<PAGE>
4,250,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered hereby are being offered by 99 CENTS Only Stores ("99 CENTS
Only Stores" or the "Company"). Prior to this offering, there has been no public
market for the Common Stock. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price.
Subject to issuance of the Common Stock offered hereby, the Common Stock has
been approved for listing on the New York Stock Exchange under the symbol "NDN."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
THE PUBLIC AND COMMISSIONS (1) THE COMPANY (2)
<S> <C> <C> <C>
Per Share........................... $14.50 $1.01 $13.49
Total (3)........................... $61,625,000 $4,292,500 $57,332,500
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters by the Company and its existing shareholders (the "Existing
Shareholders") and other matters.
(2) Before deducting expenses estimated at $650,000 payable by the Company. Of
the Proceeds to the Company, $39.9 million will be distributed to the
Existing Shareholders in payment of notes issued and dividends payable
declared in connection with the termination of the Company's S corporation
status. See "Use of Proceeds."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
637,500 additional shares of Common Stock at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$70,868,750, $4,936,375 and $65,932,375, respectively. See "Underwriting."
------------------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if issued by the Company and
delivered to and accepted by the Underwriters and subject to certain prior
conditions, including the right of the Underwriters to reject any order in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made through the facilities of The Depository Trust Company in New York, New
York on or about May 29, 1996.
------------------------
EVEREN SECURITIES, INC.
NATWEST SECURITIES LIMITED
CROWELL, WEEDON & CO.
The date of this Prospectus is May 23, 1996
<PAGE>
GRAND OPENING -- HUNTINGTON PARK STORE
For grand openings, the Company sells 9 color televisions, 9 microwave ovens and
99 other promotional items for only 99 CENTS to attract additional attention and
publicity. 99 CENTS Only Stores' grand openings typically garner large crowds
and media coverage.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DESCRIPTION OF PHOTOGRAPH: PRE-OPENING CROWD AT
HUNTINGTON PARK STORE GRAND OPENING
<PAGE>
CAPTIONS
99 CENTS ONLY STORES-REGISTERED TRADEMARK- IS A LEADING DEEP-DISCOUNT RETAILER
OF PRIMARILY NAME-BRAND, CLOSE-OUT
AND REGULARLY AVAILABLE GENERAL MERCHANDISE AT AN AFFORDABLE, SINGLE PRICE
POINT.
99 CENTS ONLY STORES-REGISTERED TRADEMARK- ARE ATTRACTIVELY MERCHANDISED, CLEAN,
FULL-SERVICE
"DESTINATION" LOCATIONS THAT OFFER AN EXCITING SHOPPING ENVIRONMENT.
DESCRIPTION OF PHOTOGRAPHS: IN STORE DISPLAYS OF THE REGISTRANT'S MERCHANDISE.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO 637,500
ADDITIONAL SHARES OF COMMON STOCK. SEE "UNDERWRITING." THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS."
THE COMPANY
99 CENTS Only Stores-Registered Trademark- is a leading deep-discount
retailer of primarily name-brand, close-out and regularly available general
merchandise at an affordable, single price point. The Company operates a chain
of 38 value-priced 99 CENTS Only Stores in Southern California and also
distributes merchandise through its Bargain Wholesale-SM- division. The Company
believes that it operates the nation's oldest existing one-price general
merchandise chain and that it was the first chain to sell all merchandise at a
99 CENTS or $1.00 single price point. 99 CENTS Only Stores are attractively
merchandised, clean, full-service "destination" locations that offer customers
significant value on their everyday household needs in an exciting shopping
environment. Bargain Wholesale distributes products at prices generally below
normal wholesale to both small and large domestic retailers, other distributors
and exporters. Bargain Wholesale complements the Company's retail operation by
allowing the Company to purchase in larger volume at more favorable pricing and
to generate additional net sales with relatively small incremental increases in
operating expenses.
In 1995, the Company recognized record pro forma net income of $9.6 million
on record revenues of $152.8 million and record operating income of $16.9
million. During the three-month period ended March 31, 1996, the Company
recognized pro forma net income of $2.5 million on revenues of $42.3 million and
operating income of $4.4 million. From its first store opening in 1982, the
Company's growing chain of 99 CENTS Only Stores has expanded to 38 stores. The
Company's 99 CENTS Only Stores operations accounted for $122.0 million (or
approximately 80%) of the Company's net sales in 1995. The Company plans to open
7 or 8 new stores in each of 1996 and 1997. Of the stores planned for 1996, the
Company has already opened 2 stores and has signed leases for 2 additional
stores as of the date of this Prospectus. Bargain Wholesale, which commenced
operations in 1976, accounted for $30.3 million (or approximately 20%) of the
Company's net sales in 1995. Bargain Wholesale's recent growth is primarily
attributable to an increased focus on large domestic and international accounts
and expansion into new geographic markets.
The Company believes that its attractive store-level economics will
facilitate its planned expansion. The average investment per new store opened in
1994, including capital expenditures and inventory on-hand (as of December 31,
1994) but excluding pre-opening expenses, was approximately $561,000. New stores
opened in 1994 had average net sales of approximately $4.2 million during the
first year of operation. In 1995, the Company's operating margin was 11.0%.
The Company sells consumer items in staple product categories including
beverages and food, health and beauty aids, household products (cleaning
supplies, paper goods, ETC.), housewares (glassware, kitchen items, ETC.) and
hardware. The Company purchases most of its merchandise directly from the
manufacturer. The Company's suppliers include many of the nation's leading
consumer product companies. During 1995, the Company purchased merchandise from
more than 999 suppliers, including Colgate-Palmolive Company, The Dial Corp.,
Eveready Battery Company, Inc., General Electric Company, Gerber Products
Company, The Gillette Company, Hershey Foods Corporation, Johnson & Johnson,
Kraft General Foods Inc., Lever Brothers Company, Mattel, Inc., The Mead
Corporation, Nabisco, Inc., Nestle, The Pillsbury Company, The Procter & Gamble
Company, Revlon, Inc. and SmithKline Beecham Corporation.
3
<PAGE>
The Company's 99 CENTS Only Stores offer customers quality merchandise
generally at a significant discount from normal retail. The Company believes
that word-of-mouth advertising and its affordable, single price point help
attract new customers. The Company also believes that frequent repeat visits and
impulse purchases are encouraged by the value and quality of the Company's
merchandise, the wide mix of consistently available everyday consumables and the
continuously changing selection of name-brands and other quality close-outs.
99 CENTS Only Stores are typically either free-standing buildings or anchor
locations in an outdoor shopping center. The existing 99 CENTS Only Stores
average over 12,000 gross square feet. Since 1993, the Company has opened 11 new
stores (including 2 relocations in 1995) that average over 16,000 gross square
feet. The Company currently targets new store locations ranging from 15,000 to
23,000 gross square feet. The Company believes that its larger 99 CENTS Only
Stores allow it to fully display its wide assortment of merchandise in a more
attractive format, carry deeper stock positions and provide customers with a
more inviting and convenient environment that encourages longer shopping. The
Company's decision to target larger stores reflects the higher average annual
store revenues typically achieved by these stores. Except for three relocations
to larger, nearby sites and one store closure as the result of a fire, the
Company has never closed one of its 99 CENTS Only Stores.
The Company's near-term retail expansion strategy continues to focus on
Southern California, as the Company believes that this region offers substantial
opportunities for continued profitable growth. Clustering stores in this
geographic area also permits the Company to take advantage of management,
distribution and advertising efficiencies. The Company expects that expansion in
its wholesale division will be driven by its continued focus on large domestic
and international accounts and the expansion of its geographic markets. The
Company maintains an 880,000 square foot single-story warehouse and distribution
facility located in Los Angeles County, California. The Company's corporate
offices are also located in this facility. The Company believes its current
warehouse facility will support distribution to more than 99 stores in Southern
California.
The Company is a California corporation. Its executive offices are located
at 4000 East Union Pacific Avenue, City of Commerce, California 90023, and its
telephone numbers are (213) LUCKY-99 and (213) JUST-BUY.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered
by the Company........................ 4,250,000 shares (1)
Common Stock to be outstanding
after the Offering.................... 14,179,135 shares (2)
Use of Proceeds......................... To fund a distribution of $39.9 million to pay notes issued and
dividends payable declared to the Existing Shareholders in connection
with the termination of the Company's S corporation status, to expand
retail operations and for general corporate purposes. See "Use of
Proceeds."
New York Stock Exchange Symbol.......... "NDN"
</TABLE>
- ---------------
(1) Assumes no exercise of the over-allotment option granted by the Company to
the Underwriters.
(2) Excludes 500,000 shares of Common Stock reserved for future issuance
pursuant to options outstanding under the Company's 1996 Stock Option Plan.
Under the treasury stock method of computing earnings per share, these
options represent 121,034 equivalent shares. See "Management -- Stock
Option Plan."
4
<PAGE>
SUMMARY FINANCIAL AND CERTAIN OPERATING DATA
The following information should be read in conjunction with the Company's
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" included elsewhere in
this Prospectus. See also "Selected Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SALES PER SQUARE FOOT DATA AND NUMBER OF STORES)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Net sales:
99 CENTS Only Stores......... $ 89,967 $ 95,873 $ 101,828 $ 110,724 $ 121,998 $ 27,092 $ 32,256
Other retail operations
(1)........................ 3,104 3,125 3,093 2,097 492 327 --
Bargain Wholesale............ 19,544 21,938 18,028 18,916 30,337 6,138 10,020
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total...................... 112,615 120,936 122,949 131,737 152,827 33,557 42,276
Gross profit................... 37,626 41,188 41,469 43,692 50,667 11,127 13,466
Selling, general and
administrative expenses...... 23,482 29,060 32,081 32,661 33,809 7,753 9,066
Operating income............... 14,144 12,128 9,388 11,031 16,858 3,374 4,400
Special litigation provision
(reversal) (2)............... 2,100 -- -- (2,900) -- -- --
Income before pro forma
provision for income taxes
(3).......................... 12,083 12,178 9,343 13,167 16,103 3,185 4,211
Pro forma net income
(unaudited) (3).............. 7,236 7,439 5,866 8,004 9,594 1,947 2,492
Pro forma earnings per
common share (unaudited)
(3)(4)....................... $ 0.75 $ 0.19
Pro forma weighted average
number of common shares
outstanding (unaudited)
(3)(4)....................... 12,803 12,803
COMPANY OPERATING DATA:
99 CENTS Only Stores net sales
growth....................... 17.1 % 6.6 % 6.2 % 8.7 % 10.2 % 19.1 %
Bargain Wholesale
net sales growth............. 50.4 % 12.2 % (17.8)% 4.9 % 60.4 % 63.2 %
Total Company net sales
growth....................... 21.9 % 7.4 % 1.7 % 7.1 % 16.0 % 26.0 %
Gross margin................... 33.4 % 34.1 % 33.7 % 33.2 % 33.2 % 33.2 % 31.9 %
Operating margin............... 12.6 % 10.0 % 7.6 % 8.4 % 11.0 % 10.1 % 10.4 %
Pro forma net income margin.... 6.4 % 6.2 % 4.8 % 6.1 % 6.3 % 5.8 % 5.9 %
RETAIL OPERATING DATA (5):
Number of stores open
at end of period............. 24 30 31 34 36 34 38
Change in comparable stores
net sales (6)................ (0.3)% (8.6)% (3.5)% (1.4)% (0.2)% 6.2 %
Change in comparable stores
net sales, as adjusted (7)... (0.2)% 2.2 % 6.3 %
Average net sales per store
open for the full period..... $ 3,826 $ 3,550 $ 3,349 $ 3,267 $ 3,467 $ 797 $ 875
Average net sales per estimated
saleable square foot (8)..... $ 462 $ 417 $ 388 $ 396 $ 397 $ 92 $ 97
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------
PRO FORMA
AS ADJUSTED
ACTUAL (9)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................... $ (5,043) $ 44,081
Total assets............................................................................ 58,838 76,844
Long-term debt.......................................................................... -- --
Capitalized lease obligation, including current portion................................. 9,828 9,828
Total shareholders' equity.............................................................. 2,353 55,722
</TABLE>
- ---------------
SEE NOTES ON FOLLOWING PAGE.
5
<PAGE>
(1) The Company operated stores during the periods presented under different
tradenames pending conversion to the 99 CENTS Only Stores format or their
eventual closing. Only one such store was operated by the Company in 1995,
and that store was closed in May 1995. See "Business -- Store Locations."
(2) See "Business -- Legal Proceedings" and Note 7 to "Notes to Financial
Statements."
(3) Prior to May 1, 1996, the Company was treated as an S corporation for
federal and state income tax purposes. See "Termination of S Corporation
Status." The pro forma presentation reflects a provision for income taxes as
if the Company had always been a C corporation, at an assumed effective tax
rate of 40.1% in 1991 and 1992, 41.0% in 1993, 1994 and 1995 and for the
three-month periods ended March 31, 1995 and 1996, plus the effect of
deferred taxes and tax credits.
(4) Pro forma earnings per common share have been computed by dividing pro forma
net income by the pro forma weighted average number of common shares and
common stock equivalents outstanding. Pro forma weighted average common
equivalent shares include 2,753,000 shares offered hereby to fund certain
notes issued and dividends payable declared to the Existing Shareholders, in
connection with the termination of the Company's S Corporation status.
Common stock equivalents include all outstanding stock options and warrants
after applying the treasury stock method. All currently outstanding options
have been considered outstanding for all fiscal years presented and are
included in the calculation of the weighted average number of common shares
and common stock equivalents outstanding for pro forma earnings per common
share computations in accordance with the rules of the Securities and
Exchange Commission (the "Commission").
(5) Includes retail operating data solely for the Company's 99 CENTS Only
Stores.
(6) Change in comparable stores net sales compares net sales for stores open for
the entire two periods compared.
(7) Excludes the Company's Fairfax/Wilshire # 1 store, which remained open after
a larger new store (Fairfax/Wilshire #2) was opened fewer than 500 feet away
in August 1994. For a discussion of the Company's strategy of opening larger
new stores in close proximity to existing stores, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
General."
(8) Computed based upon estimated total saleable square footage of stores open
for the entire period.
(9) Adjusted to reflect (i) the conversion of the Company from an S corporation
to a C corporation, and (ii) the sale of 4,250,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom, including the payment of $39.9 million of certain notes
issued and dividends payable declared to the Existing Shareholders in
connection with the termination of the Company's S corporation status. See
"Use of Proceeds," "Capitalization" and Note 4 of "Notes to Financial
Statements."
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
DEPENDENCE ON EXPANSION FOR FUTURE GROWTH
The Company's future operating results will depend largely upon its ability
to open and operate new stores successfully and to manage a larger business
profitably. In 1993, 1994 and 1995, the Company opened one, four and four
stores, respectively (one, three and two stores, respectively, net of relocated
stores and one store closed as the result of a fire). During 1996, the Company
has opened two stores and expects to open five or six additional stores in
Southern California during the remainder of the year. The Company anticipates
opening seven or eight new stores in 1997. This schedule represents a
significantly increased rate of expansion as compared to previous years. See
"Business -- Expansion Strategy." The average investment per new store opened in
1994, including capital expenditures and inventory on hand (as of December 31,
1994), but excluding pre-opening expenses, was approximately $561,000 per store.
The Company's cash needs for new store openings are expected to total
approximately $3.9 million to $4.5 million in each of 1996 and 1997. The Company
anticipates that it will fund these capital requirements for at least the next
12 months from net cash provided by operations, availability under its credit
facilities, and net proceeds from this offering after the special distribution
to existing Shareholders. See "Use of Proceeds" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources." The success of the Company's expansion strategy is dependent
upon many factors, including identifying suitable markets and sites for new
stores, negotiating leases with acceptable terms, refurbishing stores,
appropriately upgrading its financial and management information systems and
controls and managing its operating expenses. In addition, the Company must be
able to continue to hire, train, motivate and retain competent managers and
store personnel. Many of these factors are beyond the Company's control. As a
result, there can be no assurance that the Company will be able to achieve its
expansion goals. Any failure of the Company to achieve its expansion goals on a
timely basis, obtain acceptance in markets in which it currently has limited or
no presence, attract and retain qualified management and other personnel,
appropriately upgrade its financial and management information systems and
controls or manage operating expenses could adversely affect the Company's
future operating results and its ability to execute its business strategy.
A variety of factors, including store location, store size, rental terms,
and the level of initial advertising expenditures influence if and when a store
becomes profitable. Assuming the Company's planned expansion occurs as
anticipated, the Company's store base will include a relatively high proportion
of stores with relatively short operating histories. There can be no assurance
that the new stores will achieve the sales per saleable square foot and
store-level operating margins currently achieved at the Company's existing
stores. If the new stores on average fail to achieve these results, the
Company's planned expansion could produce a decrease in the Company's 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 the Company's 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. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Results of
Operations" and "Business -- Expansion Strategy."
SUPPLIER RELATIONSHIPS; AVAILABILITY OF CLOSE-OUT AND SPECIAL-SITUATION
MERCHANDISE
The Company's success depends in large part upon its ability to locate and
purchase quality close-out and special situation merchandise at attractive
prices in order to maintain a mix of name-brand and other merchandise at the
99 CENTS price point. There can be no assurance that such merchandise will
continue to be available in the future. Further, there can be no assurance that
such merchandise will be available in quantities necessary to accommodate the
Company's expansion strategy.
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, for which it competes with other wholesalers, discount chains,
mass merchandisers, food markets, drug chains, club stores, other retailers and
7
<PAGE>
various small privately-held companies and individuals. Although the Company is
not dependent on any single supplier or group of suppliers, the Company's
results of operations could be adversely affected by a disruption in the
availability of merchandise.
The Company's suppliers sometimes restrict the advertising, promotion and
method of distribution of the merchandise sold to the Company. These
restrictions may make it more difficult for the Company to resell quickly items
in its inventory that are subject to such restrictions. See "Business --
Purchasing."
HIGH-LEVEL OF INVENTORY
The Company takes advantage of large volume purchases, close-outs and other
special situations in order to obtain inventory at favorable prices. As a
result, the Company typically maintains inventory at levels that are generally
higher than other discount retailers. At December 31, 1993, 1994 and 1995 and
March 31, 1996, the Company had net inventory recorded of $28.8 million, $32.5
million, $34.3 million and $32.5 million, respectively.
The Company reviews periodically the net realizable value of its inventory
and makes adjustments to its carrying value when appropriate. While the current
carrying value of the Company's inventory reflects management's belief that the
Company will realize the net values recorded on the Company's balance sheet,
there can be no assurance that the Company will be able to do so. A sale by the
Company of any material portion of its inventory at an amount less than its
carrying value or a determination to write down any material portion of the
Company's inventory will have a material adverse impact on the Company's cost of
sales, gross profits, operating income and net income during the period in which
such event or events occur. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Liquidity and Capital Resources."
AFFILIATE TRANSACTIONS
The Company currently leases 10 of its 38 store locations and a parking lot
associated with one of these stores from certain of the Existing Shareholders or
their affiliates. David Gold, Chief Executive Officer of the Company, and his
wife, Sherry Gold, own one store location through a partnership (14139 Paramount
Properties), and hold a 75% interest in a partnership (6135-6161 Atlantic
Boulevard Partnership) which owns an additional store location. An additional
five store locations are owned by HKJ Gold, Inc., a California corporation, the
sole shareholders of which are Howard Gold, Karen Schiffer and Jeff Gold, the
three children of David and Sherry Gold. Howard Gold and Jeff Gold are also
officers and directors of the Company. David Gold, Sherry Gold, Howard Gold,
Karen Schiffer and Jeff Gold, together, through a partnership (Au Zone
Investments #2, L.P., a California limited partnership) also indirectly own
three other store locations and a parking lot rented to an additional store
location. Annual rental expense for the facilities owned by the Existing
Shareholders or their affiliates was approximately $1.0 million, $1.5 million
and $1.6 million in 1993, 1994 and 1995, respectively. During the three months
ended March 31, 1996 the rental expense for these facilities totalled $400,000.
The Company has entered into leases for two new stores and one relocated store.
HKJ Gold, Inc. is the landlord of two of these properties and Howard Gold, Jeff
Gold, Karen Schiffer and her husband Eric Schiffer, who is also an officer of
the Company, together, are the landlord of the third property. In addition, HKJ
Gold, Inc. has agreed to purchase a site currently leased by the Company,
subject to certain contingencies. The Company believes that such leases and
purchase contract are no less favorable to the Company than those an unrelated
party would have provided after arm's-length negotiations. In the future, the
Company does not intend to enter into real estate transactions with the Existing
Shareholders or their affiliates, except with respect to the renewal or
modification of existing leases and occasions where such transactions are
determined to be in the best interests of the Company. The Existing Shareholders
have agreed that neither they nor their affiliates will pursue any future real
estate opportunity that could be utilized by the Company as a store or warehouse
location unless it is unanimously rejected by the independent Directors on the
Company's Board of Directors. Moreover, all future real estate transactions
between the Company and the Existing Shareholders or their affiliates will
require the unanimous approval of the independent Directors on the Company's
Board of Directors and a determination by such independent Directors that such
transactions are the equivalent of a negotiated arm's-length transaction with a
third party. There can be no guarantee that the Company and the Existing
Shareholders or their affiliates will be able to agree on renewal terms for the
properties currently leased by the Company from the Existing Shareholders, or,
if such terms are agreed to, that the independent Directors on the Board of
Directors will approve such terms. The failure of the Company to renew a lease
will result in the Company having to relocate or close the store associated with
such lease; one or more such relocations or closures will be costly and may have
a material adverse effect on the Company's business and results of operations.
8
<PAGE>
ADVERSE ECONOMIC FACTORS; CHANGE IN MINIMUM WAGE
The Company's ability to provide quality merchandise at its 99 CENTS price
point is subject to certain economic factors beyond the Company's control,
including inflation, other operating costs (such as employee health care costs
or prevailing wage levels), consumer confidence and general economic conditions.
There can be no assurance that such factors will remain favorable, in
particular, that health care costs or the Company's wages will remain at current
levels. Proposals currently before the United States Congress, the California
legislature and proposed for consideration by California voters in November 1996
include measures that would raise the minimum wage significantly. Inflation, an
increase in healthcare costs, wages or other operating costs or a declining
consumer confidence or general economic conditions could have a material adverse
effect on the Company's business and results of operations, especially given
constraints on the Company's ability to pass on any incremental costs through
price increases.
COMPETITION
Each of the markets in which the Company operates is highly competitive.
Although several of the largest operators of discount stores at the dollar price
point (or their parent companies) have recently filed for or emerged from
bankruptcy protection in the U.S. Bankruptcy Court and have closed a number of
their stores, while others have abandoned the $1.00 price point concept and/or
reconfigured their stores, the Company faces competition in both the acquisition
of inventory and sale of merchandise from other wholesalers, discount stores,
single price point merchandisers, mass merchandisers, food markets, drug chains,
club stores and other retailers. The industry also includes a large number of
competitive privately held companies and individuals. In some instances these
competitors are also customers of the 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 that could have an
adverse effect on the Company's business and results of operations. See
"Business -- Competition."
CONCENTRATION OF OPERATIONS IN SOUTHERN CALIFORNIA
All of the Company's stores are located in Southern California. In addition,
the Company's current retail expansion plans anticipate that all new stores will
be located in this geographic region. Consequently, the Company's results of
operations and financial condition are dependent upon general trends in the
Southern California economy. The Southern California economy has experienced a
recession in the early 1990s. Between 1989 and 1993, a significant decline in
retail spending was recorded in most counties of California, particularly the
greater Los Angeles region. Although retail markets in this region began to
recover and this recovery continued during 1995, there can be no assurance that
this trend will continue or that retail spending will not 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, which at times have disrupted the local economy and pose physical
risks to the Company's properties and which could adversely affect the Company's
operations. Although the Company maintains standard property and business
interruption insurance, the Company does not maintain earthquake insurance on
its facilities and business. See "Business -- Warehousing and Distribution."
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Substantially all of the Company's inventory is shipped or picked-up
directly from suppliers and delivered to the Company's single warehouse and
distribution facility in Los Angeles County, California, where the inventory is
processed and distributed. The Company's success depends in large part on the
orderly operation of this receiving and distribution process, which depends, in
turn, on adherence to shipping schedules and effective management of the
warehouse operations. Although management believes that the Company's receiving
and distribution process is efficient and well positioned to support the
Company's expansion plans, there can be no assurance that the Company has
anticipated, or will anticipate, all of the changing demands its expanding
operations will impose on its receiving and distribution system or that events
beyond the control of the Company will not result in delays in the delivery of
merchandise to the warehouse or from the warehouse to the stores. In addition,
because the Company's receiving and distribution operations are concentrated at
a
9
<PAGE>
single location, a fire, earthquake or other disaster at its warehouse and
distribution facility could materially and adversely affect its business and
results of operations. In the Company's case, such a disaster could be
particularly damaging because much of its inventory is purchased as close outs
and special situations and could not be readily replaced for its carrying value,
if at all. Although the Company maintains standard property and business
interruption insurance, the Company does not maintain earthquake insurance on
its facilities and business. See "Business -- Warehousing and Distribution."
INTERNATIONAL OPERATIONS
Although international sales have historically not been material to the
Company's consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales and are expected to continue to do so in the near future.
In addition, some of the inventory purchased by the Company is manufactured
outside the United States. International transactions may be subject to
political and economic risks, including political instability, currency
controls, exchange rate fluctuations, and changes in import/export regulations,
tariff and freight rates. In addition, various forms of protectionist trade
legislation have been proposed in the United States and certain other countries.
Any resulting changes in current tariff structures or other trade and monetary
policies could adversely affect the Company's international operations.
Political and economic factors have been identified by the Company with respect
to certain of the markets in which it competes. There can be no assurance that
these factors will not result in the reduction of purchases of the Company's
products.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on its
executive officers and other key management, particularly its Chief Executive
Officer, David Gold; its Senior Vice President of Wholesale Operations, Helen
Pipkin; and its Chief Financial Officer, Carl L. Wood. The Company does not have
an employment contract with any of its executive officers and does not maintain
"key man" life insurance on any of its executive officers. As the Company
continues to grow, it will continue to hire, appoint or otherwise change senior
managers and other key executives. There can be no assurance that the Company
will be able to retain its executive officers and key personnel or attract
additional qualified members to management in the future. See "Management."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's highest net sales and operating income have been
experienced during the fourth quarter, which includes the holiday selling
season. During 1994 and 1995, approximately 28.3% and 29.3%, respectively, of
the Company's net sales and approximately 35.8% and 33.0%, respectively, of its
operating income were generated during the fourth quarter. Accordingly, any
adverse trend in net sales for such period could have a material adverse effect
upon the Company's profitability and adversely affect the Company's results of
operations for the entire year. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Seasonality and Quarterly
Fluctuations."
In addition to seasonality, the Company's results of operations may
fluctuate from quarter to quarter as a result of the amount and timing of sales
contributed by new stores, the level of advertising and pre-opening expenses
associated with the opening of new stores and the integration of new stores into
the operations of the Company, as well as other factors.
ENVIRONMENTAL MATTERS
Under various Federal, state and local environmental laws and regulations, a
current or previous owner or occupant of real property may become liable for the
costs of removal or remediation of hazardous substances at such real property.
Such laws and regulations often impose liability without regard to fault. The
Company currently leases all of its stores, as well as its warehouse and
distribution facility (where its executive offices are located). The Company
could be held liable for the costs of remedial actions with respect to hazardous
substances on such properties under the terms of the governing lease and/or
governing law. In addition, the Company operates one underground diesel storage
tank and one above-ground propane storage tank at its warehouse and distribution
facility. Although the Company has not been notified of, and is not otherwise
aware of, any current environmental liability, claim or non-compliance, there
can be no assurance that the Company will not be required to incur remediation
or other costs in the future in connection with its leased properties or its
storage tanks.
10
<PAGE>
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.
CONTROL BY EXISTING SHAREHOLDERS
Upon consummation of this offering, David Gold, members of his immediate
family and certain of their respective affiliates will beneficially own 70.0%
(67.0% if the Underwriters' over-allotment option is exercised in full) of the
voting stock of the Company. This ownership position will enable these owners to
control the Company's policies and to prevent a change in control of the
Company. See "Principal Shareholders."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
of the Company and there can be no assurance that an active public market for
the Common Stock will develop after the offering. The initial public offering
price will be determined by negotiations between the Company and the
Representatives based upon several factors. The trading price of the Company's
Common Stock could be subject to wide fluctuations in response to variations in
operating results, announcements of developments by the Company or its
competitors, and other events or factors. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations that have
particularly affected the market price for many companies and that often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Common Stock of
the Company.
DILUTION
Investors purchasing shares of Common Stock in this offering will experience
immediate and substantial dilution in the net tangible book value per share of
the Common Stock of $10.57 per share. See "Dilution."
ANTI-TAKEOVER EFFECT
A number of provisions of the Company's Articles of Incorporation and Bylaws
and certain California laws and regulations pertaining to matters of corporate
governance (including the ability to issue preferred stock without shareholder
approval) may be deemed to have and may have the effect of making more
difficult, and thereby discouraging, a merger, tender offer, proxy contest or
assumption of control and change of incumbent management, even when shareholders
other than the Company's principal shareholders consider such a transaction to
be in their best interest. Accordingly, shareholders may be deprived of an
opportunity to sell their shares at a substantial premium over the market price
of the shares. See "Description of Capital Stock."
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing shareholders could adversely affect the prevailing
market price of the Company's Common Stock. Upon consummation of the sale of
securities offered hereby, the Company will have 14,179,135 shares of Common
Stock outstanding. Immediately following this offering, the 4,250,000 shares
offered hereby (4,887,500 if the Underwriter's over-allotment option is
exercised in full), will be eligible for immediate sale in the public market
without restriction. In addition, upon expiration of certain lock-up agreements
between the Company, its officers, directors and shareholders and the
Underwriters, beginning 12 months after the date of this Prospectus, or earlier
if EVEREN Securities, Inc. consents, approximately 9,929,135 additional shares
will be eligible for immediate sale in the public market, subject to compliance
with Rule 144 promulgated by the Commission under the Securities Act of 1933, as
amended (the "Act"). In addition, the Company intends to file a registration
statement under the Act covering the 1,000,000 shares reserved for issuance
under the Company's stock option plan 30 days following the completion of the
offering. See "Shares Eligible for Future Sale."
11
<PAGE>
TERMINATION OF S CORPORATION STATUS
Effective May 1, 1996 (the "Termination Date"), the Company changed in form
from an S corporation to a C corporation. The Company was treated as an S
corporation from its inception through April 30, 1996. As a result, through the
date immediately preceding the Termination Date, the Company's earnings were
taxed for federal income tax purposes directly to the Existing Shareholders
rather than to the Company. Other than a tax imposed on S corporations by the
State of California (currently 1.5% of income), state income taxes on earnings
also were the responsibility of the Existing Shareholders. On the Termination
Date, the Company became subject to federal and state corporate income taxes.
See Note 4 of "Notes to Financial Statements."
In connection with the termination of the S corporation election, the
Company will record an increase in the deferred tax asset on its balance sheet
with a corresponding credit to its statement of operations which will ultimately
increase retained earnings. The pro forma deferred tax asset, principally
relating to timing differences arising from the treatment of the allowance for
overstock and obsolescence and accruals for book and tax purposes, was
approximately $5.0 million as of March 31, 1996.
The Company paid an aggregate of $32.0 million in S corporation cash
distributions to the Existing Shareholders from January 1, 1993 through April
30, 1996. Such distributions were paid to Existing Shareholders to pay their
income taxes and as a distribution of a portion of the Company's earnings. In
March 1996 and April 1996, the Company distributed dividends aggregating $35.5
million to the Existing Shareholders in the form of notes payable. Further, in
May 1996, the Company declared a dividend payable to the Existing Shareholders
in the amount of $4.4 million, which amount approximated the increase in the
Company's deferred tax asset resulting therefrom. These notes and dividends
payable will be paid at the time of the closing of this offering out of the net
proceeds hereof.
The Company and the Existing Shareholders have entered into a tax
indemnification agreement (the "Tax Agreement") relating to their respective
income tax liabilities. Because the Company has been fully subject to corporate
income taxation since the Termination Date, the reallocation of income and
deductions between the period during which the Company was treated as an S
corporation and the period during which the Company is subject to corporate
income taxation may increase the taxable income of one party while decreasing
that of another party. Accordingly the Tax Agreement is intended to assure that
taxes are borne by the Company on the one hand and the Existing Shareholders on
the other only to the extent that such parties received the related income. The
Tax Agreement generally provides that, if an adjustment is made to the taxable
income of the Company for a year in which it was treated as an S corporation,
the Company will indemnify the Existing Shareholders and the Existing
Shareholders will indemnify the Company against any increase in the indemnified
party's income tax liability (including interest and penalties and related costs
and expenses), with respect to any tax year to the extent such increase results
in a related decrease in the income tax liability of the indemnifying party for
that year. The Company will also indemnify the Existing Shareholders for all
taxes imposed upon them as the result of their receipt of an indemnification
payment under the Tax Agreement. Any payment made by the Company to the Existing
Shareholders pursuant to the Tax Agreement may be considered by the Internal
Revenue Service or state taxing authorities to be non-deductible by the Company
for income tax purposes.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,250,000 shares of
Common Stock offered hereby are approximately $56.7 million ($65.3 million if
the Underwriters' over-allotment option is exercised in full). The Company will
use approximately $39.9 million of the net proceeds from the offering to pay
notes issued and dividends payable declared to the Existing Shareholders prior
to the date hereof in connection with the termination of the Company's S
corporation status. See "Termination of S Corporation Status." The Company
intends to use the balance of the net proceeds to continue to accelerate the
expansion of its retail operations and for general corporate purposes. Any net
proceeds to the Company not immediately used for such purposes will be invested
in short-term investment grade securities. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996; the pro forma capitalization of the Company which reflects the
conversion of the Company from an S corporation to a C corporation; and the pro
forma capitalization of the Company as adjusted, which reflects the sale of
4,250,000 shares of Common Stock offered by the Company hereby at a price to the
public of $14.50 per share and the application of the net proceeds therefrom,
including the distributions to the Existing Shareholders in connection with the
termination of the Company's S corporation status. The table should be read in
conjunction with the Company's Financial Statements and Notes thereto together
with Management's Discussion and Analysis of Results of Operations and Financial
Condition.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
--------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash.............................................. $ 4,888 $ 1,888 $18,649
------- --------- -----------
------- --------- -----------
Dividend payable to the Existing
Shareholders(2)................................. $ -- $ 4,400 $ --
------- --------- -----------
Notes payable to the Existing Shareholders(2)..... 35,363 35,521 --
------- --------- -----------
Long-term debt.................................... -- -- --
------- --------- -----------
Capitalized lease obligation...................... 9,828 9,828 9,828
------- --------- -----------
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized;
no shares issued and outstanding.............. -- -- --
Common Stock, no par value; 40,000,000 shares
authorized;
9,929,135 shares issued and outstanding,
actual and pro forma; 14,179,135 shares
outstanding pro forma as adjusted(3).......... 195 195 56,536
Retained earnings (deficit)..................... 2,158 (814) (814)
------- --------- -----------
Total shareholders' equity...................... 2,353 (619) 55,722
------- --------- -----------
Total capitalization.......................... $47,544 $49,130 $65,550
------- --------- -----------
------- --------- -----------
</TABLE>
- ---------------
(1) Gives pro forma effect to (i) a cash dividend to the Existing Shareholders
in the amount of $3.0 million declared on April 16, 1996, (ii) a
distribution to the Existing Shareholders in the form of notes issued in the
aggregate amount of $158,000 made on April 30, 1996; (iii) a dividend
payable to the Existing Shareholders in the amount of $4.4 million, declared
on May 1, 1996; and (iv) an increase of $4.586 million in the Company's
deferred tax asset as the result of the termination of the Company's S
corporation status. The dividends and distributions described in (ii) and
(iii) above were declared and made in contemplation of the termination of
the Company's S corporation status. The notes issued and dividends payable
declared are intended to be paid out of the net proceeds of the offering.
See "Termination of S Corporation Status" and "Use of Proceeds."
(2) Notes issued and dividends payable declared include amounts distributable to
the Existing Shareholders in contemplation of the termination of the
Company's S corporation status. The notes are intended to be paid using the
net proceeds of the offering. See "Termination of S Corporation Status" and
"Use of Proceeds."
(3) Excludes 500,000 shares of Common Stock reserved for issuance pursuant to
options outstanding under the Company's 1996 Stock Option Plan. See
"Management -- Stock Option Plan."
13
<PAGE>
DIVIDEND POLICY
The Company does not currently anticipate paying a dividend on its Common
Stock. Any future determination to pay cash dividends will be made at discretion
of the Company's Board of Directors and will be dependent upon the Company's
results of operations, financial condition and other factors deemed relevant by
the Board of Directors.
DILUTION
The net tangible book value of the Company at March 31, 1996 was $2.4
million or $0.24 per share of Common Stock. Net tangible book value per share is
equal to the Company's total assets less its total liabilities, divided by the
total number of outstanding shares of Common Stock. After giving effect to the
sale of 4,250,000 shares offered by the Company hereby and the receipt and
application of the net proceeds therefrom (after deducting (i) the underwriting
discount, (ii) offering expenses payable and (iii) the S corporation
distribution to the Existing Shareholders of $39.9 million in payment of notes
issued and dividends payable declared in 1996), the pro forma net tangible book
value of the Company at March 31, 1996 would have been approximately $55.7
million or $3.93 per share. This represents an immediate increase in such net
tangible book value of $3.69 per share to the Existing Shareholders and an
immediate dilution of $10.57 per share to new shareholders purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price...................................... $ 14.50
Net tangible book value per share as of March 31, 1996........... $ 0.24
Decrease attributable to distribution of S corporation
earnings....................................................... (2.82)
Increase per share attributable to new shareholders.............. 6.51
---------
Pro forma net tangible book value per share as of March 31, 1996
after the offering............................................... 3.93
---------
Dilution per share to new shareholders............................. $ 10.57
---------
---------
</TABLE>
The calculations in the table set forth above assume no exercise of the
Underwriters' over-allotment option and do not reflect 500,000 shares of Common
Stock reserved for issuance pursuant to options outstanding under the Company's
1996 Stock Option Plan. See "Management -- Stock Option Plan."
14
<PAGE>
SELECTED FINANCIAL AND CERTAIN OPERATING DATA
The following table sets forth selected financial and operating data of the
Company for the periods indicated. The following selected statements of income
data for each of the three years ended December 31, 1993, 1994, 1995, and the
balance sheet data as of December 31, 1994 and 1995 are derived from the
financial statements and notes thereto included elsewhere herein audited by
Arthur Andersen LLP, independent public accountants, as set forth in their
report also included elsewhere herein. The selected statements of income data
for the years ended December 31, 1991 and 1992, and the balance sheet data as of
December 31, 1991, 1992 and 1993 are derived from financial statements audited
by Arthur Andersen LLP not included herein. The unaudited selected statements of
income data for the three-month periods ended March 31, 1995 and 1996, and the
unaudited balance sheet data as of March 31, 1996, are derived from unaudited
financial statements of the Company prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for any interim period are not necessarily indicative of results to
be expected for a full year. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
-------------------------------------------------------------------- -----------
1991 1992 1993 1994 1995 1995
------------ ------------ ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SALES PER SQUARE FOOT DATA AND NUMBER OF
STORES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales:
99 CENTS Only Stores.......................... $ 89,967 $ 95,873 $ 101,828 $ 110,724 $ 121,998 $ 27,092
Other retail operations (1)................... 3,104 3,125 3,093 2,097 492 327
Bargain Wholesale............................. 19,544 21,938 18,028 18,916 30,337 6,138
------------ ------------ ------------ ------------ ------------ -----------
Total....................................... 112,615 120,936 122,949 131,737 152,827 33,557
Cost of sales................................... 74,989 79,748 81,480 88,045 102,160 22,430
------------ ------------ ------------ ------------ ------------ -----------
Gross profit.................................... 37,626 41,188 41,469 43,692 50,667 11,127
Selling, general and administrative expenses.... 23,482 29,060 32,081 32,661 33,809 7,753
------------ ------------ ------------ ------------ ------------ -----------
Operating income................................ 14,144 12,128 9,388 11,031 16,858 3,374
Special litigation provision (reversal) (2)..... 2,100 -- -- (2,900) -- --
Interest (income) expense, net.................. (39) (50) 45 764 755 189
------------ ------------ ------------ ------------ ------------ -----------
Income before pro forma provision for
income taxes (3).............................. 12,083 12,178 9,343 13,167 16,103 3,185
Pro forma provision for
income taxes (unaudited) (3).................. 4,847 4,739 3,477 5,163 6,509 1,238
------------ ------------ ------------ ------------ ------------ -----------
Pro forma net income (unaudited) (3)............ $ 7,236 $ 7,439 $ 5,866 $ 8,004 $ 9,594 $ 1,947
------------ ------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ ------------ -----------
Pro forma earnings per
common share (unaudited) (3)(4)............... $ 0.75
------------
------------
Pro forma weighted average number of common
shares outstanding (unaudited) (3)(4)......... 12,803
------------
------------
COMPANY OPERATING DATA:
99 CENTS Only Stores net sales growth......... 17.1% 6.6% 6.2% 8.7% 10.2%
Bargain Wholesale net sales growth............ 50.4% 12.2% (17.8)% 4.9% 60.4%
Total Company net sales growth................ 21.9% 7.4% 1.7% 7.1% 16.0%
Gross margin.................................. 33.4% 34.1% 33.7% 33.2% 33.2% 33.2%
Operating margin.............................. 12.6% 10.0% 7.6% 8.4% 11.0% 10.1%
Pro forma net income margin................... 6.4% 6.2% 4.8% 6.1% 6.3% 5.8%
RETAIL OPERATING DATA (5):
Number of stores open at end of period........ 24 30 31 34 36 34
Change in comparable stores net sales (6)..... (0.3)% (8.6)% (3.5)% (1.4)% (0.2)%
Change in comparable stores net sales,
as adjusted (7)............................. (0.2)% 2.2%
Average net sales per store open for
the full year............................... $ 3,826 $ 3,550 $ 3,349 $ 3,267 $ 3,467 $ 797
Average net sales per estimated saleable
square foot (8)............................. $ 462 $ 417 $ 388 $ 396 $ 397 $ 92
<CAPTION>
1996
-----------
<S> <C>
STATEMENT OF INCOME DATA:
Net sales:
99 CENTS Only Stores.......................... $ 32,256
Other retail operations (1)................... --
Bargain Wholesale............................. 10,020
-----------
Total....................................... 42,276
Cost of sales................................... 28,810
-----------
Gross profit.................................... 13,466
Selling, general and administrative expenses.... 9,066
-----------
Operating income................................ 4,400
Special litigation provision (reversal) (2)..... --
Interest (income) expense, net.................. 189
-----------
Income before pro forma provision for
income taxes (3).............................. 4,211
Pro forma provision for
income taxes (unaudited) (3).................. 1,719
-----------
Pro forma net income (unaudited) (3)............ $ 2,492
-----------
-----------
Pro forma earnings per
common share (unaudited) (3)(4)............... $ 0.19
-----------
-----------
Pro forma weighted average number of common
shares outstanding (unaudited) (3)(4)......... 12,803
-----------
-----------
COMPANY OPERATING DATA:
99 CENTS Only Stores net sales growth......... 19.1%
Bargain Wholesale net sales growth............ 63.2%
Total Company net sales growth................ 26.0%
Gross margin.................................. 31.9%
Operating margin.............................. 10.4%
Pro forma net income margin................... 5.9%
RETAIL OPERATING DATA (5):
Number of stores open at end of period........ 38
Change in comparable stores net sales (6)..... 6.2%
Change in comparable stores net sales,
as adjusted (7)............................. 6.3%
Average net sales per store open for
the full year............................... $ 875
Average net sales per estimated saleable
square foot (8)............................. $ 97
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------
AT DECEMBER 31, PRO FORMA
----------------------------------------------------- AS ADJUSTED
1991 1992 1993 1994 1995 1996 1996(9)
--------- --------- --------- --------- --------- --------- ------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficit)....................... $ 18,580 $ 24,173 $ 19,242 $ 24,713 $ 28,690 $ (5,043) $ 44,081
Total assets.................................... 27,694 33,343 46,960 51,419 57,598 58,838 76,844
Long-term debt.................................. -- -- -- -- -- -- --
Capitalized lease obligation,
including current portion..................... -- -- 11,080 10,548 9,977 9,828 9,828
Total shareholders' equity...................... $ 18,805 $ 24,494 $ 23,307 $ 30,811 $ 35,558 $ 2,353 $ 55,722
</TABLE>
- ---------------
SEE NOTES ON FOLLOWING PAGE.
15
<PAGE>
(1) The Company operated other stores during the periods presented under
different tradenames pending conversion to the 99 CENTS Only Stores format
or their eventual closing. Only one such store was operated by the Company
in 1995, and that store was closed in May 1995. See "Business -- Store
Locations."
(2) See "Business -- Legal Proceedings" and Note 7 to "Notes to Financial
Statements."
(3) Prior to May 1, 1996, the Company was treated as an S corporation for
federal and state income tax purposes. See "Termination of S corporation
Status." The pro forma presentation reflects a provision for income taxes as
if the Company had always been a C corporation, at an assumed effective tax
rate of 40.1% in 1991 and 1992, 41.0% in 1993, 1994 and 1995 and for the
three-month periods ended March 31, 1995 and 1996, plus the effect of
deferred taxes and tax credits.
(4) Pro forma earnings per common share have been computed by dividing pro forma
net income by the pro forma weighted average number of common shares and
common stock equivalents outstanding. Pro forma weighted average common
equivalent shares include 2,753,000 shares offered hereby to fund certain
notes issued and dividends payable declared to the Existing Shareholders, in
connection with the termination of the Company's status as an S corporation.
Common stock equivalents include all outstanding stock options and warrants
after applying the treasury stock method. All currently outstanding options
have been considered outstanding for all fiscal years presented and are
included in the calculation of the weighted average number of common shares
and common stock equivalents outstanding for pro forma earnings per common
share computations in accordance with the rules of the Commission.
(5) Includes retail operating data solely for the Company's 99 CENTS Only
Stores.
(6) Change in comparable stores net sales compares net sales for stores open the
entire two periods compared.
(7) Excludes the Company's Fairfax/Wilshire #1 store, which remained open after
a larger new store (Fairfax/Wilshire #2) was opened fewer than 500 feet away
in August 1994. For a discussion of the Company's strategy of opening larger
new stores in close proximity to existing stores, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
General."
(8) Computed based upon estimated total saleable square footage of stores open
for the entire period.
(9) Adjusted to reflect (i) the conversion of the Company from an S corporation
to a C corporation, and (ii) the sale of 4,250,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom, including the payment of $39.9 million of certain notes
issued and dividends payable declared to the Existing Shareholders in
connection with the termination of the Company's S corporation status. See
"Use of Proceeds," "Capitalization" and Note 4 to "Notes to Financial
Statements."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS PROSPECTUS. SEE ALSO "SELECTED FINANCIAL DATA."
GENERAL
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company has distributed its merchandise on a wholesale basis through
its Bargain Wholesale division. On August 13, 1982, the Company opened its first
99 CENTS Only Stores location and as of the date of this Prospectus operates a
chain of 38 deep-discount 99 CENTS Only Stores. The Company's growth during the
last three years has primarily come from new store openings and growth in its
Bargain Wholesale division. The Company opened 1, 4 and 4 stores in 1993, 1994
and 1995, respectively (1, 3 and 2, respectively, net of relocated stores and 1
store closed as the result of a fire). The Company opened 2 stores in the first
three months of 1996, 1 in Huntington Beach, California and 1 in Harbor City,
California and expects to open 5 or 6 additional stores during the year. The
Company intends to open 7 or 8 stores in 1997. Of the additional stores planned
for 1996, the Company has concluded lease negotiations on 3 sites (including one
store relocation site).
Other retail operations include operations of acquired stores pending their
closure or conversion to the 99 CENTS Only Stores retail format. Since 1982, the
Company has acquired groups of store sites and inventory from three different
chains. The Company either immediately converted the acquired sites to the
99 CENTS Only Stores format, operated the acquired sites under their original
tradename until they were either converted, closed or sold, or immediately
closed the site. The last of such stores was closed in May 1995. The Company may
acquire additional sites in the future from existing chains if suitable
opportunities arise.
Bargain Wholesale's growth over the three years ending December 31, 1995 was
primarily attributable to an increased focus on large domestic and international
accounts and expansion into new geographic markets. The Company generally
realizes a lower gross profit margin on Bargain Wholesale net sales than on
99 CENTS Only Stores net sales. However, Bargain Wholesale complements the
Company's retail operations by allowing the Company to purchase in larger
volumes at more favorable pricing and to generate additional net sales with
relatively small incremental increases in operating expenses.
Comparable stores net sales (computed on 99 CENTS Only Stores open for a
full year) declined in each of the five calendar years from January 1, 1991
through December 31, 1995. The Company believes that this trend has resulted in
part from its expansion strategies. In the past, as part of its strategy to
expand retail operations, the Company opened certain larger new stores in close
proximity to existing stores where the Company determined that the trade area
could support a larger facility. In some of these situations, the Company
retained its existing store so long as it continued to contribute store-level
operating income. While this strategy was designed to increase revenues and
store-level operating income, it has had a negative impact on comparable store
net sales as some customers migrate from the existing store to the close-by new
store. The Company believes that this strategy has impacted its historical
comparable sales growth.
During each of the calendar years in the period from January 1, 1991 through
December 31, 1995, average net sales per estimated saleable square foot
(computed on 99 CENTS Only Stores open for a full year) have declined from $462
per square foot in 1991 to $397 per square foot in 1995. This trend reflects the
Company's determination to target larger locations for new store development.
Existing stores average over 12,000 square feet. Since 1993, the Company has
opened 11 new stores (including 2 relocations in 1995) that average over 16,000
gross square feet. The Company currently targets new store locations ranging in
size from 15,000 to 23,000 gross square feet. Although it is the Company's
experience that larger stores generally have lower average net sales per square
foot than its smaller stores, they generally achieve higher average annual store
revenues as a result of their increased selling area.
The Company has experienced an 8.1% compound annual growth rate in net sales
over the last three years.
17
<PAGE>
EFFECT OF CHANGE IN FORM FROM AN S CORPORATION TO A C CORPORATION
Effective May 1, 1996, the Company changed in form from an S corporation to
a C corporation, a change that will affect its operations and financial
condition by increasing the level of federal and state income taxes.
As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal income tax purposes. For California
franchise tax purposes, S corporations were taxed at 2.5% of taxable income
through 1993 and 1.5% of taxable income in 1994 and 1995 and the first three
months of 1996. Currently, the top federal tax rate for C corporations is 35%
and the corporate tax rate in California is 9.3%. As such, the change in form
will affect the earnings and the cash flows of the Company. The pro forma
provision for income taxes in the accompanying statements of income shows
results as if the Company had always been a C corporation and had adopted
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" prior to January 1, 1991.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTH
PERIODS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales:
99 CENTS Only Stores.................. 82.8% 84.0% 79.8% 80.7% 76.3%
Other retail.......................... 2.5 1.6 0.3 1.0 --
Bargain Wholesale..................... 14.7 14.4 19.9 18.3 23.7
------ ------- ------ ------ ------
Total............................... 100.0 100.0 100.0 100.0 100.0
Cost of sales........................... 66.3 66.8 66.8 66.8 68.1
------ ------- ------ ------ ------
Gross profit.......................... 33.7 33.2 33.2 33.2 31.9
Selling, general and administrative
expenses.............................. 26.1 24.8 22.2 23.1 21.5
------ ------- ------ ------ ------
Operating income........................ 7.6 8.4 11.0 10.1 10.4
Special litigation reversal............. -- (2.2) -- -- --
Interest expense, net................... -- 0.6 0.5 0.6 0.4
------ ------- ------ ------ ------
Income before pro forma provision for
income taxes.......................... 7.6 10.0 10.5 9.5 10.0
Pro forma provision for income taxes
(unaudited)........................... 2.8 3.9 4.2 3.7 4.1
------ ------- ------ ------ ------
Pro forma net income (unaudited)........ 4.8% 6.1% 6.3% 5.8% 5.9%
------ ------- ------ ------ ------
------ ------- ------ ------ ------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
NET SALES: Total net sales increased $8.7 million, or 26.0%, from $33.6
million in the 1995 period to $42.3 million in the 1996 period. 99 CENTS Only
Stores net sales increased approximately $5.2 million, or 19.1%, from $27.1
million in the 1995 period to $32.3 million in the 1996 period, and Bargain
Wholesale net sales increased approximately $3.9 million, or 63.2%, from $6.1
million in the 1995 period to $10.0 million in the 1996 period. There were no
other retail operations in 1996. The increase in 99 CENTS Only Stores net sales
was primarily attributable to the positive effect of a net increase of 4 stores
opened in 1995 and 2 stores opened in 1996 that were not open for the full
period in 1995, and a 6.2% or $1.6 million increase in comparable store net
sales from the 1995 period to the 1996 period. The increase in Bargain Wholesale
net sales was primarily attributable to an increased focus on large domestic and
international accounts, expansion into new geographic markets and increased
marketing activity during the 1996 period.
GROSS PROFIT: Gross profit increased approximately $2.4 million, or 21.0%,
from $11.1 million in the 1995 period to $13.5 million in the 1996 period. The
increase in gross profit was due to higher net sales. As a percentage of net
sales, gross profit declined from 33.2% in the 1995 period to 31.9% in the 1996
period reflecting the higher percentage of net sales represented by Bargain
Wholesale, which carries a lower gross margin than the 99 CENTS Only Stores
retail operations.
18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses ("SG&A") increased by $1.3 million, or 16.9%, from $7.8 million in the
1995 period to $9.1 million in the 1996 period, primarily due to increased costs
associated with new store growth and increased compensation expense as discussed
below. SG&A decreased as a percentage of net sales from 23.1% in the 1995 period
to 21.5% in the 1996 period. The decrease as a percentage of net sales in 1996
resulted primarily from spreading SG&A over a larger revenue base.
OPERATING INCOME: As a result of the items discussed above, operating
income increased $1.0 million, or 30.4%, from $3.4 million in the 1995 period to
$4.4 million in the 1996 period.
INTEREST EXPENSE: Interest expense relates to interest accrued on the
Company's capitalized warehouse lease, net of interest income on the Company's
cash balances. The change in interest expense between 1995 and 1996 was not
material. During the 1995 and the 1996 periods, the Company had no bank debt.
PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED): The pro forma provision
for income taxes in 1996 was $1.7 million, or 4.1% of net sales, compared to
$1.2 million, or 3.7% of net sales in 1995. The effective rate of the pro forma
provisions for income taxes were 40.4% and 40.8% in the 1995 period and the 1996
period, respectively. The effective rates are less than the statutory rates in
each period due to the benefit of certain tax credits. See Note 4 of "Notes to
Financial Statements."
PRO FORMA NET INCOME (UNAUDITED): As a result of the items discussed above,
pro forma net income increased $545,000, or 28.0%, from $1.9 million in the 1995
period to $2.5 million in the 1996 period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET SALES: Total net sales increased $21.1 million, or 16.0%, from $131.7
million in 1994 to $152.8 million in 1995. 99 CENTS Only Stores net sales
increased approximately $11.3 million, or 10.2%, from $110.7 million in 1994 to
$122.0 million in 1995, and Bargain Wholesale net sales increased approximately
$11.4 million, or 60.4%, from $18.9 million in 1994 to $30.3 million in 1995.
Changes in other retail operations from 1994 to 1995 reflected the closing of
the last such store in May 1995. The increase in 99 CENTS Only Stores net sales
was primarily attributable to the positive effect of a net increase of 5 stores
opened in 1994 and 1995, which were not open for the full year in 1994, offset
by a 0.2% or $0.2 million decrease in comparable store net sales from 1994 to
1995. Change in comparable stores net sales compares net sales for stores open
during the entire two years compared. Excluding the Company's Fairfax/Wilshire
#1 store, which remained open after a new larger store (Fairfax/Wilshire #2) was
opened fewer than 500 feet away in August 1994, the 1995 increase in comparable
stores net sales would have been 2.2%. The Company opened 4 new stores and
closed 1 store due to a fire in 1994, and opened 4 new stores (which included 2
stores which were relocated in 1995). The increase in Bargain Wholesale net
sales was primarily attributable to an increased focus on large domestic and
international accounts and expansion into new geographic markets.
GROSS PROFIT: Gross profit increased $7.0 million, or 16.0%, from $43.7
million in 1994 to $50.7 million in 1995. The increase in gross profit was due
to higher net sales. As a percentage of net sales, gross profit remained
constant at 33.2% between years.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $1.1 million, or
3.5%, from $32.7 million in 1994 to $33.8 million in 1995, primarily due to
increased costs associated with new store growth. SG&A decreased as a percentage
of net sales from 24.8% in 1994 to 22.2% in 1995. The decrease as a percentage
of net sales in 1995 resulted primarily from spreading SG&A over a larger
revenue base. SG&A for 1995 included compensation expense for certain of the
Company's executive officers and key employees in the amount of $1.0 million,
consisting of $0.8 million of annual base salary and an aggregate of $0.2
million of bonus compensation. The Company has implemented changes to its
compensation structure for 1996 that are anticipated to result in an increase in
the annual base salary paid to these executive officers and key employees from
$0.8 million in 1995 to $1.4 million in 1996. 1996 bonuses for these executive
officers and key employees have not been determined. However, they are not
expected to materially exceed bonus amounts paid to these executive officers and
key employees in the aggregate in 1995. Additional factors affecting
compensation expense in 1996 include the addition of key employees, the addition
of employees as a result of store expansion and wage increases for the Company's
employees generally to reflect cost of living increases.
19
<PAGE>
OPERATING INCOME: As a result of the items discussed above, operating
income increased $5.9 million, or 52.8%, from $11.0 million in 1994 to $16.9
million in 1995.
SPECIAL LITIGATION REVERSAL: The benefit from litigation expense in 1994 of
$2.9 million, or 2.2% as a percentage of net sales, reflects the reversal of
previously provided reserves not used due to the settlement of litigation for
$200,000. See "Business -- Legal Proceedings" and Note 6 to "Notes to Financial
Statements."
INTEREST EXPENSE: Interest expense relates to interest accrued on the
Company's capitalized warehouse lease, net of interest earned on the Company's
cash balances. The change in interest expense between 1994 and 1995 was not
material. During 1995, the Company had no bank debt.
PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED): The pro forma provision
for income taxes in 1995 was $6.5 million, or 4.2% of net sales, compared to
$5.2 million, or 3.9% of net sales in 1994. The effective rate of the pro forma
provision for income taxes was 40.4% and 39.2% in 1995 and 1994, respectively.
The effective rates are less than the statutory rates in each period due to the
benefit of certain tax credits. See Note 4 of "Notes to Financial Statements."
PRO FORMA NET INCOME (UNAUDITED): As a result of the items discussed above,
pro forma net income increased $1.6 million, or 19.9%, from $8.0 million in 1994
to $9.6 million in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES: Net sales increased $8.8 million, or 7.1%, from $122.9 million
in 1993 to $131.7 million in 1994. 99 CENTS Only Stores net sales increased
approximately $8.9 million, or 8.7%, from $101.8 million in 1993 to $110.7
million in 1994, and Bargain Wholesale net sales increased approximately $0.9
million, or 4.9%, from $18.0 million in 1993 to $18.9 million in 1994. The
increase in 99 CENTS Only Stores net sales was primarily attributable to the
effects of a net increase of four stores opened in 1993 and 1994, which were not
open for the full year in 1993, offset by a 1.4% or $1.4 million decrease in
comparable store net sales from 1993 to 1994. Excluding the Company's
Fairfax/Wilshire #1 store, which remained open after a new larger store
(Fairfax/Wilshire #2) was opened fewer than 500 feet away in August 1994, the
decrease in comparable stores net sales in 1994 would have been 0.2%. The
Company opened 1 new store in 1993 and 4 new stores in 1994, and closed 1 store
due to a fire. See the discussion above with respect to declines in comparable
store net sales.
GROSS PROFIT: Gross profit increased $2.2 million, or 5.4%, from $41.5
million in 1993 to $43.7 million in 1994. The increase in gross profit was due
to higher net sales. As a percentage of net sales, gross profit declined from
33.7% in 1993 to 33.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $0.6 million, or
1.8%, from $32.1 million in 1993 to $32.7 million in 1994, primarily due to
increased costs associated with new store growth. SG&A decreased as a percentage
of net sales from 26.1% in 1993 to 24.8% in 1994. SG&A also benefitted from an
approximate $500,000 savings associated with workers' compensation benefits
realized by the Company as a result of its decision to self-insure. The decrease
as a percentage of net sales in 1994 resulted primarily from spreading SG&A over
a larger revenue base.
OPERATING INCOME: As a result of the items discussed above, operating
income increased $1.6 million, or 17.5%, from $9.4 million in 1993 to $11.0
million in 1994.
SPECIAL LITIGATION REVERSAL: The benefit from litigation expense in 1994 of
$2.9 million, or 2.2% as a percentage of net sales, reflects the reversal of
previously provided reserves not required due to the settlement of litigation
for $200,000. See "Business -- Legal Proceedings" and Note 6 to "Notes to
Financial Statements."
INTEREST EXPENSE: Interest expense relates to interest accrued on the
Company's capitalized warehouse lease, net of interest earned on the Company's
cash balances. The change in interest expense between 1993 and 1994 was the
result of the Company's entry into the capitalized warehouse lease. During 1994,
the Company had no bank debt.
PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED): The pro forma provision
for income taxes in 1994 was $5.2 million, or 3.9% of net sales, compared to
$3.5 million, or 2.8% of net sales in 1993. The effective rate of
20
<PAGE>
the pro forma provision for income taxes was 39.2% and 37.2% in 1994 and 1993,
respectively. The effective rates are less than the statutory rates in each
period due to the benefit of certain tax credits. See Note 4 of "Notes to
Financial Statements."
PRO FORMA NET INCOME (UNAUDITED): As a result of the items discussed above,
pro forma net income increased $2.1 million, or 36.4%, from $5.9 million in 1993
to $8.0 million in 1994.
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 the working capital
requirements for new and existing stores. The Company takes advantage of
close-out and other special-situation opportunities which frequently results in
large volume purchases, and as a consequence, its cash requirements are not
constant or predictable during the year and can be affected by the timing and
size of its purchases.
During 1993, 1994 and 1995, net cash provided by operations was $13.8
million, $7.6 million and $17.3 million, respectively. These amounts reflect
increases in inventories in the amount of $0.2 million, $5.3 million and $1.8
million during 1993, 1994 and 1995, respectively. During 1993, 1994 and 1995,
net cash used in investing activities was $1.2 million, $1.9 million and $2.7
million, consisting primarily of expenditures to purchase property and
equipment. Net cash used in financing activities in 1993, 1994 and 1995 were
$12.8 million, $6.1 million and $11.8 million, respectively. These funds
represented payments of capital lease obligations and distributions to
shareholders to cover, in part, federal and state income taxes payable by the
Existing Shareholders with respect to the net income of the Company.
During the three months ended March 31, 1996, net cash provided by
operations was $4.7 million. This amount reflects a $1.8 million decrease in
inventories and a $652,000 increase in accounts receivable. During this period,
net cash used in investing activities was $693,000, consisting primarily of
expenditures to purchase property and equipment. Net cash used in financing
activities during the three months ended March 31, 1996 was $2.1 million. These
funds represented payments of the capitalized warehouse lease and distributions
to the Existing Shareholders to cover, in part, federal and state income taxes
payable by the Existing Shareholders with respect to the net income of the
Company.
The Company expects to expand by approximately seven to eight stores during
each of 1996 and 1997. The average investment per new store opened in 1994,
including capital expenditures and inventory on hand (as of December 31, 1994)
was approximately $561,000 per store. The Company's cash needs for new stores
opening are expected to total approximately $3.9 million to $4.5 million in each
of 1996 and 1997. The Company's total planned expenditures for other capital
items in each of 1996 and 1997 are approximately $500,000, primarily for
additions to fixtures and leasehold improvements of existing stores.
The Company has a $7.0 million bank credit facility bearing interest at the
bank's prime rate. Under the terms of its credit facility, the Company must
comply with certain financial and performance covenants including the
maintenance of profitability, a minimum current ratio, a minimum tangible net
worth, a maximum total liabilities to tangible net worth, a minimum fixed charge
coverage ratio and a maximum capital expenditure. Noncompliance by the Company
with respect to any of the loan covenants constitutes an event of default that
gives the bank the right to call the credit facility and to pursue certain
remedies. At March 31, 1996, the Company was in compliance with all such
covenants. The credit agreement expires in August 1996, at which time the
Company expects that it will be renewed.
As of March 31, 1996, there were no borrowings outstanding under the line of
credit and outstanding letters of credit were approximately $1.9 million ($1.6
million of which related to a standby letter of credit for self-insured workers'
compensation).
The Company leases its 880,000 square foot single-story warehouse and
distribution facility under a lease accounted for as a capital lease. The lease
requires monthly payments of $70,000 and accrues interest at an annual rate of
7%. At the lease expiration in December 2000, the Company has the option to
purchase the facility for $10.5 million. The Company currently intends to
exercise the option at the end of the lease. If the Company does not exercise
the purchase option, the Company will be subject to a $7.6 million penalty.
21
<PAGE>
The Company believes that it can adequately fund its planned capital
expenditures and working capital requirements for the next 12 months from net
cash provided by operations, availability under its credit facilities, and net
proceeds from this offering after the special distribution to Existing
Shareholders. See "Use of Proceeds."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience some seasonal fluctuation in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and
Halloween seasons. A greater amount of the Company's net sales and operating and
net income is generally realized during the fourth quarter. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of certain holidays (E.G.,
Easter) and the timing of new store openings, net sales contributed by new
stores and the merchandise mix.
The following table sets forth certain unaudited results of operations for
each quarter during 1994 and 1995. The unaudited information has been prepared
on the same basis as the audited financial statements appearing elsewhere in
this Prospectus and includes all adjustments, consisting only of normal
recurring 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 results to be attained for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------- ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
99 CENTS Only Stores........ $ 26,366 $ 26,631 $ 26,684 $ 31,043 $ 110,724 $ 27,092 $ 29,807 $ 30,096 $ 35,003
Other retail operations..... 751 678 314 354 2,097 327 165 -- --
Bargain Wholesale........... 4,916 4,070 4,059 5,871 18,916 6,138 6,370 8,017 9,812
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total..................... 32,033 31,379 31,057 37,268 131,737 33,557 36,342 38,113 44,815
Cost of sales................. 21,407 20,971 20,755 24,912 88,045 22,430 24,291 25,475 29,964
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.................. 10,626 10,408 10,302 12,356 43,692 11,127 12,051 12,638 14,851
Selling, general and
administrative expenses..... 7,990 7,937 8,329 8,405 32,661 7,753 8,302 8,459 9,295
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income.............. 2,636 2,471 1,973 3,951 11,031 3,374 3,749 4,179 5,556
Special litigation reversal... -- -- -- (2,900) (2,900) -- -- -- --
Interest expense, net......... 192 192 190 190 764 189 189 189 188
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Income before pro forma
provision for income
taxes....................... 2,444 2,279 1,783 6,661 13,167 3,185 3,560 3,990 5,368
Pro forma provision for income
taxes (unaudited)........... 958 893 700 2,612 5,163 1,238 1,408 1,665 2,198
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Pro forma net income
(unaudited)................. $ 1,486 $ 1,386 $ 1,083 $ 4,049 $ 8,004 $ 1,947 $ 2,152 $ 2,325 $ 3,170
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Net sales:
99 CENTS Only Stores........ $ 121,998
Other retail operations..... 492
Bargain Wholesale........... 30,337
---------
Total..................... 152,827
Cost of sales................. 102,160
---------
Gross profit.................. 50,667
Selling, general and
administrative expenses..... 33,809
---------
Operating income.............. 16,858
Special litigation reversal... --
Interest expense, net......... 755
---------
Income before pro forma
provision for income
taxes....................... 16,103
Pro forma provision for income
taxes (unaudited)........... 6,509
---------
Pro forma net income
(unaudited)................. $ 9,594
---------
---------
</TABLE>
INFLATION
The Company's ability to provide quality merchandise at the 99 CENTS price
point is subject to certain economic factors which are beyond the Company's
control, including inflation. Inflation could have a material adverse effect on
the Company's business and results of operations, especially given the
constraints on the Company's ability to pass on any incremental costs due to
price increases or other factors. The Company believes that it will be able to
respond to ordinary price increases resulting from inflationary pressures by
adjusting the number of items sold at the single price point (E.G., two items
for 99 CENTS instead of three items for 99 CENTS) and by changing its selection
of merchandise. Nevertheless, a sustained trend of significantly increased
inflationary pressure could require the Company to abandon its single price
point of 99 CENTS per item, which could have a material adverse effect on the
Company's business and results of operations. See also "Risk Factors -- Adverse
Economic Trends; Change in Minimum Wage" for a discussion of additional risks
attendant to inflationary conditions.
22
<PAGE>
NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
The statement requires impairment losses to be recorded on long-lived assets
used in operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The Company adopted this statement in the fourth
quarter of 1995. No adjustment was required to reflect the adoption of this
statement.
The FASB has issued SFAS No. 123, "Accounting for Stock Based Compensation."
The Company will be required to adopt this standard effective in 1996. The
Company intends to adopt the disclosure requirements under this standard, as and
such, the adoption will not have a material impact on the Company's financial
position or results of operations.
23
<PAGE>
BUSINESS
GENERAL
99 CENTS Only Stores is a leading, deep-discount retailer of primarily
name-brand, close-out and regularly available general merchandise at an
affordable, single price point. From its first store opening on August 13, 1982,
the Company's chain of 99 CENTS Only Stores has expanded to 38 stores. The
Company believes that it operates the nation's oldest, existing one-price
general merchandise chain and that it was the first chain to sell all
merchandise at a single price point of 99 CENTS or $1.00. The Company's stores
are attractively merchandised, clean, full-service "destination" locations that
offer customers significant value on their everyday household needs in an
exciting shopping environment.
Merchandise purchased by the Company is also distributed through Bargain
Wholesale at prices generally below normal wholesale to both small and large
domestic retailers, other distributors and exporters. Bargain Wholesale
complements the Company's retail operation by allowing the Company to purchase
in larger volumes at more favorable pricing and to generate additional net sales
with relatively small incremental increases in operating expenses.
The Company sells consumer items in staple product categories including
beverages and food, health and beauty aids, household products (cleaning
supplies, paper goods, ETC.), housewares (glassware, kitchen items, ETC.) and
hardware. The Company purchases most of its merchandise directly from the
manufacturer. The Company's suppliers include many of the nation's leading
consumer product companies. During 1995, the Company purchased merchandise from
more than 999 suppliers, including Colgate-Palmolive Company, The Dial Corp.,
Eveready Battery Company, Inc., General Electric Company, Gerber Products
Company, The Gillette Company, Hershey Foods Corporation, Johnson & Johnson,
Kraft General Foods Inc., Lever Brothers Company, Mattel, Inc., The Mead
Corporation, Nabisco, Inc., Nestle, The Pillsbury Company, The Procter & Gamble
Company, Revlon, Inc. and SmithKline Beecham Corporation.
INDUSTRY
The Company participates primarily in the highly competitive "deep-discount"
retail industry. The deep-discount retail industry is distinguished from other
retail formats by the purchase of close-out and other special-situation
merchandise at prices substantially less than original wholesale cost, and the
subsequent sale of this merchandise at prices significantly below regular
retail. This results in a continually changing selection of specific brands of
products. According to Discount News (July 3, 1995), the deep-discount retail
industry is a growing subset of the $290.4 billion discount retail industry --
one of the fastest growing retail sectors in the United States.
The sale of close-out or special-situation merchandise developed in response
to the need of manufacturers, wholesalers and others to distribute merchandise
outside their normal channels. Close-out or special-situation merchandise
becomes available for a variety of reasons, including a manufacturer's
over-production, discontinuation due to a change in style, color, size,
formulation or packaging, inability to move merchandise effectively through
regular channels, reduction of excess seasonal inventory, discontinuation of
test-marketed items and financial needs.
Many deep-discount retailers also sell merchandise that can be 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.
24
<PAGE>
THE SOUTHERN CALIFORNIA MARKET
The Company currently targets the five-county Southern California market:
Los Angeles (34 stores); Orange (3 stores); San Bernardino (1 store); Ventura
(none currently) and Riverside (none currently).1 These counties have an
aggregate estimated population of 15.6 million (9.2 million in Los Angeles
County alone), and a non-agricultural workforce of approximately 5.9 million.
According to the Economic Development Corporation of Los Angeles County, total
personal income for Southern California was over $360 billion and taxable retail
sales topped $91 billion in 1995. In addition to providing a consumer market
greater than that of most nations, international trade in the Southern
California market grew to more than $168 billion in 1995. For a discussion of
certain risks associated with the concentration of operating in a single
geographic region, see "Risk Factors -- Southern California."
BUSINESS STRATEGY
The Company's business strategy is based on the following principles that
distinguish it from other "dollar stores" as well as other deep-discount
operators:
EXCELLENT VALUE AT AN AFFORDABLE PRICE. The Company is dedicated to
providing exceptional value to its customers. The Company strives to be the most
competitively priced consumable merchandise retailer in the communities it
serves. Management believes that the items the Company sells for 99 CENTS are
typically sold for significantly higher prices elsewhere.
FOCUS ON "NAME-BRAND" CONSUMABLES. The Company provides its customers with
a wide variety of first quality, name-brand consumable merchandise. The Company
strives to exceed customers' expectations of the range and quality of name-brand
consumables that can be purchased for 99 CENTS. A majority of the items
purchased by the Company in 1995 was comprised of name-brand products that have
immediate consumer recognition. The Company believes that this focus along with
providing everyday household items increases the frequency of customer visits
and impulse purchases and reduces the Company's exposure to seasonality and
economic cycles.
BROAD SELECTION OF REGULARLY AVAILABLE BASIC HOUSEHOLD CONSUMER ITEMS. A
majority of the items offered by the Company are available for reorder. By
consistently offering a wide selection of basic household consumer items, the
Company encourages consumers to regularly shop 99 CENTS Only Stores for their
everyday household needs.
STRONG LONG-TERM SUPPLIER RELATIONSHIPS. The Company believes that it has
developed a reputation as a leading purchaser of name-brand close-outs through
its ability to make immediate buy decisions, ability to pay cash or accept
abbreviated credit terms, reputation for prompt payment, commitment to honor all
issued purchase orders and willingness to purchase goods close to a target
season or out of season. Other important factors include the Company's ability
to minimize channel conflict for the manufacturer by quickly selling name-brand
close-outs without, if requested by the supplier, advertising or wholesaling the
item. The Company believes this reputation along with its clean, attractively
merchandised stores have helped create strong, long-term relationships with many
leading consumer product companies.
SAVVY PURCHASING. The Company purchases merchandise at substantially
discounted prices as a result of its buyers' knowledge, experience and
negotiating ability and its established reputation among its suppliers. The
Company is willing to take advantage of large-volume purchases, close-outs and
other special situations in order to obtain merchandise at favorable prices.
ATTRACTIVE AND CONSISTENT STORE ECONOMICS. The Company believes that its
attractive store level economics will facilitate its planned expansion. The
average investment per new store opened in 1994, including capital expenditures
and inventory on-hand (as of December 31, 1994), but excluding pre-opening
expenses, was approximately $561,000. New stores opened in 1994 had average
sales of approximately $4.2 million during the first year of operations. In
1995, the Company's operating margin was 11.0%.
FOCUS ON SOUTHERN CALIFORNIA MARKET. Management believes Southern
California has significant potential for Company growth in store locations,
sales and profitability. By continuing to locate new stores in Southern
- ------------
1. The geographic region does not include San Diego (including the City of San
Diego) and Imperial Counties.
25
<PAGE>
California, the Company will be able to take advantage of its existing warehouse
and distribution facility, regional advertising and other management and
operating efficiencies to provide for further growth without incurring the
additional overhead and risk that would be entailed by expansion in new
geographic markets.
COMPLEMENTARY BARGAIN WHOLESALE OPERATIONS. Bargain Wholesale complements
the Company's 99 CENTS Only Stores by allowing the Company to purchase in larger
volumes at more favorable pricing, and to generate increased net sales with
relatively small incremental increases in operating expenses.
EXPANSION STRATEGY
Management believes that the primary sources of sales growth in the future
will be new store openings and growth in its wholesale division. In 1993, 1994
and 1995, the Company opened 1, 4 and 4 stores, respectively (including 2
relocated stores in 1995). The Company intends to accelerate the pace of its new
store openings. The Company plans to open 7 or 8 new stores in each of 1996 and
1997. Of the stores planned for 1996, the Company has already opened 2 stores
and has signed leases for 3 additional stores (including one relocation site) as
of the date of this Prospectus.
The Company continues to target Southern California for its new store
openings. The Company expects to open stores in new communities within the
region and "fill in" existing markets by opening additional stores in
communities that are currently served. Although locating larger new stores close
to existing stores has had, and could continue to have, a negative impact on
comparable store net sales, this strategy has generated increased sales and
operating income. Management believes Southern California offers significant
potential for growth in sales and profitability. See "Business -- The Southern
California Market." By continuing to locate new stores in Southern California,
the Company will be able to take advantage of its existing warehouse and
distribution facility, regional advertising and other management and operating
efficiencies to provide for further growth without incurring the additional
overhead and risk that would be entailed by expansion in new geographic markets.
While the Company's near-term expansion plans are for Southern California,
the Company believes the 99 CENTS Only Stores format could be successful in
other densely populated areas of the country that also have a wide range of
socio-economic and demographic characteristics. Densely populated geographic
markets offer the potential for multiple locations. Clustering multiple stores
in a single market allows the Company to take advantage of distribution,
advertising and other operational efficiencies. Although the Company is not
engaged in any discussions and has no plans to expand into other geographic
markets, it would consider such an expansion by acquisition of a chain or chains
of clustered retail sites in a densely populated region. Any such decision would
be dependent upon market conditions, the terms of any proposed acquisition, the
demographics of the proposed community or communities and available Company
resources.
The average investment per new store opened in 1994, including capital
expenditures and inventory on hand (as of December 31, 1994), but excluding
pre-opening expenses, was approximately $561,000. New stores opened during 1994
had average net sales of approximately $4.2 million during the first year of
operation. In 1995, the Company's operating margin was 11.0%. The Company seeks
to locate new stores in suitable existing structures which it can refurbish in a
manner consistent with its retail concept. This strategy allows the Company to
open stores in new locations generally within three to four months following the
conclusion of lease negotiations.
Net sales in the Company's wholesale division grew from $18.0 million in
1993 to a record $30.3 million in 1995. Bargain Wholesale's recent growth is
primarily attributable to an increased focus on large domestic and international
accounts and expansion into new geographic markets. Although international sales
have historically not been material to the Company's consolidated net sales,
they have contributed to recent growth in Bargain Wholesale's net sales and are
expected to continue to do so in the near future. The Company intends to expand
its wholesale operation further by continuing this focus, increasing its
marketing and promotional program as well as the number of trade shows at which
it exhibits, opening a showroom in New York City, improving customer service and
aggressively contacting its customers on a more frequent basis through
telephone, facsimile and mail.
26
<PAGE>
99 CENTS ONLY STORES -- RETAIL OPERATIONS
The Company's 99 CENTS Only Stores offer customers quality merchandise,
generally at a significant discount from normal retail. The Company's stores are
attractively merchandised, clean, full-service "destination" locations that
offer consumable general merchandise to value-conscious consumers for their
regular household needs. All merchandise sold in the Company's stores is sold
for 99 CENTS per item or two or more items for 99 CENTS. A majority of the items
purchased by the Company in 1995 was comprised of name-brand merchandise that
has immediate consumer recognition. The Company strives to exceed the customer's
expectations of the range and quality of name-brand consumables that can be
purchased for 99 CENTS. Management believes that many of its customers purchase
more items than they anticipated.
MERCHANDISING. The Company's stores retail a broad variety of
first-quality, name-brand and other close-out merchandise as well as a wide
assortment of regularly available consumer goods. The Company believes that the
success of its 99 CENTS Only Stores concept arises from the value inherent in
selling primarily name-brand consumables, most of which were originally priced
to retail from $1.35 to $9.99, for only 99 CENTS per item or group of items.
Each store typically carries several thousand different stock keeping units
(SKUs). The merchandise sold in the Company's stores consist primarily of a wide
variety of basic consumer items including beverages and food, health and beauty
aids, and household products (cleaning supplies, paper goods, ETC.). The stores
also carry housewares (glassware, kitchen items, ETC.), hardware, stationery and
party goods, seasonal, baby products and toys, giftware, pet products and
clothing.
While 99 CENTS Only Stores regularly carry a variety of basic household
consumer items, the stores differ from typical discount retail stores in that
they do not continuously stock complete lines of merchandise. Although a
substantial portion of the merchandise purchased by the Company in 1995 is
available for reorder, the mix of specific brands of merchandise on store
shelves frequently changes, depending upon the availability of close-out and
other special-situation merchandise at suitable prices. Since commencing its
close-out purchasing strategy in 1976, the Company has not experienced
difficulty in obtaining name-brand, close-out and other special-situation
merchandise at attractive prices. Management believes that the continuously
changing mix of merchandise found in its stores from one week to the next
encourages impulse and larger volume purchases, results in customers shopping
more frequently and helps to create a sense of urgency, awareness and
excitement. Unlike many discount retailers, the Company imposes no limitations
on the quantity of specific items that may be purchased by a single consumer.
The layout of each of the Company's 99 CENTS Only Stores is customized to
the actual size and configuration of the individual space. The interior of each
store is, however, designed to reflect a uniform format, featuring attractively
displayed products in windows, consistent merchandise display techniques, bright
lighting, cleanliness, lower shelving height that allows unobstructed visibility
throughout the store, distinctive color scheme, interior and exterior signage,
and customized check-out counters, floors, price tags, shopping carts and
shopping bags. The Company emphasizes strong visual presentation in all key
traffic areas of the store. Merchandising displays are maintained throughout the
day and changed frequently, and often incorporate seasonal themes. The Company
believes that due to the continuously changing merchandise, the lower shelving
height and the absence of aisle description signs, the typical customer tends to
shop the whole store.
The Company targets value-conscious consumers from a wide range of
socio-economic backgrounds with diverse demographic characteristics. Purchases
are by cash, credit or debit card. The Company's stores do not accept checks or
manufacturers' coupons. The Company's stores are open every day with opening
hours designed to meet the needs of family consumers. The Company advertises
that its stores are open 9:00 a.m. to 9:00 p.m., "9 days a week."
STORE LOCATIONS. The Company's 38 existing 99 CENTS Only Stores are all
located in Southern California and average over 12,000 gross square feet. Since
1993, the Company has opened 11 new stores (including 2 relocations in 1995)
that average over 16,000 gross square feet and currently targets new store
locations between 15,000 and 23,000 gross square feet. The Company believes that
its larger 99 CENTS Only Stores allow it to fully display its wide assortment of
merchandise in a more attractive format, carry deeper stock positions and
provide customers with a more inviting and convenient environment that
encourages longer shopping. The Company's decision to target larger stores
reflects the higher average annual store revenues typically achieved by these
stores.
27
<PAGE>
The table below summarizes certain information with respect to the Company's
existing 99 CENTS Only Stores:
<TABLE>
<CAPTION>
ESTIMATED
GROSS
GROUND ESTIMATED
FLOOR SALEABLE
SQUARE SQUARE
LOCATION YEAR OPENED FOOTAGE FOOTAGE
- ------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Westchester Area 1982 10,000 7,500
Azusa 1983 3,800 3,600
Arcadia 1984 10,900 6,200
Garden Grove #1 1984 12,000 9,200
Hawthorne #1 1984 15,000 12,200
Montebello 1984 5,200 3,800
La Puente 1985 7,000 5,800
Panorama City 1985 10,600 9,900
Pico/Union District 1987 4,500 3,400
Van Nuys 1987 7,600 5,400
Hawthorne #2 1988 19,600 13,500
Maywood 1988 12,800 9,400
Fairfax/Wilshire #1 1989 7,400 5,700
North Hollywood 1989 8,600 6,200
Ontario 1989 10,600 8,100
Paramount 1990 13,100 9,400
Pico Rivera 1990 18,900 14,300
Temple City 1990 8,700 6,300
Whittier 1990 7,000 6,600
Norwalk 1991 17,000 11,100
Pasadena 1991 17,000 11,000
Canoga Park 1992 14,300 12,300
Huntington Park 1992 12,900 9,500
La Mirada 1992 18,400 13,800
Lawndale 1992 14,200 11,500
Lincoln Heights (*) 1992 3,900 2,600
Santa Monica 1992 6,300 5,000
North Long Beach 1993 12,000 10,200
Arleta 1994 20,300 15,700
Fairfax/Wilshire #2 1994 18,600 15,500
Universal City 1994 12,200 8,600
Walnut Park 1994 7,900 5,900
Garden Grove #2 1995 22,400 19,600
Hawaiian Gardens 1995 15,000 12,400
Reseda 1995 15,000 11,500
San Pedro 1995 13,500 10,200
Harbor City 1996 20,600 17,400
Huntington Beach 1996 24,600 18,200
----------- -----------
Total 479,400 368,500
Average 12,600 9,700
</TABLE>
- ---------------
(*) The Company intends to relocate this store (with an estimated saleable area
of 2,600 square feet) to a new, nearby location (with an estimated gross
ground floor area of 10,000 square feet and an estimated saleable area of
approximately 9,000 square feet).
The Company's stores are located in freestanding buildings, neighborhood
shopping centers (anchored by 99 CENTS Only Stores, a supermarket or a drug
store) or downtown central business districts. None of the Company's stores are
located in an indoor shopping mall, outlet mall or small strip center. The
stores are all located within a fifty-mile radius of downtown Los Angeles,
primarily in densely populated, demographically diverse neighborhoods. Of the
Company's stores, 34 are located in Los Angeles County, 3 are located in Orange
County and 1 is located in San Bernardino County.
28
<PAGE>
The Company leases all of its retail locations. The Company typically seeks
leases with an initial five to ten-year term with one or more five-year options.
See "Business -- Properties." The Company identifies potential sites through a
network of contacts within the brokerage and real estate communities and through
independent investigation by Company personnel.
The Company currently leases 10 of its 38 store locations and a parking lot
associated with one of these stores from certain of the Existing Shareholders or
their affiliates. In addition, The Company has entered into leases with certain
of the Existing Shareholders or their affiliates for these additional locations
(including one relocation site). See "Risk Factors -- Affiliate Transactions,"
"Business -- Properties" and "Management -- Certain Transactions."
Since 1982, the Company has acquired groups of store sites and inventory
from three different chains. The Company either immediately converted the
acquired sites to the 99 CENTS Only Stores' format, operated the acquired sites
under their original tradename until they were either converted, closed or sold,
or immediately closed the site. The last of such stores was closed in May 1995.
The Company may acquire additional sites in the future from existing chains if
suitable opportunities are presented to the Company.
In the past, as part of its strategy to expand retail operations, the
Company opened certain new stores in close proximity to existing stores where
the Company determined that the trade area could support a larger facility. In
some of these situations, the Company retained its existing store so long as it
continued to contribute store-level operating income. While this strategy was
designed to increase revenues and store-level operating income, it has had a
negative affect on comparable store net sales as some customers migrate from the
existing store to the close-by larger new store. Except for 3 relocations to
larger, nearby sites and 1 store closure as a result of a fire, the Company has
never closed one of its 99 CENTS Only Stores.
The following table sets forth relevant information with respect to the
growth of the Company's 99 CENTS Only Stores operations:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT SALES PER SQUARE FOOT
DATA)
<S> <C> <C> <C> <C> <C>
99 CENTS Only Stores net sales.................... $ 89,967 $ 95,873 $101,828 $110,724 $121,998
Annual growth rate................................ 17.1% 6.6% 6.2% 8.7% 10.2%
Store count beginning of year..................... 22 24 30 31 34
New stores........................................ 2 6(1) 1 4 4
Stores closed..................................... 0 0 0 1(2) 2(3)
Store count at year end........................... 24 30 31 34 36
Average net sales per store (4)................... $ 3,826 $ 3,550 $ 3,349 $ 3,267 $ 3,467
Total estimated saleable square footage period
end............................................. 204,000 259,000 269,000 293,000 326,000
Average sales per estimated saleable square foot
(4)............................................. $ 462 $ 417 $ 388 $ 396 $ 397
Change in comparable store net sales (5).......... (0.3)% (8.6)% (3.5)% (1.4)% (0.2)%
Change in comparable store net sales, as adjusted
(6)............................................. (0.2)% 2.2%
</TABLE>
- ------------
(1) One of the new stores was a June 1992 conversion of an operating retail
store run by the Company under a tradename different from the 99 CENTS Only
Stores concept.
(2) Store closed September 1994 due to fire.
(3) Stores closed due to relocation to larger nearby sites.
(4) For stores open for the entire fiscal year.
(5) Change in comparable stores net sales compares net sales for stores open
for the entire two years compared.
(6) Excludes the Company's Fairfax/Wilshire #1 store, which remained open after
a new larger store (Fairfax/Wilshire #2) was opened fewer than 500 feet
away in August 1994. For a discussion of the Company's strategy of opening
new stores in close proximity to older, existing stores, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
General."
29
<PAGE>
STORE MANAGEMENT. Substantially all merchandise decisions with respect to
pricing and advertising are made at the Company's headquarters. The Company
employs six district managers responsible for store operations and five
merchandising supervisors responsible for store merchandising. These District
Managers and Merchandising Supervisors are supervised by the Company's Vice
President of Retail Operations and Vice President of Merchandising and Store
Openings, respectively. District Managers visit each store in their district at
least twice a week and focus on the implementation of Company's policies,
operations and merchandising philosophy. District Managers also help train store
management. The Vice President of Retail Operations also supervises a cashiers
training school located at the Company's corporate offices. Merchandising
Supervisors and their crews (usually three to five experienced stock people)
visit each of the stores at least once a week and help the store managers to
maintain and improve the appearance of the sales floor, move merchandise
sections, organize the stockroom and train store personnel. Typically the
Company's stores are staffed with a manager, two assistant managers, a head
cashier, 13 cashiers and 12 stockers. Store managers are responsible for
assessing their respective stores stocking needs and ordering accordingly.
Accounting and general financial functions are provided at the Company's
corporate offices.
ADVERTISING. Advertising expenditures were $1.4 million, $1.4 million and
$1.2 million for 1993, 1994 and 1995, respectively, or 1.0%, 1.0% and 0.8% of
net sales, respectively. The Company manages its advertising without the
assistance of an outside agency. The Company allocates the majority of its
advertising budget to newspaper and radio advertising. The Company's advertising
strategy emphasizes the offering of nationally recognized, name-brand
merchandise at significant savings. The Company minimizes its advertising
expenditures by an efficient implementation of its advertising program combined
with word-of-mouth publicity, locations with good visibility and efficient
signage. Because of the Company's promotional campaign, grand openings of a
99 CENTS Only Store often attract long lines of customers and receive media
coverage.
BARGAIN WHOLESALE
The Company conducts its wholesale operations under the trade name, "Bargain
Wholesale," through its 15,000 square foot product showroom located at the
Company's 880,000 square foot single-story warehouse and distribution facility.
Bargain Wholesale also conducts business through general merchandise trade shows
and mailed product circulars.
The following table presents certain information regarding the Company's
wholesale division:
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales (in thousands).......................... $19,544 $21,938 $18,028 $18,916 $30,337
Annual rate of growth -- net sales................ 50.4% 12.2% (17.8)% 4.9% 60.4%
</TABLE>
Bargain Wholesale traditionally relied upon small and medium size Southern
California retailers to form its core customer base. In 1991, the Company began
to focus greater attention on Bargain Wholesale with the hiring of a Senior Vice
President of Wholesale Operations. Outside factors including the 1992 Los
Angeles civil disturbances and the 1994 Northridge earthquake, had an adverse
impact on Bargain Wholesale's traditional core customer base. By shifting its
focus to large domestic and international accounts and the expansion of its
geographic markets, Bargain Wholesale was able to recover from the outside
factors affecting its 1993 and 1994 results and significantly improve its
performance in 1995.
In 1995, Bargain Wholesale sold merchandise to over 999 customers. The
Company advertises its wholesale operations primarily through direct mail. The
Company plans to continue to expand its wholesale operations by continuing its
focus on the needs of large domestic and international accounts, expansion into
new geographic markets, increasing its marketing and promotional programs,
increasing the number of trade shows at which it exhibits, opening a showroom in
New York City, improving customer service and aggressively contacting its
customers on a more frequent basis through telephone, facsimile and mail.
The Company's wholesale inventory is substantially similar to its retail
inventory. Typical wholesale customers include other wholesalers, small local
retailers, large regional and national retailers, and exporters. During 1995, no
single customer accounted for more than 5% of Bargain Wholesale's net sales. The
Company
30
<PAGE>
offers 15-day payment terms to its Bargain Wholesale customers who meet the
Company's credit standards. Customers located abroad, certain smaller customers
or others who do not meet the Company's credit standards pay cash upon pickup or
before shipment of merchandise.
Bargain Wholesale complements the Company's retail operations by allowing
the Company to purchase in larger volumes at more favorable pricing and to
generate additional net sales with relatively small incremental increases in
operating expenses. Bargain Wholesale also provides the Company with a channel
by which it may distribute merchandise above the 99 CENTS price point.
PURCHASING
The Company's purchasing department staff consists of six buyers, managed by
the Company's Vice President of Purchasing. The Company's Chief Executive
Officer also participates in the Company's purchasing activities. The Company's
buyers purchase for both the 99 CENTS Only Stores and Bargain Wholesale.
The Company believes a primary factor contributing to its success is its
ability to identify and take advantage of opportunities to purchase merchandise
with high consumer 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 5% of the Company's
total purchases for 1995. In 1995, the Company purchased its inventory from more
than 999 suppliers, including Colgate-Palmolive Company, The Dial Corp.,
Eveready Battery Company, Inc., General Electric Company, Gerber Products
Company, The Gillette Company, Hershey Foods Corp., Johnson & Johnson, Kraft
General Foods Inc., Lever Brothers Company, Mattel, Inc., The Mead Corporation,
Nabisco, Inc., Nestle, The Pillsbury Company, The Procter & Gamble Company,
Revlon, Inc. and SmithKline Beecham Corporation.
A substantial amount of the merchandise purchased by the Company in 1995 was
close-out or special-situation merchandise. Close-out or special-situation
merchandise becomes available for a variety of reasons, including a
manufacturer's over-production, discontinuation of merchandise due to a change
in style, color, size, formulation or packaging, inability to move merchandise
effectively through regular channels, reduction of excess seasonal inventory,
discontinuation of test-marketed items and financial needs. The Company's buyers
are continuously seeking close-out opportunities. The Company's experience and
expertise in buying merchandise has enabled it to develop relationships with
many manufacturers that often offer some or all of their close-out merchandise
to the Company prior to attempting to sell it through other channels.
The Company has developed strong relationships with many manufacturers and
distributors that recognize their special-situation merchandise can be moved
quickly through the Company's retail and wholesale distribution channels. These
strong relationships along with the Company's ability to purchase in large
volumes also enable the Company to purchase continuously available name-brand
goods at discounted wholesale prices. The key elements to these supplier
relationships include the Company's (i) ability to make immediate buy decisions,
(ii) experienced buying staff, (iii) ability to pay cash or accept abbreviated
credit terms, (iv) reputation for prompt payment, (v) commitment to honor all
issued purchase orders and (vi) willingness to purchase goods close to a target
season or out of season. Other important factors include the Company's ability
to minimize channel conflict for the manufacturer by quickly selling name-brand
close-outs without, if requested by the supplier, advertising or wholesaling the
item, the Company's ability to purchase and resell large volume orders and the
ability to minimize the risk of damaging a product's image by having
attractively merchandised stores filled with name-brand items. Management
believes the Company's long-term relationships with its suppliers and its
reputation for integrity will continue to provide the Company with opportunities
to acquire quality merchandise at reduced wholesale prices.
Private label consumer products, made exclusively for the Company, accounted
for approximately 4% of total merchandise purchased in 1995. The Company is
continuously developing new private label consumer
31
<PAGE>
products to broaden the assortment of merchandise that is consistently
available. The Company also has an in-house operation called Deluxe Imports that
imports products primarily from Southeast Asia. Deluxe Imports accounted for
approximately 5% of total merchandise purchased in 1995. The Company primarily
imports merchandise in product categories which are not brand sensitive to
consumers such as kitchen items, housewares, toys and hardware.
WAREHOUSING AND DISTRIBUTION
The Company maintains an 880,000 square foot, single-story warehouse and
distribution facility located on approximately 23 acres in the City of Commerce,
California. The Company's headquarters are also located in this facility. The
site is located near downtown Los Angeles and has close access to the Southern
California freeway and rail systems and the ports of Los Angeles and Long Beach.
The warehouse has 129 dock doors available for receiving or shipping. The
Company believes that its current warehouse and distribution facility will be
able to support distribution to more than 99 stores in Southern California.
Most of the Company's merchandise is shipped by truck directly from
manufacturers and other suppliers to the Company's warehouse and distribution
facility. As part of its distribution network, the Company owns a fleet of 11
tractors and 20 trailers which are primarily used to deliver merchandise to its
stores. Full truck deliveries are made from its distribution center to each
store typically four times a week. Product is delivered to a store the day after
the store places a schedule order. Most of the merchandise is pulled by the
store (I.E., ordered by the store manager) versus pushed by the distribution
center (I.E., sent by order of the Company's distribution personnel).
Approximately 2% of product stocked by the stores is shipped by the manufacturer
directly to the store. The Company attempts to optimally utilize its fleet by a
combination of filling outbound trucks to capacity and instituting a backhaul
program whereby products are picked up from suppliers in conjunction with
deliveries to stores in the same general area. Approximately half of all
merchandise picked up by the Company's trucks was backhauled to its warehouse.
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, however, may elect from time to
time to lease temporary storage facilities to accommodate extraordinary
purchases. There can be no assurance that the Company's existing warehouse will
provide adequate space for the Company's long-term storage needs.
PROPERTIES
The Company currently leases all of its store locations, and therefore has
been able to add stores without incurring indebtedness to acquire real estate.
The Company currently leases 10 of its 38 store locations and a parking lot
associated with one of these stores from certain of the Existing Shareholders or
their affiliates. In addition, the Company has entered into leases with certain
Existing Shareholders or their affiliates for three additional locations
(including one relocation site.) See "Risk Factors -- Affiliate Transactions"
and "Management -- Certain Transactions."
Management believes that the Company's stable operating history, excellent
credit history and ability to generate substantial customer traffic give the
Company significant leverage when negotiating lease terms. Most of the Company's
leases provide for fixed rents, subject to periodic adjustments. Although the
Company has not purchased any real estate in the past, it may do so in the
future; and certain of the Company's store leases contain provisions that grant
the Company a right of first refusal to acquire the subject site.
The following table sets forth, as of the date of this Prospectus,
information relating to the expiration dates of the Company's current 99 CENTS
Only Stores leases (including three recently signed leases for future locations)
assuming the exercise of all options to extend:
<TABLE>
<CAPTION>
EXPIRING EXPIRING EXPIRING EXPIRING 2003
1996 1997-1999 2000-2002 AND BEYOND
- --------- ------------- ------------ ----------------
<S> <C> <C> <C>
5(1) 4 1 31(2)
</TABLE>
- ------------
(1) Includes 4 stores leased on a month-to-month basis.
(2) Reflects relocation site for a store with a lease originally scheduled to
expire in 1998.
32
<PAGE>
The Company leases its 880,000 square foot, single-story warehouse and
distribution facility. The Company's executive offices are also located in this
facility. In December 1993, the Company entered into a seven year triple-net
lease agreement with a purchase option, that is accounted for on the Company's
financial statements as a capitalized lease obligation. The lease included the
Company's initial payment of $2.75 million and eighty four monthly payments of
$70,000. As part of the agreement to lease, the Company received $500,000 in
1993 and $1.0 million in 1994 to apply to renovation costs. The facility's fire
prevention and lighting systems were completely upgraded. A state-of-the-art
sprinkler system, hundreds of new smoke-vents (skylights) and energy efficient
lighting with motion detectors were installed. Also, over 25 dock levelers and
new racking with over 10,000 pallet positions were installed. The Company has
the option to purchase the property for $10.5 million at the end of the lease
and the Company currently intends to exercise the option. If the Company does
not exercise the purchase option, then the Company will be subject to a $7.6
million penalty.
MANAGEMENT INFORMATION SYSTEMS
The Company's business is currently supported by a standard accounting and
financial reporting system utilizing a PC-based local area network (LAN) and a
separate partially customized inventory control system processed by a
Hewlett-Packard RISC-based computer. The Company's inventory management is
designed to track all inventory received at the Company's distribution center
and shipped to each 99 CENTS Only Stores location or Bargain Wholesale
customers. The Company's systems allow management to monitor inventory and
assist store operations. In light of the Company's continuously changing
merchandise and other factors, the Company has determined not to install a point
of sale system. The retail order processing system has been designed to expedite
the processing of retail store orders, for both store and warehouse personnel.
Buyers use inventory and historical shipment information to assist in reordering
and inventory planning functions. The Company employs an accounts receivable,
accounts payable, and general ledger software package that shares information
with a separate inventory management and order processing system. The Company is
in the process of integrating these functions. The Company has implemented
various reporting tools to support the timely generation of financial and
managerial reports from the Company's information systems.
The Company's accounting and management information system was originally
installed in 1990 and the Company's inventory control system was installed in
1994. These systems have continuously been upgraded and enhanced from
time-to-time and continue to evolve. This process is monitored by a steering
committee consisting of six department heads and an outside member of the Board
of Directors. The Company believes that its accounting and management
information system and inventory control system adequately provide for its
current needs. The Company intends to continue to update and enhance its systems
in order to improve capabilities and provide for planned growth. If the Company
should experience faster than anticipated growth, the Company may be required to
install a new management information or inventory control system or undergo a
significant modification of its current systems to accommodate a larger
business.
COMPETITION
Each of the markets in which the Company operates is highly competitive. The
Company sells product lines which are similar to other wholesalers,
deep-discount stores, single price point merchandisers, discount merchandisers,
food markets, drug stores, club stores and other retailers. The industry also
includes a number of small privately held companies and individuals. In some
instances, these competitors are also customers of the Company's Bargain
Wholesale division. However, most single price point retailers do not have
99 CENTS Only Stores' focus on consumable name-brand merchandise. Nevertheless,
there is increasing competition with other wholesalers and retailers, including
other deep-discount retailers, for the purchase of quality close-out and other
special situation merchandise. Some of these competitors have substantially
greater financial resources and buying power than the Company. The Company's
ability to compete will depend on many factors including the success of its
purchase and resale of such merchandise at lower prices than the competition.
The Company may face intense competition in the future that could have an
adverse effect on its business and results of operations.
33
<PAGE>
EMPLOYEES
At March 31, 1996, the Company had 1,301 employees (1,109 in its retail
operation, 119 in its warehouse and distribution facility, 48 in its corporate
offices, and 25 in its wholesale division). None of the Company's employees is
party to a collective bargaining agreement. The Company considers relations with
its employees to be satisfactory. The Company offers certain benefits, including
health insurance, to its full-time employees.
LEGAL PROCEEDINGS
The Company is engaged in litigation in the ordinary course of its business,
none of which the Company believes is material.
In 1989 the Company purchased $220,000 of inventory for resale. A third
party claimed to have a valid lien on such inventory sold to the Company. After
a series of judgments, reversals and other legal actions, the litigation was
settled for $200,000 in early 1995. From 1991 through 1993 the Company provided
a reserve of $3.1 million for estimated litigation and interest costs. As a
result of the settlement, $200,000 was charged to the reserve and the remaining
$2.9 million was included in income in 1994.
TRADEMARKS AND SERVICE MARKS
"99 CENTS Only Stores" and "99 CENTS" are registered service marks of the
Company and are listed on the United States Patent and Trademark Office
Principal Register. Bargain Wholesale is a service mark used by the Company.
Management believes that the Company's trademarks, service marks and trade names
are an important but not critical element of the Company's merchandising
strategy.
ENVIRONMENTAL MATTERS
Under various Federal, state and local environmental laws and regulations, a
current or previous owner or occupant of real property may become liable for the
costs of removal or remediation of hazardous substances at such real property.
Such laws and regulations often impose liability without regard to fault. The
Company currently leases all of its stores, as well as its warehouse and
distribution facility (where its executive offices are located). In connection
with such leases, the Company could be held liable for the costs of remedial
actions with respect to hazardous substances. In addition, the Company operates
one recently installed underground diesel storage tank and one above-ground
propane storage tank at its warehouse and distribution facility. Although the
Company has not been notified of, and is not otherwise aware of, any current
environmental liability, claim or non-compliance, there can be no assurance that
the Company will not be required to incur remediation or other costs in the
future in connection with its leased properties or its storage tanks.
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.
34
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
Information regarding the Company's directors, executive officers and
certain key employees as of April 30, 1996 is as follows:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE
OFFICERS: AGE OFFICE
- ------------------------------ --- ------------------------------------------------------------------
<S> <C> <C>
David Gold 63 Chairman of the Board; Chief Executive Officer; and President
Helen Pipkin 53 Senior Vice President of Wholesale Operations
Carl L. Wood 44 Chief Financial Officer
Howard Gold 36 Senior Vice President of Warehouse Operations; and Director
Eric Schiffer 35 Senior Vice President of Operations and Administration; and
Director
Jeff Gold 28 Senior Vice President of Real Estate and Management Information
Systems; and Director
William O. Christy* 64 Director
Marvin L. Holen* 66 Director
Ben Schwartz* 78 Director
<CAPTION>
CERTAIN KEY EMPLOYEES:
- ------------------------------
<S> <C> <C>
Larry Borenstein 44 Vice President of Construction and Advertising
Carolyn J. Brock 45 Vice President of Human Resources
Robert Campbell 57 Vice President of Retail Operations
Martin Goldberg 76 Vice President of Purchasing
Jose Gomez 36 Vice President of Merchandising and Store Openings
Kenneth R. Phipps 45 Vice President of Distribution
</TABLE>
- ------------
* Member of Audit and Compensation Committees
DIRECTORS AND EXECUTIVE OFFICERS:
DAVID GOLD has been a director, President and Chief Executive Officer of the
Company since the founding of the Company in 1965. Mr. Gold has over 40 years of
retail experience and 20 years of wholesale experience.
HELEN PIPKIN joined the Company in 1991 and serves as Senior Vice President
of Wholesale Operations. Prior to joining the Company, from 1985 through 1991,
she served as Controller and Manager of Wholesale and Import Operations of Cobra
Associated International, a wholesaler of variety merchandise. She was an owner,
Vice President and Controller of Markell Imports. She has over 25 years in the
wholesale industry.
CARL L. WOOD joined the Company in 1989 and serves as the Company's Chief
Financial Officer. Mr. Wood has also served as the Company's Controller and Vice
President of Finance. Prior to joining the Company, from 1983 through 1987, he
served as Chief Financial Officer and Controller of Alternacare Corporation, a
publicly traded national operator of out-patient surgery centers. He also worked
for Arthur Andersen for seven years before leaving in 1983 as an Experienced
Manager. Mr. Wood is a Certified Public Accountant.
HOWARD GOLD has been a director of the Company since 1991. He joined the
Company in 1982 and has served in various managerial capacities since 1984. He
currently serves as Senior Vice President of Warehouse Operations. Mr. Gold
received his B.S. degree from the University of California at Los Angeles in
1984.
ERIC SCHIFFER has been a director of the Company since 1991. He joined the
Company in 1992 and currently serves as Senior Vice President of Operations and
Administration. Prior to joining the Company, from
35
<PAGE>
1987 to 1992, he was employed by Oxford Partners, a venture capital firm. From
1983 to 1985, he was an engineer at Texas Instruments. Mr. Schiffer received his
B.S.E. degree from Duke University in 1983 and his M.B.A. from Harvard Business
School in 1987.
JEFF GOLD has been a director of the Company since 1991. He joined the
Company in 1984 and has served in various managerial capacities since 1989. He
currently serves as Senior Vice President of Real Estate and Management
Information Systems. Mr. Gold received his B.A. degree from the University of
California at Berkeley in 1989.
WILLIAM O. CHRISTY has been a director of the Company since 1992. He was
President and C.E.O. of Certified Grocers of California from 1977 to 1990 where
he spent the bulk of his career. He served on numerous trade association boards
including the executive committee of the National Grocers Association Board and
Chairman of the Merchant and Manufacturer Association Board.
MARVIN L. HOLEN has been a director of the Company since 1991. He is an
attorney and in 1960 founded the law firm of Van Petten & Holen. He served on
the Board of the Southern California Rapid Transit District from 1976 to 1993
(six of those years as the Board's President) and the Los Angeles County
Metropolitan Transportation Authority from 1993 to 1995. He also served on the
Board of Trustees of California Blue Shield from 1972 to 1978, on the Board of
United California Savings Bank from 1992 to 1994 and several other corporate,
financial institution and philanthropic boards of directors.
BEN SCHWARTZ has been a director of the Company since 1993. He was Chairman
of Foods Company Markets, a supermarket chain, from 1980 until it was acquired
in 1987 by Boys Markets. Prior to that he served for many years as its
president. He has also served on the Board of Directors of Certified Grocers of
California including four years as Chairman. Additionally he sits on a number of
industry trade boards, including the Food Marketing Institute (FMI).
David Gold is the father of Howard Gold and Jeff Gold and the father-in-law
of Eric Schiffer. Marvin L. Holen is a partner in the firm of Van Petten &
Holen, which provides legal services to the Company. Fees for such services were
$109,000 in 1995.
CERTAIN KEY EMPLOYEES:
LARRY BORENSTEIN joined the Company in 1984 and currently serves as Vice
President of Construction and Advertising. Mr. Borenstein has also served in
various other managerial capacities within the Company.
CAROLYN J. BROCK joined the Company in 1994 and currently serves as Vice
President of Human Resources. During 1993 and 1994, Ms. Brock was employed by
Dodge, Warren & Peters Consultants, Inc., a consulting firm, where she served as
Executive Vice President. From 1992 to 1993, she was an owner and the Vice
President of Comp Solutions, a worker's compensation consulting firm. From 1990
to 1992, she was the President of Employers Management Services, a human
resources consulting firm.
ROBERT CAMPBELL has served as Vice President of Retail Operations since
joining the Company in January, 1995. Prior to joining the Company he was with
Safeway Stores and The Vons Companies, large regional retail food and drug
companies, for over thirty years. While at Vons, he most recently served as Vice
President of Operations for the south and central regions of California.
MARTIN GOLDBERG has served as Vice President of Purchasing since 1991. He
joined the Company as Director of Buying in 1987. From 1983 through 1987, he
served as Vice President of Purchasing of Bibi Products, an import company. He
has over 45 years of retail experience as a buyer and merchandiser.
JOSE GOMEZ joined the Company in 1980 and served in certain managerial
capacities. Since 1991, he has been Vice President of Merchandising and Store
Openings. He has 20 years of retail experience.
KENNETH R. PHIPPS joined the Company in 1993 and serves as Vice President of
Distribution. From 1991 until 1993, Mr. Phipps served as Director of Operations
for S.E. Rykoff Inc., a large food wholesaler. From 1970 to 1991, Mr. Phipps was
employed by Lucky Stores, Inc., a large grocery chain, where his
responsibilities included, at various times, serving as the distribution center
manager at three Lucky's facilities.
36
<PAGE>
In April 1996, the Company hired a Real Estate Manager and a Director of
Imports. The Company currently retains a full-time consultant to oversee its
Management Information Systems. The Company plans to replace its consultant with
an in-house Director of Management Information Systems.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash and non-cash compensation
paid or accrued by the Company to the Chief Executive Officer and the only other
executive officer compensated in excess of $100,000 for each of the years in the
three-year period ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------------------------------------------- --------- ----------- --------- ----------------
<S> <C> <C> <C> <C>
David Gold 1995 $ 65,000 -- $ 317,000
Chairman, CEO and President 1994 $ 62,500 -- $ 324,000
1993 $ 65,000 -- $ 2,000
Helen Pipkin 1995 $ 106,000 $ 20,000 --
Senior Vice President of Wholesale Operations 1994 $ 106,000 $ 20,000 --
1993 $ 106,000 $ 15,000 --
</TABLE>
- ------------
(1) Represents life insurance premiums on policies (one of which is "split
dollar") insuring the lives of David and Sherry Gold and automobile
insurance premiums on policies insuring David Gold's automobile. See
"Management -- Certain Transactions." After 1996, the Company will
discontinue paying David Gold's automobile insurance, which payments were
approximately $2,000 per year.
During 1995, the executive officers and certain key employees of the Company
received aggregate cash compensation of $1.0 million, consisting of an aggregate
of $0.8 million of annual base salary and an aggregate of $0.2 million of bonus
compensation. For 1996, the Company implemented changes in its compensation
structure that are anticipated to result in an increase in the annual base
salary paid to these executive officers and key employees from $0.8 million in
1995 to $1.4 million in 1996. Bonuses for 1996 have not been determined.
However, they are not expected to materially exceed the bonus amounts paid to
these executive officers and key employees in the aggregate in 1995.
COMPENSATION OF DIRECTORS
Each director is elected to hold office until the next annual meeting of
shareholders and until his respective successor is elected and qualified.
Officers serve at the discretion of the Board of Directors. Directors who are
not also officers of the corporation receive compensation for their activities
as directors as follows: $1,000 per month, plus $500 for each board meeting
attended plus $150 for each committee meeting attended on a day when no board
meeting is held, or $250 for each committee meeting attended as committee
chairperson. Additionally, during the time that an individual serves on the
Board of Directors such person will receive an automatic annual grant of an
option to purchase 3,000 shares of the Company's Common Stock, with a per share
exercise price equal to the fair market value (which shall be determined by
reference to the average closing price of the Company's Common Stock during the
20 trading days immediately preceding the date of grant) of a share of the
Company's Common Stock on the date of grant.
CERTAIN TRANSACTIONS
The Company currently leases 10 of its 38 store locations and a parking lot
associated with one of these stores from certain of the Existing Shareholders or
their affiliates. David Gold, Chief Executive Officer of the Company, and his
wife, Sherry Gold, own one store location through a partnership (14139 Paramount
Properties), and hold a 75% interest in a partnership (6135-6161 Atlantic
Boulevard Partnership) which owns an additional store location. An additional
five store locations are owned by HKJ Gold, Inc., a California corporation, the
sole shareholders of which are Howard Gold, Karen Schiffer and Jeff Gold, the
three children of David and Sherry Gold. Howard Gold and Jeff Gold are also
officers and directors of the Company. David Gold, Sherry Gold, Howard Gold,
Karen Schiffer and Jeff Gold, together, through a partnership (Au Zone
37
<PAGE>
Investments #2, L.P., a California limited partnership), also indirectly own
three other store locations and a parking lot rented to an additional store
location. Annual rental expense for the facilities owned by the Existing
Shareholders or their affiliates was approximately $1.0 million, $1.5 million
and $1.6 million in 1993, 1994 and 1995, respectively. During the three months
ended March 31, 1996 the rental expense for these facilities totalled $400,000.
The Company has entered into leases for two new stores and one relocated store.
HKJ Gold, Inc. is the landlord of two of these properties and Howard Gold, Jeff
Gold, Karen Schiffer and her husband Eric Schiffer, who is also an officer of
the Company, together, are the landlord of the third property. In addition, HKJ
Gold, Inc. has agreed to purchase a site currently leased by the Company,
subject to certain contingencies. The Company believes that such leases and
purchase contract are no less favorable to the Company than those an unrelated
party would have provided after arm's-length negotiations. In the future, the
Company does not intend to enter into real estate transactions with the Existing
Shareholders or their affiliates, except with respect to the renewal or
modification of existing leases and occasions where such transactions are
determined to be in the best interests of the Company. The Existing Shareholders
have agreed that neither they nor their affiliates will pursue any future real
estate opportunity that could be utilized by the Company as a store or warehouse
location unless it is unanimously rejected by the independent Directors on the
Company's Board of Directors. Moreover, all future real estate transactions
between the Company and the Existing Shareholders or their affiliates will
require the unanimous approval of the independent Directors on the Company's
Board of Directors and a determination by such independent Directors that such
transactions are the equivalent of a negotiated arm's-length transaction with a
third party. There can be no guarantee that the Company and the Existing
Shareholders or their affiliates will be able to agree on renewal terms for the
properties currently leased by the Company from the Existing Shareholders, or,
if such terms are agreed to, that the independent Directors on the Board of
Directors will approve such terms.
The Company was treated as an S corporation from its inception through April
30, 1996. David Gold, Sherry Gold, Howard Gold, Karen Schiffer and Jeff Gold
beneficially own all of the outstanding Common Stock. Eric Schiffer is the
beneficial owner of certain of these shares. For 1993, 1994 and 1995, the
Company made aggregate S corporation distributions to its shareholders of $10.2
million, $5.6 million and $11.2 million, respectively. In January and April
1996, the Company made additional cash distributions to the Existing
Stockholders in an aggregate amount of $5.0 million. In March 1996 and April
1996, the Company distributed dividends aggregating $35.5 million to the
Existing Stockholders in the form of notes. Further, in May 1996, the Company
declared a dividend payable in the aggregate amount of $4.4 million in
connection with the termination of the Company's S corporation status. These
notes and dividends payable declared will be paid at the time of the closing of
this offering from the net proceeds hereof.
The Company and the Existing Shareholders have entered into a tax
indemnification agreement relating to their respective income tax liabilities.
See "Termination of S Corporation Status."
The Company pays the premium on a "split-dollar" life insurance agreement
with two of its principal shareholders. See "Management -- Executive
Compensation." Under a collateral assignment agreement, the premiums paid by the
Company will be reimbursed to the Company out of death benefit proceeds at the
death of both shareholders. The Company has recorded a receivable of $107,000
from an affiliated entity in the accompanying balance sheets as of March 31,
1996, for the present value, not to exceed the cash surrender value of the
policy, based on mortality tables, of the premiums paid through March 31, 1996.
STOCK OPTION PLAN
In March 1996, the Company and the Existing Shareholders adopted the
Company's 1996 Stock Option Plan (the "Stock Option Plan"), which provides for
the issuance of incentive stock options within the meaning of Section 422 of the
Code and non-qualified stock options to purchase an aggregate of up to 1,000,000
shares of the Common Stock of the Company. Of these, 500,000 shares are reserved
for issuance upon exercise of options granted under the Stock Option Plan. The
Stock Option Plan permits the grant of options to officers, employees, directors
and consultants of the Company.
The Stock Option Plan will be administered by a committee of the Board
consisting of two or more directors of the Company, all of whom are
"disinterested persons" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Committee"). Each option is evidenced by
written
38
<PAGE>
agreement in a form approved by the Committee. No options granted under the
Stock Option Plan are transferable by the optionee other than by will or by the
laws of descent and distribution, and each option is exercisable, during the
lifetime of the optionee, only by the optionee.
Under the Stock Option Plan, the exercise price of an incentive stock option
must be at least equal to 100% of the fair market value of the Common Stock on
the date of grant (110% of the fair market value in the case of options granted
to employees who hold more than ten percent of the voting power of Company's
capital stock on the date of grant). The exercise price of a non-qualified stock
option must be not less than the par value of a share of the Common Stock on the
date of grant. The term of an incentive or non-qualified stock option is not to
exceed ten years (five years in the case of an incentive stock option granted to
a ten percent holder). The Committee has the discretion to determine the vesting
schedule and the period required for full exercisability of stock options;
however, in no event can the Committee shorten such period to less than six
months. Upon exercise of any option granted under the Stock Option Plan, the
exercise price may be paid in cash, and/or such other form of payment as may be
permitted under the applicable option agreement, including, without limitation,
previously owned shares of Common Stock.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 22, 1996, and as adjusted to
reflect the sale of 4,250,000 shares by the Company, by (i) each director of the
Company, (ii) each person known to the Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, and (iii) all directors and
executive officers of the Company as a group. Except as may be indicated in the
footnotes to the table, each of such persons has the sole voting and investment
power with respect to the shares owned, subject to applicable community property
laws. The address of each person listed is in care of the Company, 4000 East
Union Pacific Avenue, City of Commerce, California 90023.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER THE OFFERING
----------------------- -----------------------
SHARES PERCENT SHARES PERCENT
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
David Gold (2)(7).............................................. 6,950,393 70.0% 6,950,393 49.0%
Sherry Gold (3)(7)............................................. 6,950,393 70.0% 6,950,393 49.0%
Howard Gold (4)(7)............................................. 4,269,529 43.0% 4,269,529 30.1%
Jeff Gold (5)(7)............................................... 4,269,529 43.0% 4,269,529 30.1%
Eric and Karen Schiffer (6)(7)................................. 4,269,529 43.0% 4,269,529 30.1%
Au Zone Investments #3, LLC (7)................................ 3,276,615 33.0% 3,276,615 23.1%
William O. Christy............................................. -- -- -- --
Marvin L. Holen................................................ -- -- -- --
Ben Schwartz................................................... -- -- -- --
All of the Company's executive officers and directors as a
group (9 persons) (7)(8)..................................... 9,929,135 100.0% 9,929,135 70.0%
</TABLE>
- ------------
(1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by
such person (and only such person) by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of Common Stock actually
outstanding at May 22, 1996.
(2) Includes 1,836,889 shares owned by Sherry Gold, David Gold's spouse, and
3,276,615 shares controlled through Au Zone Investments #3, LLC, a
California limited liability company ("Au Zone").
(3) Includes 1,836,889 shares owned by David Gold, Sherry Gold's spouse, and
3,276,615 shares controlled through Au Zone.
(4) Includes 3,276,615 shares controlled through Au Zone.
(5) Includes 3,276,615 shares controlled through Au Zone.
(6) Includes 3,276,615 shares controlled through Au Zone.
(7) Au Zone is the general partner of Au Zone Investments #2, L.P., a
California limited partnership (the "Partnership"). The Partnership is the
registered owner of 3,276,615 shares of Common Stock. The limited partners
of the Partnership are David Gold, Sherry Gold, Howard Gold, Jeff Gold and
Karen Schiffer. Each of the limited partners of the Partnership owns a 20%
interest in Au Zone.
(8) Includes 1,836,889 shares owned by Sherry Gold, the spouse of David Gold,
and 3,276,615 shares controlled through Au Zone.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock,
no par value. Subject to issuance of the Common Stock offered hereby, the Common
Stock has been approved for listing on the New York Stock Exchange under the
symbol "NDN." The following statements are brief summaries of certain provisions
relating to the Company's capital stock.
COMMON STOCK
The Company is authorized to issue 40,000,000 shares of Common Stock, no par
value. The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by the shareholders. The holders of
Common Stock are entitled to receive ratably dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision is made
for each class of stock, if any, having preference over the Common Stock.
The holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are, and the shares of Common Stock offered by the Company hereby, when issued
against the consideration set forth in this Prospectus, will be, validly issued,
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 1,000,000 shares of the
Preferred Stock, no par value, in one or more series with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
these shares of Preferred Stock could be utilized, under certain circumstances,
as a method of discouraging, delaying or preventing an acquisition or a change
in control of the Company. The Company does not currently intend to issue any of
the authorized but unissued shares of its Preferred Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws include several
provisions that may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. These provisions include the inability of
shareholders to take action by written consent without a meeting, the inability
of shareholders to call for a special meeting of shareholders and the inability
of shareholders to remove directors without cause. The Articles of Incorporation
also contains a provision that requires a 66 2/3 percent vote to amend any of
the previously discussed provisions.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the sale of the securities offered hereby, the Company
will have 14,179,135 shares of Common Stock outstanding (14,816,635, if the
Underwriters' over-allotment option is exercised in full). Of these shares,
4,250,000 shares (4,887,500, if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or registration
under the Act, except for any shares purchased by an affiliate of the Company
(in general, a person who has a control relationship with the Company) which
will be subject to the limitations of Rule 144 promulgated under the Act. All of
the remaining 9,929,135 shares of Common Stock are deemed to be "restricted
securities" as that term is defined in Rule 144 promulgated under the Act, all
of which are eligible for sale in the public market in compliance with Rule 144.
Holders of these shares (representing 70.0% of the outstanding Common Stock)
have agreed for a period of 12 months after the date of this Prospectus not to
participate, directly or indirectly, in transactions relating to the Common
Stock. See "Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years is entitled to sell, within any three-month period, a number
41
<PAGE>
of shares which does not exceed the greater of 1% of the then-outstanding shares
of the Company's Common Stock (approximately 141,791 shares immediately after
the offering) or the average weekly trading volume of the Company's Common Stock
in the over-the-counter market or on a recognized exchange during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 may also be subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months preceding a sale, and who has beneficially owned
shares within the definition of "restricted securities" under Rule 144 for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitation, manner of sale provisions, public information
requirements or notice requirements.
The Company is authorized to issue up to 1,000,000 shares of Common Stock
under its Stock Option Plan, of which 500,000 are subject to options which have
been granted as of the date of this Prospectus. See "Management -- Stock Option
Plan." The Company intends to file a registration statement under the Act
covering these shares of Common Stock 30 days following the completion of the
offering. Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market, subject to vesting restrictions and the lock-up
arrangements described above.
42
<PAGE>
UNDERWRITING
Subject to the terms and certain conditions of the Underwriting Agreement
(the Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom EVEREN Securities, Inc., NatWest Securities Limited
and Crowell, Weedon & Co. are acting as representatives (the "Representatives"),
have severally agreed to purchase 4,250,000 shares of Common Stock from the
Company. The number of shares of Common Stock that each Underwriter has agreed
to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
EVEREN Securities, Inc. ......................................................... 965,000
NatWest Securities Corporation................................................... 960,000
Crowell, Weedon & Co. ........................................................... 960,000
Bear, Stearns & Co. Inc. ........................................................ 75,000
Alex. Brown & Sons Incorporated.................................................. 75,000
Goldman, Sachs & Co. ............................................................ 75,000
Lehman Brothers Inc. ............................................................ 75,000
Morgan Stanley & Co. Incorporated................................................ 75,000
Robertson, Stephens & Company, L.P. ............................................. 75,000
Salomon Brothers Inc ............................................................ 75,000
Adams, Harkness & Hill, Inc. .................................................... 40,000
Advest, Inc. .................................................................... 40,000
William Blair & Company.......................................................... 40,000
J.C. Bradford & Co. ............................................................. 40,000
The Chicago Corporation.......................................................... 40,000
Cowen & Company.................................................................. 40,000
Dain Bosworth Incorporated....................................................... 40,000
A.G. Edwards & Sons, Inc. ....................................................... 40,000
Furman Selz Incorporated......................................................... 40,000
Janney Montgomery Scott Inc. .................................................... 40,000
Jefferies & Company.............................................................. 40,000
McDonald & Company Securities, Inc. ............................................. 40,000
Mesirow Financial, Inc. ......................................................... 40,000
Morgan Keegan & Company, Inc. ................................................... 40,000
Needham & Company, Inc. ......................................................... 40,000
Piper Jaffray Inc. .............................................................. 40,000
The Robinson-Humphrey Company, Inc. ............................................. 40,000
Sutro & Co. Incorporated......................................................... 40,000
Van Kasper & Company............................................................. 40,000
Vector Securities International, Inc. ........................................... 40,000
Wedbush Morgan Securities Inc. .................................................. 40,000
-----------
Total........................................................................ 4,250,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters who are parties thereunder are subject to certain conditions. If
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than the
shares of Common Stock covered by the over-allotment option described below)
must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to public
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not to exceed $0.60 per share. The Underwriters may
allow, and such dealers may re-allow, discounts not to exceed $0.205 per share
to certain other dealers. After the initial public offering of the shares of
Common Stock, the public offering price and the other selling terms may be
changed by the Representatives.
43
<PAGE>
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 637,500 additional shares of Common Stock at the price to the
public set forth on the cover page of this Prospectus, less underwriting
discounts and commission, solely to cover over-allotments, if any. Such option
may be exercised at any time until 30 days after the date of this Prospectus. To
the extent that the Underwriters exercise such option, each of the Underwriters
will be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
The Representatives have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the shares of Common
Stock being offered hereby.
The Company and the Existing Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
The initial price to the public for the Common Stock offered hereby was
determined by negotiation between the Company and the Representatives. The
factors considered in determining the initial price to the public included the
history of and the prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of this offering and the recent market prices of securities of
generally comparable companies.
Prior to this offering, there has been no established trading market for the
Common Stock. There can be no assurance as to the liquidity of any market that
may develop for the Common Stock or the ability of holders to sell their Common
Stock; nor can there be any assurance that the price at which holders are able
to sell their Common Stock will not be lower than the price at which the Common
Stock is sold to the public by the Underwriters. See "Risk Factors -- No Prior
Public Market; Possible Volatility of Stock Price."
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the shares of Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any shares of Common Stock within the
United States, its territories or possessions or to persons who are citizens
thereof or residents therein. The Underwriting Agreement does not limit the sale
of the shares of Common Stock offered hereby outside of the United States.
NatWest Securities Limited has also represented and agreed that (i) it has
not offered or sold and will not offer or sell any Common Stock to persons in
the United Kingdom prior to admission of the Common Stock to listing in
accordance with Part IV of the Financial Services Act 1986 (the "1986 Act")
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purpose of
their businesses or otherwise in circumstances which have not resulted and will
not resulted in an offer to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995 or the 1986 Act, (ii) it has
complied and will comply with all applicable provisions of the 1986 Act with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom and (iii) it has only issued or passed
on, and will only issue or pass on, in the United Kingdom any document received
by it in connection with the issue of the Common Stock, other than any document
which consists of or any part of listing particulars, supplementary listing
particulars or any other document required or permitted to be published by
listing rules under Part IV of the 1986 Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
The Company, the Existing Shareholders and each of its officers and
directors who are not Existing Shareholders beneficially owning an aggregate of
9,929,135 shares of Common Stock after this offering have agreed with the
Underwriters not to (other than in connection with this offering and in
connection with certain transfers of Common Stock to entities organized for the
exclusive benefit of family members of the Existing Shareholders), directly or
indirectly offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of any shares of Common
Stock of the Company or issue any securities convertible into or exercisable
44
<PAGE>
or exchangeable (except pursuant to the terms of the Company's various employee
stock plans (see "Management -- Stock Option Plans") for Common Stock, or enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of Common Stock, or enter into any agreement
to do any of the foregoing for a period of 12 months after the date of this
Prospectus without the written consent of EVEREN Securities, Inc. (the "Lock-Up
Agreement"). As part of the Lock-Up Agreement, the Company has also agreed with
the Underwriters that it will not, without the written consent of EVEREN
Securities, Inc., file a registration statement relating to shares of capital
stock (including the Common Stock), or securities convertible into or
exercisable or exchangeable for, or warrants, options or rights to purchase or
acquire, capital stock, during such 12-month period, with the exception of the
filing of Registration Statements on Form S-8 with respect to the Company's
employee stock plans.
Subject to issuance of the Common Stock offered hereby, the Common Stock has
been approved for listing on the New York Stock Exchange under the symbol "NDN."
LEGAL MATTERS
Counsel for the Company, Troop Meisinger Steuber & Pasich, LLP, Los Angeles,
California, has rendered an opinion to the effect that the Common Stock offered
by the Company upon sale will be duly and validly issued, fully paid and
non-assessable. Riordan & McKinzie, Los Angeles, California, is acting as
counsel to the Underwriters in connection with certain legal matters relating to
this offering.
EXPERTS
The audited financial statements as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement under the Act with respect to the shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. Statements contained in this Prospectus as
to the contents of any contract or any other document referred to are not
necessarily complete, and with respect to any contract or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved. For further information
with respect to the Company and the shares offered hereby, reference is hereby
made to the Registration Statement and exhibits thereto. A copy of the
Registration Statement, including the exhibits thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of this offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission in accordance with
its rules. Such reports and other information concerning the Company may be
inspected and copied at the public reference facilities referred to above as
well as certain regional offices of the Commission.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 (audited) and March 31, 1996 (unaudited)................... F-3
Statements of Income for each of the three years in the period ended December 31, 1995 (audited) and the
three-month periods ended March 31, 1995 and 1996 (unaudited)............................................. F-4
Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1995
(audited) and the three-month period ended March 31, 1996 (unaudited)..................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1995 (audited) and the three-month periods ended March 31, 1995 and 1996 (unaudited)...................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 CENTS Only Stores:
We have audited the accompanying balance sheets of 99 CENTS ONLY STORES (a
California Corporation) as of December 31, 1994 and 1995, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 99 CENTS Only Stores as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 9, 1996
(except with regard to the matters
discussed in Note 8, as to which the
date is May 2, 1996)
F-2
<PAGE>
99 CENTS ONLY STORES
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------ MARCH 31, PRO FORMA
1996 MARCH 31,
----------- 1996
(UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash................................................................ $ 212,000 $ 3,057,000 $ 4,888,000 $ 1,888,000
Accounts receivable, net of allowance for doubtful accounts of
$42,000, $34,000 and $41,000, as of December 31, 1994 and 1995 and
March 31, 1996, respectively...................................... 894,000 1,360,000 2,005,000 2,005,000
Inventories......................................................... 32,518,000 34,313,000 32,485,000 32,485,000
Other............................................................... 442,000 324,000 395,000 395,000
------------ ------------ ----------- -----------
Total current assets............................................ 34,066,000 39,054,000 39,773,000 36,773,000
------------ ------------ ----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Land................................................................ 5,107,000 5,107,000 5,107,000 5,107,000
Buildings and improvements.......................................... 8,553,000 8,553,000 8,553,000 8,553,000
Leasehold improvements.............................................. 3,643,000 5,025,000 5,340,000 5,340,000
Fixtures and equipment.............................................. 2,840,000 3,992,000 4,369,000 4,369,000
Transportation equipment............................................ 404,000 421,000 421,000 421,000
------------ ------------ ----------- -----------
20,547,000 23,098,000 23,790,000 23,790,000
Less -- Accumulated depreciation and amortization................... (3,748,000) (5,311,000) (5,774,000) (5,774,000)
------------ ------------ ----------- -----------
16,799,000 17,787,000 18,016,000 18,016,000
------------ ------------ ----------- -----------
OTHER ASSETS:
Deferred income taxes............................................... 233,000 378,000 370,000 4,956,000
Deposits............................................................ 321,000 231,000 231,000 231,000
Receivable from affiliated entity................................... -- 107,000 107,000 107,000
Other............................................................... -- 41,000 341,000 341,000
------------ ------------ ----------- -----------
554,000 757,000 1,049,000 5,635,000
------------ ------------ ----------- -----------
$51,419,000 $57,598,000 $58,838,000 $60,424,000
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligation......................... $ 571,000 $ 612,000 $ 623,000 $ 623,000
Accounts payable.................................................... 4,732,000 5,750,000 5,483,000 5,483,000
Accrued expenses:
Payroll and payroll-related....................................... 744,000 818,000 486,000 486,000
Sales tax......................................................... 781,000 900,000 737,000 737,000
Liability for claims.............................................. 959,000 959,000 841,000 841,000
Other............................................................. 504,000 116,000 89,000 89,000
Workers' compensation............................................... 1,062,000 1,209,000 1,194,000 1,194,000
Dividend payable.................................................... -- -- -- 4,400,000
Notes payable to shareholders....................................... -- -- 35,363,000 35,521,000
------------ ------------ ----------- -----------
Total current liabilities....................................... 9,353,000 10,364,000 44,816,000 49,374,000
------------ ------------ ----------- -----------
LONG-TERM LIABILITIES:
Deferred rent....................................................... 812,000 1,346,000 1,369,000 1,369,000
Accrued interest.................................................... 466,000 965,000 1,095,000 1,095,000
Capital lease obligation, net of current portion.................... 9,977,000 9,365,000 9,205,000 9,205,000
------------ ------------ ----------- -----------
11,255,000 11,676,000 11,669,000 11,669,000
------------ ------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized -- 1,000,000 shares
Issued and outstanding -- none.................................... -- -- -- --
Common stock, no par value:
Authorized -- 40,000,000 shares
Issued and outstanding -- 9,929,135 shares at December 31, 1994
and 1995, March 31, 1996 and pro forma March 31, 1996............. 195,000 195,000 195,000 195,000
Retained earnings (deficit)......................................... 30,616,000 35,363,000 2,158,000 (814,000)
------------ ------------ ----------- -----------
30,811,000 35,558,000 2,353,000 (619,000)
------------ ------------ ----------- -----------
$51,419,000 $57,598,000 $58,838,000 $60,424,000
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
99 CENTS ONLY STORES
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------ THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------------
1993 1994 1995 MARCH 31, MARCH 31,
-------------- -------------- -------------- 1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES:
99 CENTS Only Stores.................. $ 101,828,000 $ 110,724,000 $ 121,998,000 $ 27,092,000 $ 32,256,000
Other retail.......................... 3,093,000 2,097,000 492,000 327,000 --
Bargain Wholesale..................... 18,028,000 18,916,000 30,337,000 6,138,000 10,020,000
-------------- -------------- -------------- ------------ ------------
122,949,000 131,737,000 152,827,000 33,557,000 42,276,000
COST OF SALES........................... 81,480,000 88,045,000 102,160,000 22,430,000 28,810,000
-------------- -------------- -------------- ------------ ------------
Gross profit........................ 41,469,000 43,692,000 50,667,000 11,127,000 13,466,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................... 32,081,000 32,661,000 33,809,000 7,753,000 9,066,000
-------------- -------------- -------------- ------------ ------------
Operating income.................... 9,388,000 11,031,000 16,858,000 3,374,000 4,400,000
-------------- -------------- -------------- ------------ ------------
OTHER (INCOME) EXPENSE:
Reversal of special litigation
reserve............................. -- (2,900,000) -- -- --
Interest income....................... (3,000) (9,000) (14,000) (3,000) (2,000)
Interest expense...................... 48,000 773,000 769,000 192,000 191,000
-------------- -------------- -------------- ------------ ------------
45,000 (2,136,000) 755,000 189,000 189,000
-------------- -------------- -------------- ------------ ------------
Income before pro forma provision
for income taxes.................. 9,343,000 13,167,000 16,103,000 3,185,000 4,211,000
PRO FORMA PROVISION FOR INCOME TAXES
(Unaudited)............................ 3,477,000 5,163,000 6,509,000 1,238,000 1,719,000
-------------- -------------- -------------- ------------ ------------
PRO FORMA NET INCOME (Unaudited)........ $ 5,866,000 $ 8,004,000 $ 9,594,000 $ 1,947,000 $ 2,492,000
-------------- -------------- -------------- ------------ ------------
-------------- -------------- -------------- ------------ ------------
PRO FORMA EARNINGS PER COMMON SHARE
(Unaudited)............................ $ 0.75 $ 0.19
-------------- ------------
-------------- ------------
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
(Unaudited)............................ 12,803,000 12,803,000
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
99 CENTS ONLY STORES
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND THE THREE-MONTH PERIOD ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS
----------- ----------- ---------------
<S> <C> <C> <C>
BALANCE, December 31, 1992............................................ 9,929,135 $ 195,000 $ 24,298,000
Net income.......................................................... -- -- 9,063,000
Cash distributions to shareholders.................................. -- -- (10,250,000)
----------- ----------- ---------------
BALANCE, December 31, 1993 9,929,135 195,000 23,111,000
Net income.......................................................... -- -- 13,105,000
Cash distributions to shareholders.................................. -- -- (5,600,000)
----------- ----------- ---------------
BALANCE, December 31, 1994............................................ 9,929,135 195,000 30,616,000
Net income.......................................................... -- -- 15,947,000
Cash distributions to shareholders.................................. -- -- (11,200,000)
----------- ----------- ---------------
BALANCE, December 31, 1995............................................ 9,929,135 195,000 35,363,000
Net income (unaudited).............................................. -- -- 4,158,000
Cash distributions to shareholders (unaudited)...................... -- -- (2,000,000)
Distributions to shareholders in the form of notes payable
(unaudited)....................................................... -- -- (35,363,000)
----------- ----------- ---------------
BALANCE, March 31, 1996 (unaudited)................................... 9,929,135 $ 195,000 $ 2,158,000
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------ THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ---------------------------
1993 1994 1995 MARCH 31, MARCH 31,
-------------- -------------- -------------- 1995 1996
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 9,063,000 $ 13,105,000 $ 15,947,000 $ 3,154,000 $ 4,158,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for doubtful accounts..... 55,000 (69,000) -- -- 7,000
Depreciation and amortization....... 1,028,000 1,342,000 1,640,000 374,000 464,000
Loss on disposition of property and
equipment.......................... 258,000 66,000 32,000 -- --
Provision (benefit) for deferred
income taxes....................... 47,000 (155,000) (145,000) -- 8,000
Provision for (reversal of) special
litigation reserve................. 1,000,000 (2,900,000) -- -- --
Provision for inventory reserve..... -- 1,650,000 -- -- --
Changes in assets and liabilities
associated with operating activities:
Accounts receivable................. (250,000) (387,000) (466,000) 194,000 (652,000)
Inventories......................... (244,000) (5,347,000) (1,795,000) 2,105,000 1,828,000
Other assets........................ 255,000 (202,000) 77,000 58,000 (371,000)
Deposits............................ (42,000) 145,000 90,000 -- --
Receivable from affiliated entity... -- -- (107,000) -- --
Accounts payable.................... 1,518,000 (642,000) 1,018,000 (824,000 ) (267,000)
Accrued expenses.................... 491,000 420,000 (195,000) (464,000 ) (640,000)
Workers' compensation............... 600,000 462,000 147,000 57,000 (15,000)
Deferred rent....................... 15,000 (119,000) 534,000 134,000 23,000
Accrued interest.................... -- 466,000 499,000 121,000 130,000
Special litigation reserve.......... -- (200,000) -- -- --
-------------- -------------- -------------- ------------ -------------
Net cash provided by operating
activities....................... 13,794,000 7,635,000 17,276,000 4,909,000 4,673,000
-------------- -------------- -------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment... (1,219,000) (1,919,000) (2,660,000) (533,000 ) (693,000)
-------------- -------------- -------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease
obligation........................... (2,580,000) (532,000) (571,000) (139,000 ) (149,000)
Distributions to shareholders......... (10,250,000) (5,600,000) (11,200,000) (1,800,000 ) (2,000,000)
-------------- -------------- -------------- ------------ -------------
Net cash used in financing
activities....................... (12,830,000) (6,132,000) (11,771,000) (1,939,000 ) (2,149,000)
-------------- -------------- -------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH......... (255,000) (416,000) 2,845,000 2,437,000 1,831,000
CASH, beginning of period............... 883,000 628,000 212,000 212,000 3,057,000
-------------- -------------- -------------- ------------ -------------
CASH, end of period..................... $ 628,000 $ 212,000 $ 3,057,000 $ 2,649,000 $ 4,888,000
-------------- -------------- -------------- ------------ -------------
-------------- -------------- -------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. LINE OF BUSINESS
99 CENTS Only Stores (the Company) is primarily a retailer of various
consumer products through 36 and 38 stores at December 31, 1995 and March 31,
1996, respectively, in Southern California. The Company is also a wholesale
distributor of various consumer products.
2. CONCENTRATION OF OPERATIONS IN SOUTHERN CALIFORNIA
All of the Company's retail stores are located in Southern California. In
addition, the Company's current retail expansion plans anticipate that all
planned new stores will be located in this geographic region. Consequently, the
Company's results of operations and financial condition are dependent upon
general economic trends and various environmental factors in Southern
California.
3. UNAUDITED INFORMATION
The unaudited financial statements and related notes as of March 31,1996 and
for the three-month periods ended March 31, 1995 and 1996 reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to fairly present the results of operations, changes in
cash flows and financial position as of and for the periods presented. These
unaudited financial statements should be read in conjunction with the audited
financial statements and related notes thereto. The results for the interim
periods presented are not necessarily indicative of results to be expected for
the full year.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are priced at the lower of cost (first-in, first-out) or
market.
DEFERRED OFFERING COSTS
In connection with a proposed public offering of common stock, the
Company has capitalized $41,000 and $341,000 of legal and accounting costs
as of December 31, 1995 and March 31, 1996, respectively. These costs are
included in other assets in the accompanying balance sheets and will be
charged to common stock upon completion of the offering or otherwise to
operations.
DEPRECIATION AND AMORTIZATION
Property and equipment are depreciated and amortized on the
straight-line basis for financial reporting purposes over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Building and improvements 27.5 years
Leasehold improvements Lesser of 5 years or
remaining lease term
Fixtures and equipment 5 years
Transportation equipment 3 years
</TABLE>
F-7
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company follows the policy of capitalizing expenditures that
materially increase asset lives and charging ordinary repairs and
maintenance to operations as incurred. Repairs and maintenance expense was
$478,000, $726,000 and $629,000 in 1993, 1994 and 1995, respectively.
DEFERRED RENT
Certain of the Company's operating leases for its retail locations
include scheduled increasing monthly payments. In accordance with generally
accepted accounting principles, the Company has accounted for the leases to
provide straight line charges to operations over the lives of the leases.
REVENUE RECOGNITION
Revenue is recognized at the point of sale for retail sales and at the
time of shipment for wholesale sales.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the
opening of new retail stores.
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. Cash payments for state income taxes were $170,000, $134,000 and
$200,000 in 1993, 1994 and 1995, respectively. Interest payments totaled
approximately $48,000, $308,000 and $269,000 for the years ended December
31, 1993, 1994 and 1995, respectively. In 1993, the Company acquired
$13,660,000 of property and equipment under a capital lease obligation.
Cash payments for state income taxes were $0 and $75,000 during the
three-month periods ended March 31, 1995 and 1996, respectively. Interest
payments totaled $71,000 and $61,000 for the three-month periods ended March
31, 1995 and 1996, respectively. During the three-month period ended March
31, 1996, the Company declared a distribution to shareholders in the form of
notes payable totaling $35,363,000.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
the current year's presentation.
PRO FORMA PRESENTATION (UNAUDITED)
Through April 30, 1996, the Company has elected treatment as an S
corporation under provisions of the Internal Revenue Code. Effective May 1,
1996, the Company terminated its S corporation election and become a C
corporation.
A. Pro Forma Balance Sheet (Unaudited)
The accompanying pro forma balance sheet as of March 31, 1996, reflects
an increase in the deferred tax asset from $370,000 to $4,956,000, or
$4,586,000, as if the Company had always been a C corporation. As a C
corporation, the computation of deferred taxes is based on federal C
corporation tax rates, which are not applicable to S corporations, and C
corporation state tax rates, which are significantly larger than S
corporation state tax rates (see "Pro Forma Statements of Income
(Unaudited)"). The actual increase in the deferred tax asset will be based
upon recorded amounts for cumulative temporary differences at the time of
conversion. The deferred tax asset represents taxes previously paid by the
F-8
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shareholders for which the Company will receive a future benefit. In
connection therewith, the Company intends to distribute to the shareholders,
in the form of dividends payable to the shareholders, $4,400,000, an amount
equaling a portion of the increase in the recorded amount of the deferred
tax asset (see below).
The increase in the pro forma deferred tax asset is based on amounts as
if the Company had been a C corporation at March 31, 1996. The actual
amounts may differ based on recorded balances in the Company's financial
statements at the date of conversion from an S corporation to a C
corporation.
Subsequent to March 31, 1996, the Company declared various distributions
to existing shareholders (see Note 8) as follows:
<TABLE>
<S> <C>
Cash distribution on April 16, 1996............................ $3,000,000
Distribution in the form of notes payable to shareholders on
April 30, 1996................................................ $ 158,000
Distribution in the form of dividends payable on May 1, 1996... $4,400,000
</TABLE>
The accompanying pro forma balance sheet as of March 31, 1996, reflects
these transactions as if they had occured on March 31, 1996. As it is the
Company's intent to pay, the notes payable and dividends payable immediately
following the proposed public offering, the related balances of $158,000 and
$4,400,000, respectively, are reflected as current liabilities in the
accompanying pro forma balance sheet as of March 31, 1996. No interest has
been imputed on the notes payable because the notes will be paid within one
year.
B. Pro Forma Statements of Income (Unaudited)
As an S corporation, the Company's income, whether distributed or not,
was taxed at the shareholder level for federal income tax purposes. For
California franchise tax purposes, S corporations were taxed at 2.5 percent
of taxable income through 1993 and 1.5 percent of taxable income in 1994 and
1995.
Because of the Company's intended change in tax status, historical
results of operations, including income taxes, and related earnings per
share information may not, in all cases, be comparable to or indicative of
current and future results. Therefore, pro forma information, which shows
results as if the Company had always been a C corporation, is presented on
the face of the accompanying statements of income.
The pro forma provision for income taxes included in the accompanying
statements of income shows results as if the Company had always been subject
to income taxes as a C corporation and had adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes," prior
to fiscal 1991.
Under SFAS 109, deferred income tax assets or liabilities are computed
based on temporary differences between the financial statement and income
tax bases of assets and liabilities using the enacted marginal income tax
rate in effect for the year in which the differences are expected to
reverse. Deferred income tax expenses or credits are based on the changes in
the deferred income tax assets or liabilities from period to period.
F-9
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods and for
loss carryforwards. A valuation allowance is recognized if, based on the
weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
The pro forma provision for income taxes for the years ended December
31, 1993, 1994 and 1995 and for the three months ended March 31, 1996
follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
------------------------------------------ ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------
1993 1994 1995 MARCH 31,
------------ ------------ ------------ 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal......................................... $ 3,847,000 $4,215,000 $5,952,000 $1,455,000
State........................................... 659,000 723,000 1,020,000 249,000
------------ ------------ ------------ ------------
4,506,000 4,938,000 6,972,000 1,704,000
Deferred.......................................... (1,029,000) 225,000 (463,000) 15,000
------------ ------------ ------------ ------------
Pro forma provision for income taxes.............. $ 3,477,000 $5,163,000 $6,509,000 $1,719,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Differences between the pro forma provision for income taxes and income
taxes at the statutory federal income tax rate for each of the three years
in the period ended December 31, 1995 and for the three months ended March
31, 1996 follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1993 1994 1995 1996
------------------------ ------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax at statutory
federal rate.......... $ 3,270 35.0% $ 4,608 35.0% $ 5,636 35.0% $ 1,474 35.0%
State income taxes, net
of federal income tax
effect................ 561 6.0 790 6.0 966 6.0 253 6.0
Effect of permanent
differences........... 6 -- 12 -- 14 -- 2 --
LARZ and targeted jobs
credits............... (360) (3.8) (247) (1.8) (107) (0.6) (10) (0.2)
----------- --- ----------- --- ----------- --- ----------- ---
$ 3,477 37.2% $ 5,163 39.2% $ 6,509 40.4% $ 1,719 40.8%
----------- --- ----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- --- ----------- ---
</TABLE>
F-10
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A detail of the Company's pro forma deferred tax asset as of December
31, 1994 and 1995 and March 31, 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------ MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Inventory reserve........................................... $1,675,000 $1,675,000 $ 1,675,000
Uniform inventory capitalization............................ 918,000 931,000 931,000
Depreciation................................................ 588,000 805,000 846,000
Liability for claims........................................ 393,000 393,000 345,000
Workers' compensation....................................... 435,000 496,000 490,000
Deferred rent............................................... 333,000 552,000 561,000
LARZ credit................................................. 185,000 195,000 195,000
Other, net.................................................. (20,000) (77,000) (87,000)
------------ ------------ -----------
4,507,000 4,970,000 4,956,000
Valuation allowance......................................... -- -- --
------------ ------------ -----------
$4,507,000 $4,970,000 $ 4,956,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
C. Pro Forma Earnings Per Common Share (Unaudited)
Pro forma earnings per common share for the year ended December 31,
1995 have been computed by dividing pro forma net income by the pro forma
weighted average number of common shares outstanding plus the dilutive
effect of common stock equivalents. Pro forma weighted average number of
common shares outstanding also includes 2,753,000 shares offered as part
of the public offering; proceeds from such shares will be used to fund a
distribution to shareholders of $39,921,000.
Pursuant to the rules of the Securities and Exchange Commission,
historical per share data are not presented and pro forma per share data
are presented for the latest fiscal year only in the accompanying
statements of income. Also pursuant to these rules, the number of common
shares issuable due to options granted during the twelve months preceding
the Company's proposed public offering are included in the calculation of
shares outstanding using the treasury stock method from the beginning of
all periods presented.
NEW AUTHORITATIVE PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" (SFAS 121), which requires impairment
losses to be recorded on long-lived assets used in operations when
indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The Company adopted SFAS 121 in the fourth quarter of 1995. As the
Company has not recorded long-lived assets on its balance sheet, the
adoption of this standard had no impact on the Company's financial position
or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 encourages, but does not
require, a fair value based method of accounting for employee stock options
or similar equity instruments. It also allows an entity to elect to continue
to measure compensation cost under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to
F-11
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employees" (APB 25), but requires pro forma disclosure of net income and
earnings per share as if the fair value based method had been applied. The
Company will be required to adopt this standard effective in 1996. While the
Company is still evaluating SFAS 123, it currently expects to elect to
measure compensation cost under APB 25 and comply with the pro forma
disclosure requirements. If the Company makes this election, SFAS 123 will
have no impact on the Company's financial position or results of operations
because the Company's stock option plan is a fixed plan which has no
intrinsic value at the grant date under APB 25.
5. CAPITALIZED LEASE OBLIGATION
The Company leases its warehouse, distribution and corporate facility
(approximately 880,000 square feet -- unaudited) under a lease accounted for as
a capital lease. Included in property and equipment is approximately $13,660,000
of land and buildings, at cost, related to this lease.
The lease requires fixed payments of $70,000 per month and bears interest at
a rate of 7 percent per annum. At the lease expiration in December 2000, the
Company has the option to purchase the facility for $10,500,000. The Company
plans to exercise the option at the end of the lease.
Total minimum lease payments under the lease are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996............................................................... $ 840,000
1997............................................................... 840,000
1998............................................................... 840,000
1999............................................................... 840,000
2000............................................................... 11,340,000
----------
14,700,000
Less -- Amount representing interest (7 percent)....................... (4,723,000)
----------
Present value of minimum lease payments................................ 9,977,000
Less -- Current portion................................................ (612,000)
----------
$9,365,000
----------
----------
</TABLE>
6. RELATED-PARTY TRANSACTIONS
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1,022,000,
1,465,000 and $1,555,000 in 1993, 1994 and 1995, respectively.
The Company pays the premium on a split dollar life insurance agreement with
two of its principal shareholders. Under a collateral assignment agreement, the
premiums paid by the Company will be reimbursed to the Company out of death
benefit proceeds at the death of both shareholders. The Company has recorded a
receivable of $107,000 from an affiliated entity in the accompanying balance
sheets as of December 31, 1995, for the present value, not to exceed the cash
surrender value of the policy, based on mortality tables, of the premiums paid
through December 31, 1995.
During 1993, 1994 and 1995, the Company expensed legal fees to the law firm
of Van Patten & Holen of $154,000, $36,000 and $109,000, respectively. Marvin
Holen, a director of the Company, is a partner in this law firm.
F-12
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY
In December 1994, the Company modified its credit facility with a bank.
The credit facility provides for a line of credit of $7 million that can be
used for working capital purposes and issuance of letters of credit. The
line of credit expires on August 30, 1996 and the interest rate is at the
bank's prime rate (8.5 percent as of December 31, 1995).
As of December 31, 1995, there were no borrowings outstanding under the
line of credit and outstanding letters of credit were approximately
$2,181,000 ($1,636,000 of which relates to a standby letter of credit for
self-insured workers' compensation -- see Note 7 -- Workers' Compensation).
As of March 31, 1996, there were no borrowings under the line of credit and
outstanding letters of credit were approximately $1,882,000 ($1,636,000 of
which related to a standby letter of credit for self-insured workers'
compensation -- see Note 7 -- Workers' Compensation).
Under the terms of its credit facility, the Company must comply with
certain financial and performance covenants including the maintenance of
profitability, a minimum current ratio, a minimum tangible net worth, a
maximum total liabilities to tangible net worth, a minimum fixed charge
coverage ratio and a maximum capital expenditure. Noncompliance by the
Company with respect to any of the loan covenants constitutes an event of
default that gives the bank the right to call the credit facility and to
pursue certain remedies. At December 31, 1995 and March 31, 1996, the
Company was in compliance with all such covenants.
SPECIAL LITIGATION
In 1989, the Company purchased $220,000 of inventory for resale. A third
party claimed to have a valid lien on the merchandise sold to the Company.
After a series of judgments, reversals and other legal actions, the
litigation was settled for $200,000 in early 1995.
From 1991 to 1993, the Company provided a reserve for $3.1 million for
estimated litigation and interest costs. As a result of the settlement,
$200,000 was charged to the reserve and the remaining $2.9 million was
included in income in 1994.
LEASE COMMITMENTS
The Company leases various facilities under operating leases which
expire at various dates through 2005. Some of the lease agreements contain
renewal options and/or provide for scheduled increases or increases based on
the Consumer Price Index. Total minimum lease payments under each of these
lease agreements, including scheduled increases, are charged to operations
on a straight-line basis over the life of each respective lease. Certain
leases require the payment of property taxes, maintenance and insurance.
Rental expense charged to operations in 1993, 1994 and 1995 was
approximately $5,222,000, $4,724,000 and $5,107,000, respectively.
F-13
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1995, the minimum annual rentals payable under all
non-cancelable operating leases were as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996.................................................................. $ 4,649,000
1997.................................................................. 4,383,000
1998.................................................................. 4,220,000
1999.................................................................. 3,888,000
2000.................................................................. 3,654,000
Thereafter................................................................ 10,806,000
-----------
$31,600,000
-----------
-----------
</TABLE>
In addition, the Company also leases certain retail facilities on a
month-to-month basis. The aggregate monthly rental payments for
month-to-month leases at December 31, 1995 were approximately $25,000.
WORKERS' COMPENSATION
Effective August 11, 1993, the Company became self-insured as to
workers' compensation claims. The Company carries excess workers'
compensation insurance which covers any individual claim in excess of
$250,000 with a $2,000,000 ceiling. Through March 9, 1996, the Company has
not made a claim against the policy. The Company provides for losses of
estimated known and incurred but not reported insurance claims. Known claims
are estimated and accrued when reported. Incurred but not reported claims
are estimated and accrued based on the Company's experience and the
experience of a third-party administrator. At December 31, 1995, the Company
had accrued approximately $1,209,000 for estimated workers' compensation
claims.
In connection with the self-insurance of workers' compensation, the
Company is required, by the State of California, to maintain a standby
letter of credit. As of December 31, 1995, there was $1,636,000 under the
standby letter of credit.
8. SUBSEQUENT EVENTS
STOCK SPLIT
In April 1996, the Company increased the number of authorized common
shares to 40,000,000 and split the outstanding common shares 80,324.17
shares for one share. In May 1996, the Company again split the outstanding
common shares approximately 1.24 shares for one share. The accompanying
financial statements give retroactive effect to this increase in authorized
common shares and stock splits.
PREFERRED STOCK
The Company has authorized the issuance of up to 1,000,000 shares of
preferred stock. The preferred shares have no par value. No shares are
issued or outstanding.
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan provides for the granting of
non-qualified and incentive stock options to purchase up to 1,000,000 shares
of common stock. Options may be granted to officers, employees, directors
and consultants. As of March 31, 1996, no options had been granted. In May
1996, the Company granted to certain employees an aggregate of 500,000 at an
exercise price of $10.99 per share.
F-14
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
All stock options granted have been at exercise prices equal to or
greater than the fair market value at the date of grant, as determined by
the board of directors. It is management's current intent to continue to
grant both incentive and non-qualified stock options at exercise prices
which are equal to or greater than the fair market value at the date of
grant.
DISTRIBUTION TO SHAREHOLDERS
On March 22, 1996, the Company declared a distribution to existing
shareholders of $35,363,000. In connection therewith, the Company issued 10
year notes payable to the shareholders, bearing no interest for the first
year and then at an annual rate of prime plus 1%. The Company intends to pay
the notes payable immediately following the proposed public offering.
Consequently, the entire $35,363,000 balance of the notes payable is
reflected as a current liability in the accompanying balance sheet as of
March 31, 1996.
On April 16, 1996, the Company declared and paid a cash distribution to
existing shareholders totaling $3,000,000. This distribution has been
reflected in the accompanying pro forma balance sheet as of March 31, 1996
as if the distribution had occurred on March 31, 1996 (See Note 4).
On April 30, 1996, the Company declared a distribution to existing
shareholders of $158,000. In connection therewith, the Company issued 10
year notes payable to the Shareholders, bearing no interest for the first
year and then at an annual rate of prime plus 1%. This distribution and the
related notes payable to shareholders have been reflected in the
accompanying pro forma balance sheet as of March 31, 1996, as if the
transaction had occurred on March 31, 1996 (See Note 4).
On May 1, 1996, the Company declared a distribution to existing
shareholders of $4,400,000, in the form of a dividend payable. This
distribution and the related dividend payable have been reflected in the
accompanying pro forma balance sheet as of March 31, 1996, as if the
transaction had occurred on March 31, 1996 (See Note 4).
CHANGE IN TAX STATUS
Effective May 1, 1996, the Company elected to terminate its S
Corporation tax status under provisions of the Internal Revenue Code and
became a C Corporation (See Note 4).
F-15
<PAGE>
"WHAT THE NEWCOMERS ARE JUST LEARNING,
9 CENTS ONLY STORES-REGISTERED TRADEMARK- HAS BEEN PERFECTING FOR OVER 10
YEARS!"
<PAGE>
[BRIDAL REGISTRY ADVERTISEMENT]
Newspaper Advertisement -- "Bridal Registry" Theme
June 6, 1995 Los Angeles Times
The Company often advertises around a theme to attract additional attention and
generate publicity.
DESCRIPTION OF PHOTOGRAPH: NEWSPAPER ADVERTISEMENT ILLUSTRATION
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Termination of S Corporation Status............ 12
Use of Proceeds................................ 13
Capitalization................................. 13
Dividend Policy................................ 14
Dilution....................................... 14
Selected Financial and
Certain Operating Data........................ 15
Management's Discussion and Analysis of Results
of Operations
and Financial Condition....................... 17
Business....................................... 24
Management..................................... 35
Principal Shareholders......................... 40
Description of Capital Stock................... 41
Shares Eligible for Future Sale................ 41
Underwriting................................... 43
Legal Matters.................................. 45
Experts........................................ 45
Additional Information......................... 45
Index to Financial Statements.................. F-1
</TABLE>
--------------
UNTIL JUNE 17, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,250,000 SHARES
[LOGO]
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
EVEREN SECURITIES, INC.
NATWEST SECURITIES LIMITED
CROWELL, WEEDON & CO.
MAY 23, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
