retain sufficiently qualified candidates.
OUR OPERATING RESULTS MAY FLUCTUATE AND MAY BE AFFECTED BY SEASONAL BUYING
PATTERNS
Historically, our highest net sales and operating income have occurred
during the fourth quarter, which includes the Christmas and Halloween selling
seasons. During 2002 and 2003, we generated approximately 29.5% and 28.7%,
respectively, of our net sales and approximately 32.7% and 26.6% 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. Transportation scheduling, warehouse capacity constraints,
labor disruptions, adverse weather conditions or other disruptions during the
peak holiday season could also affect our net sales and profitability for the
year.
18
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 and location 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;
- - 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. As of June 30, 2004,
we leased all but 30 of our stores and own three distribution facilities.
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 Southern California 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; CONCENTRATION OF OWNERSHIP BY OUR EXISTING OFFICERS AND
PRINCIPAL STOCKHOLDERS
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 as of June 30, 2004, 22,736,242 or 32.4% of shares outstanding.
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 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
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 industries of any of our
significant clients;
- - the conditions of the market generally;
- - additions or departures of key personnel;
- - future sales of our common stock; and
- - increased competition.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk for its investments in
marketable securities. At June 30, 2004, the Company had $158.0 million in
marketable securities maturing at various dates through November 2009. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity. We do not enter into any derivative or interest rate hedging
transactions. Any premium or discount recognized upon the purchase of an
investment is amortized over the term of the investment. At June 30, 2004, the
fair value of investments approximated the carrying value.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including David Gold (our Chief Executive
Officer) and Andrew Farina (our Chief Financial Officer), of the effectiveness
of the design and operation of our disclosure controls and procedures as of June
30, 2004. Based on that evaluation, Mr. Gold and Mr. Farina concluded that,
subject to the limitations noted below, our disclosure controls and procedures
are effective in ensuring that information required to be disclosed by the
Company in reports it files or submits under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported as specified
in the rules and forms of the Securities Exchange Commission.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and internal control over
financial reporting will prevent all error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system can be met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. No evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls.
CHANGES IN INTERNAL CONTROLS AND FINANCIAL REPORTING PROCEDURES
As previously announced on June 11, 2004, during the second quarter of
fiscal 2004 and in connection with physical counts of our retail store
inventories performed by an outside service and our inventory control
department, as well as a review of related inventory accounting processes, the
Company's management determined that it was necessary to make an additional
shrinkage provision of $8.2 million. We believe this may indicate a deficiency
in our internal controls and processes, relating to inventory management and
reporting.
We are currently focused on implementing changes to our internal controls
to address what we believe are the weaknesses. In June 2004, we hired an outside
consulting firm to review and document selected inventory management processes
and controls and identify potential weaknesses to assist with the reduction of
inventory shrinkage, including those associated with perishable products. In
addition to responding to the recommendations of our consultants, we plan to
adopt updated policies in the third and fourth quarter of 2004 to tighten
procedures around the transfer and movement of inventory received from suppliers
at both the retail stores and the Company's distribution centers, as well as
inter and intra-store and warehouse transfers of inventory.
20
Other than implementing the matters discussed above, there have been no
changes in our internal control over financial reporting in the period covered
by this quarterly report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This report on Form 10-Q 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 and 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (including, without limitation, the section titled "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 this Form 10-Q and
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In view of the inherent difficulty of predicting the outcome of legal
matters of the nature identified below, the Company cannot state with confidence
what the eventual outcome of these matters will be. Based on current knowledge,
these matters are not presently expected to have a material adverse effect on
the Company's financial condition or liquidity, but each could have a material
adverse effect on the Company's results of operations for the accounting period
or periods in which they might be resolved.
Gillette Company vs. 99 Cents Only Stores. (Los Angeles Superior Court).
The trial in the lawsuit filed by the Gillette Company against 99 Cents Only
Stores, arising out of a dispute over the interpretation of a contract between
the parties, has concluded. Gillette was suing for breach of contract, alleging
that the Company owes Gillette an additional principal sum of approximately $2.1
million (apart from the approximately $1 million already paid to Gillette), and
the Company cross-complained against Gillette, alleging breach of contract,
fraud and unfair business acts. The jury's verdict resulted in a net liability
to the Company of the principal sum of approximately $0.3 million. It is
expected that this decision will be the subject of post-trial motions and
appeals.
Melgoza vs. 99 Cents Only Stores (Los Angeles Superior Court); Ramirez vs.
99 Cents Only Stores (Los Angeles Superior Court). On May 7, 2003, Melgoza, a
former Store Manager, filed a putative class action on behalf of himself and
others similarly situated. The suit alleges that the Company improperly
classified Store Managers in the Company's California stores as exempt from
overtime requirements as well as meal/rest period and other wage and hour
requirements imposed by California law. Each store typically has one Store
Manager and two or three Assistant Store Managers. Pursuant to the California
Labor Code, the suit seeks to recover unpaid overtime compensation, penalties
for failure to provide meal and rest periods, waiting time penalties for former
employees, interest, attorney fees, and costs. The suit also charges, pursuant
to California's Business and Professions Code section 17200, that the Company
engaged in unfair business practices by failing to make such payments, and seeks
payment of all such wages (in the form of restitution) for the four-year period
preceding the filing of the case through the present.
21
On June 9, 2004, Ramirez, a former Assistant Manager who is represented by
the same counsel as Melgoza, filed a putative class action complaint that makes
the same allegations with respect to current and former Assistant Managers at
our stores that are named in the Melgoza action with respect to our current and
former Store Managers. The Ramirez complaint also added claims for additional
penalties on behalf of all purported class members under California's new Labor
Code Private Attorney General Act of 2004.
We are in final settlement negotiations to resolve the Melgoza and Ramirez cases
via one consolidated settlement. The Company provided a reserve of $6.0 million
for this matter in the quarter ended March 31, 2004.
Ortiz and Perese vs. 99 Cents Only Stores (U.S. District Court, Southern
District of Texas). On July 23, 2004, the plaintiffs filed a putative
collective action under the federal Fair Labor Standards Act alleging that Store
Managers and Assistant Managers in the Company's Arizona, California, Nevada and
Texas stores were misclassified as exempt employees under federal law and
seeking to recover allegedly unpaid overtime wages for these employees.
On June 15, 2004, David Harkness filed a class action suit against the
Company and certain of its executive officers in the United States District
Court for the Central District of California. Harkness, who seeks to represent
all who purchased shares of the Company's common stock between March 11 and June
10, 2004, alleges that the Company's public statements during the class period
violated the Securities Exchange Act of 1934 by failing adequately to describe
various aspects of the Company's operations and prospects. Two other
plaintiffs, Ralph Schwartz and Samuel Toovy, filed complaints in the same court
on June 24 and July 2, 2004, respectively, making substantially the same
allegations against the same defendants and seeking to represent the same
putative class. On June 16, 2004, another alleged shareholder, Paul Doherty,
filed a shareholder derivative suit in Los Angeles County Superior Court,
repeating the allegations of the Harkness complaint and demanding, purportedly
on behalf of the Company, damages and other relief against certain of the
Company's executive officers and directors for alleged breaches of fiduciary and
other duties.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The table below sets forth information with respect to our repurchases of our
common stock during the three months ended June 30, 2004.
Total Number of
--------------------
Total Average Shares Maximum Number of
------------- -------- -------------------- -------------------
Number of Price Purchased as Part of Shares that May Yet
------------- -------- -------------------- -------------------
Shares per Publicly Announced Be Purchased Under
------------- -------- -------------------- -------------------
Month Purchased Share Plans or Programs the Program
- ------------ ------------- -------- -------------------- -------------------
April 2004
(4/01/04 to 3,000,000
4/30/04) -- -- --
May 2004
(5/01/04 to
5/31/04) __ __ __ 3,000,000
June 2004
(6/01/04 to
6/30/04) 1,970,000 (1) $ 14.70 1,970,000 1,030,000
22
(1) On May 14, 2004, we announced that our Board of Directors had approved the
repurchase of up to 3,000,000 shares of our common stock. The shares were
authorized to be purchased, from time to time, in open market transactions or
privately negotiated transactions over a period ending on May 31, 2005. The
repurchase program is being effected from time to time, based on our evaluation
of market conditions and other factors. The Company has used and plans to
continue to use existing cash to fund the repurchases. All of the shares
repurchased during the three months ended June 30, 2004 were purchased in open
market transactions through this program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held its 2004 Annual Meeting of Stockholders on June 11, 2004. A
quorum of shareholders were present either in person or by proxy. There were
four matters submitted to a vote of the shareholders.
The first matter was the election of nine directors to hold office for a
one-year term. All directors who were nominated were elected. The results of
the election are set forth in the following table:
DIRECTOR VOTES FOR VOTES AGAINST
- ----------------- ---------- -------------
Eric Schiffer 68,147,943 1,120,508
Lawrence Glascott 67,806,521 1,461,930
David Gold 68,143,779 1,124,672
Howard Gold 67,763,999 1,504,452
Jeff Gold 68,143,810 1,124,641
Marvin Holen 67,806,521 1,461,930
Ben Schwartz 67,763,271 1,505,180
William Christy 68,186,125 1,082,326
Eric Flamholtz 68,283,468 984,983
The second matter was to consider and act upon a shareholder proposal that
requested the Board of Directors to establish certain vendor standards to be
inserted in the Company's purchase contracts with its vendors. This proposal was
not approved.
VOTES FOR VOTES AGAINST ABSTENTIONS UNVOTED
- ---------- ------------- ----------- ---------
10,970,654 46,711,158 4,050,395 7,536,244
The third matter was to allow a shareholder vote prior to the adoption of any
shareholder rights plan, also known as a "poison pill." This proposal was not
approved.
VOTES FOR VOTES AGAINST ABSTENTIONS UNVOTED
- ---------- ------------- ----------- ---------
23,162,514 35,105,829 3,463,864 7,536,244
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits 31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
23
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
Current Report on Form 8-K filed on April 6, 2004; Items 7 and 12
were reported
Current Report on Form 8-K filed on April 13, 2004; Items 4 and 7
were reported
Current Report on Form 8-K/A filed on April 16, 2004; Items 4 and
7 were reported
Current Report on Form 8-K filed on April 20, 2004; Items 4 and 7
were reported
Current Report on Form 8-K filed on April 20, 2004; Items 7 and
12 were reported
Current Report on Form 8-K filed on May 14, 2004; Items 5 and 7
were reported
Current Report on Form 8-K filed on June 14, 2004; Items 9 and 10
were reported
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
99 CENTS ONLY STORES
Date: August 9, 2004 /s/ Andrew A. Farina
--------------------
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
25