UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2411605
(State or other jurisdiction (I.R.S. Employer Identification No.)
or organization)
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(Address of Principal executive offices)
Registrant's telephone number, including area code: (213) 980-8145
NONE
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, No Par Value, 14,816,635 Shares as of May 14, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
99 Cents Only Stores
Balance Sheets
(Amounts In Thousands)
March 31, December 31,
1997 1996
(Unaudited)
---------- ----------
Assets
Current assets:
Cash________________________________ $5,804 $3,375
Short-term investment_______________ 27,949 27,619
Accounts receivable, net of
allowance For doubtful of $209,000
and $211,000 as of March 31, 1997
and December 31, 1996,
respectively______________________ 2,070 1,561
Inventories_________________________ 37,265 36,933
Other_______________________________ 535 323
-------- --------
Total current asset_________________ 73,623 69,811
Property and equipment, at cost:
Land________________________________ 7,159 7,159
Building and improvements___________ 10,195 10,195
Leasehold improvements______________ 7,655 6,546
Fixtures and equipment______________ 6,449 5,840
Transportation equipment____________ 438 438
Construction in progress____________ 233 134
-------- --------
32,129 30,312
Less - accumulated depreciation
And amortization_____________ (7,863) (7,239)
-------- --------
Total property and equipment, net___ 24,266 23,073
Other assets:
Deferred income taxes_______________ 5,702 5,702
Deposits____________________________ 246 246
Receivable from affiliated entity___ 165 165
-------- --------
6,113 6,113
-------- --------
Total assets________________________ $104,002 $98,997
======== ========
The accompanying notes are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
99 Cents Only Stores
Balance Sheets
(Amounts In Thousands)
<S> <C> <C>
March 31, December 31,
1997 1996
(Unaudited)
---------- ----------
Liabilities and Shareholder' Equity
Current liabilities:
Current portion of capital
lease obligation__________________________ $668 $656
Accounts payable____________________________ 5,689 6,577
Accrued expenses:
Payroll and payroll related_______________ 1,055 1,086
Sales tax_________________________________ 909 1,056
Liability for claims______________________ 706 706
Other_____________________________________ 59 34
Workers' compensation_____________________ 726 771
Income taxes payable______________________ 2,527 103
-------- --------
Total current liabilities___________________ 12,339 10,989
Long-term liabilities:
Deferred rent_______________________________ 1,304 1,294
Accrued interest____________________________ 1,640 1,500
Capital lease obligation, net of
Current portion___________________________ 8,537 8,709
-------- --------
11,481 11,503
Commitments and contingencies_______________ - -
Shareholder' 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 - 14,816,635
Shares at December 31, 1997 and
14,984,456 shares at March 31, 1996_______ 65,354 65,354
Retained earnings_________________________ 14,828 11,151
-------- --------
Total shareholders' equity__________________ 80,182 $76,505
-------- --------
Total liabilities and shareholders' Equity__ $104,002 $98,997
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<TABLE>
<CAPTION>
<PAGE>
99 Cents Only Stores
Statements of Income
(Unaudited)
(Amounts In Thousands Except Earnings Per Share Data)
<S> <C> <C>
Three Months Ended
March 31,
1997 1996
-------- --------
Net sales:
99 Cents Only Stores________________ $39,168 $32,256
Bargain Wholesale___________________ 11,576 10,020
-------- --------
Net sales___________________________ 50,744 42,276
Cost of sales_______________________ 33,328 28,810
-------- --------
Gross profit________________________ 17,416 13,466
Selling, general and
Administrative expenses___________ 11,331 9,066
-------- --------
Operating income____________________ 6,085 4,400
Interest income (expense), net______ 151 (189)
-------- --------
Income before provision for
Income taxes______________________ 6,236 4,211
Provision for income taxes:
Historical______ 2,560
Pro forma_______ -------- 1,719
--------
Net income:
Historical______ $3,676
Pro forma_______ ======== $2,492
========
Earnings per share:
Historical______ $0.25
Pro forma_______ ===== $0.19
=====
Weighted average number of common
Shares outstanding:
Historical______ 14,984
Pro forma_______ ======== 12,803
========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
99 Cents Only Stores
Statements of Cash Flows
(Unaudited)
(Amounts In Thousands)
<TABLE> Three Months Ended
<CAPTION> March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income_________________________________________ $3,676 $4,158
Adjustment to reconcile net income to cash
Provided by operating activities:
Provision for doubtful accounts____________________ - 7
Depreciation and amortization______________________ 624 464
Provision (benefit) for deferred income taxes______ - 8
Changes in asset and liabilities
Associated with operating activities:
Accounts receivable________________________________ (509) (652)
Short-term securities______________________________ (329) -
Inventories________________________________________ (332) 1,828
Other assets_______________________________________ (212) (371)
Deposits___________________________________________ - -
Accounts payable___________________________________ (888) (267)
Accrued expenses___________________________________ (152) (640)
Workers' compensation______________________________ (45) (15)
Income taxes payable_______________________________ 2,423 -
Deferred rent______________________________________ 10 23
Accrued interest___________________________________ 140 130
-------- --------
Net cash provided by operating activities__________ 4,406 4,673
Cash flows from investing activities:
Purchase of property and equipment_________________ (1,817) (693)
-------- --------
Net cash used in investing activities______________ ($1,817) ($ 693)
Cash flows from financing activities:
Payments of capital lease obligation_______________ (160) (149)
Net proceeds from initial public offering__________ - -
Payments of notes payable to shareholders'_________ - -
Payment of dividend payable________________________ - -
Distributions to shareholders______________________ - (2,000)
-------- --------
Net cash (used in) financing activities____________ ($ 160) ($2,149)
Net increase in cash_______________________________ 2,429 1,831
Cash, beginning of period__________________________ 3,375 3,057
-------- --------
Cash, end of period________________________________ $5,804 $4,888
</TABLE> ======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
99 CENTS ONLY STORES
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information and footnote disclosures normally included in financial
statements prepared in conformity with generally accepted accounting
principles have been omitted or condensed pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). These statements
should be read in conjunction with the company's December 31, 1996 audited
and pro forma financial statements and notes thereto included in the
Company's Form 10-K dated March 27, 1997, including all amendments thereto.
In the opinion of management, these interim financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for each of
the periods presented. The results of operations and cash flows for such
periods are not necessarily indicative of results to be expected for the full
year.
2. PUBLIC OFFERING OF STOCK
In May 1996, the Company completed its initial public offering of 4,887,500
shares (including 637,500 shares from the exercise of the over allotment
option granted to the underwriters) of common stock. Of the net proceeds of
approximately $65.3 million, the Company used approximately $39.9 million to
pay notes issued and dividends payable declared to the Existing Shareholders.
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 not immediately used for such purposes have been
invested in short-term investments grade securities.
3. PRO FORMA PRESENTATION
Through April 30, 1996, the Company had elected treatment as an S corporation
under provisions of the Internal Revenue Code. Effective May 1, 1996, the
Company terminated its S corporation election and became a C corporation.
A. Pro Forma Statements of Income
As an S corporation, the Company's income, whether distributed or not, was
taxed at the shareholder level for federal income tax purposes. For
California franchise tax purposes, as an S corporation, the Company was taxed
at 1.5 percent of taxable income.
Because of the Company's change in tax status, historical results of
operations, including income taxes, and related earnings per share
information may not in all cases, be comparable to or indicative of current
and future results. Therefore, pro forma information, which shows results as
if the Company had always been a C Corporation, is presented on the face of
the accompanying statements.
The pro forma provision for income taxes included in the accompanying
statements of income shows results as if the Company had always been subject
to taxes as a C Corporation and had adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," prior to fiscal
1991.
Under SFAS 109, deferred income tax assets or liabilities are computed based
on temporary differences between the financial statement and income tax bases
of assets and liabilities using the enacted marginal income tax rate in
effect for the year in which the differences are expected to reverse.
Deferred income tax expenses or credits are based on the changes in the
deferred income tax assets or liabilities from period to period. Under SFAS
109, deferred tax assets may be recognized for temporary differences that
will result in deductible amounts in future periods and for loss carry
forwards. A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. For the three month period ended
March 31, 1996 the pro forma provision for income taxes was based upon a
combined federal and state tax rate of approximately 41 percent, offset by
the impact of various tax credits.
B. Pro Forma Earnings Per Common Share
Pro forma earnings per common share have been computed by dividing pro forma
net income by the pro forma weighted average number of common shares
outstanding plus the dilutive effect of common stock equivalents. Pro forma
weighted average number of common shares outstanding also includes amounts
(weighted from the beginning of the period to the initial public offering)
for shares offered as a part of the public offering; the proceeds from such
shares being used to fund a $39.9 million distribution to shareholders.
Pro forma per share data are presented for the three month period ended March
31, 1996 and historical per share data are presented for the three months
period ended March 31, 1997 only, in the accompanying statements of income.
The number of common shares issuable due to options granted during the twelve
months preceding the Company's public offering are included in the
calculation of shares outstanding using the treasury stock method from the
beginning of all periods presented.
4. CHANGE IN TAX STATUS/INCOME TAX PROVISION
As discussed in note 3 above, effective May 1, 1996, the Company terminated
its S corporation election and became a C corporation. As such, the actual
taxes due by the Company for each period presented are based on S corporation
tax rates for income from January 1, 1996 through April 30, 1996 and C
corporation tax rate thereafter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
99 Cents Only Stores is a leading deep-discount retailer of general
merchandise at a single price point. 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.
In 1982, the Company opened the first of its 99 Cents Only Stores and as of
the date of this form 10-Q operates a chain of 46, 99 Cents Only Stores. The
Company's growth has primarily come from new store openings and growth in its
Bargain Wholesale division.
Bargain Wholesale's growth is primarily attributable to an increased focus on
large domestic and international accounts and expansion into new geographic
markets. In February 1997 the Bargain Wholesale division opened a showroom in
New York City. The Company intends to continue to expand its wholesale
division by continuing this focus, increasing its marketing and promotional
programs and increasing the number of trade shows at which it exhibits. The
Company generally realizes lower gross 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 increases in operating expenses.
Initial Public Offering
In May 1996, the Company completed its initial public offering of 4,887,500
shares (including 637,500 shares from the exercise of the over allotment
option granted to the underwriters) of common stock. Of the net proceeds of
approximately $65.3 million, the Company used approximately $39.9 million to
pay notes issued and dividends payable declared to the Existing Shareholders.
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 not immediately used for such purposes have been
invested in short-term investment grade securities.
Effect of Change in Form From an S Corporation to a C Corporation
As part of its initial public offering, the Company changed in form from an S
Corporation to a C corporation, which 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 1.5% of
taxable income for the first four months of 1996. Currently the top Corporate
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.
(See Note 4 of Notes to Financial Statements.)
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
NET SALES: Net sales increased $8.5 million, or 20.0%, to $50.7 million in
the 1997 period from $42.3 million in the 1996 period. The 99 Cents Only
Stores net sales increased approximately $6.9 million, or 21.4%, to $39.2
million in the 1997 period from $32.3 million in the 1996 period, and Bargain
Wholesale net sales increased approximately $1.6 million, or 15.5%, to $11.6
million in the 1997 period from $10.0 million in the 1996 period. The
increase in the 99 Cents Only Stores net sales was attributable to the
positive effect of 2 new stores opened in the first quarter of 1997, the full
effect of 3 new store openings in the third quarter and 2 in the fourth
quarter of 1996 and a 0.5% or $0.3 million increase in comparable store net
sales in the 1997 period from the 1996 period. The increase in Bargain
Wholesale net sales was primarily attributable to a continued increased focus
on large domestic and international marketing activity during the 1996
period.
GROSS PROFIT: Gross profit increased approximately $4.0 million, or 29.3%, to
$17.4 million in 1997 period from $13.5 million in the 1996 period. The
increase in gross profit was due to higher net sales and an increase in the
gross profit margin to 34.3% in the 1997 period from 31.9% in the 1996
period. The 2.4% point increase in the gross profit margin is due to
merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $2.3 million, or
25.0%, from $9.1 million in 1996 to $11.3 million in the 1997 period. This
was primarily due to increased costs associated with new store growth and the
effect of local tax credits recognized in the first quarter of 1996 as well
as the timing of advertising cost during the first quarter of 1996. As a
result SG&A increased as a percentage of net sales from 21.4% in 1996 to
22.3% in 1997.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $1.7 million, or 38.3%, to $6.1 million in 1997 from $4.4 million
in 1996. The operating margin increased to 12.0% of sales in 1997 compared to
10.4% in 1996.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized warehouse lease, net of interest earned on the
Company's cash balances and short-term investments. The change in interest
expense between 1997 and 1996 was due to interest earned on short-term
marketable securities. During 1997 and 1996, the Company had no bank debt.
PROVISION FOR INCOME TAXES: The provision for income taxes of $2.6 million in
1997 compares to a pro forma provision of $1.7 million in 1996. The effective
rate of the historical and pro forma provision for income taxes was
approximately 41.1% in 1997 and 40.8% in 1996. The effective rates
approximate the statutory rates in each period.
NET INCOME: As a result of the items discussed above, pro forma net income
increased $1.2 million, or 47.5% to $3.7 million in 1997 from $2.5 million in
the 1996 period. Net income increased to 7.2% of net sales from 5.9% pro
forma net income in the 1996 period.
LIQUIDITY AND CAPITAL RESOURCES
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 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.
In May 1996, the Company completed its initial public offering of 4,888,500
shares (including 637,500 shares from the exercise of the over allotment
option granted to the underwriters) of common stock. Of the proceeds of
approximately $65.3 million, the Company used approximately $39.9 million to
pay notes issued and dividends payable declared to the pre public offering
Shareholders. The Company is using the balance of the net proceeds for the
expansion of its retail operations, and for general corporate purposes. Since
the offering, the Company has opened 8 new stores. The Company has purchased
the land and buildings for 2 of the locations and may purchase other
locations in the future. Available cash not immediately needed for such
purposes has been invested in short-term investments grade securities.
During the three months ended March 31, 1997 and 1996, net cash provided by
operations was $4.4 million and $4.7 million respectively. Inventories
increased $0.3 million in 1997 and decreased $1.8 million in 1996.
Receivables increased $0.5 million and $0.7 million, in 1997 and 1996
respectively. Accounts payable and accruals were reduced $1.0 million in 1997
and $0.9 million in 1996. In 1997 current income taxes payable increased $2.4
million as a result of the change in corporate status to a C corporation. In
the first quarter of 1997, the Company also reinvested $0.3 million of
interest earned on marketable securities. Net cash used in investing
activities was $1.8 million in 1997, consisting of expenditures for property
and equipment. In 1996 cash flow from investing activities consisted of $0.7
million used for capital expenditures. Net cash used in financing activities
was $0.2 million for payments on the capitalized warehouse lease in 1997 and
in 1996. In addition in 1996 there was a $2.0 million distribution to
shareholders.
The Company has a $7.0 million bank line of credit facility bearing interest
at the bank's prime rate. Under terms of the facility, the Company must
comply with one financial covenant, the ratio of total liabilities to
tangible net worth. As of March 31, 1997, the Company was in compliance with
this covenant and there were no amounts outstanding on the line of credit.
The Company believes that it can adequately fund its planned capital
expenditures and working capital requirements for the next 12 months from the
net cash provided by operations, cash on hand and marketable securities.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. 27.01 Financial Data Schedule
(b) Item 5. 8-K filed on April 9, 1997
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
99 CENTS STORES ONLY
Date: May 14, 1997 /s/ Andrew A. Farina
Andrew A. Farina
Vice President Finance
<PAGE>
EXHIBIT 27.1
<PERIOD TYPE> 3-mos
<FISCAL YEAR END> Dec 31 1997
<PERIOD START> Jan 01 1997
<PERIOD END> Mar 31 1997
[CASH] 5,804
[SECURITIES] 27,949
[RECEIVABLES] 2,070
[ALLOWANCES] (209)
[INVENTORY] 37,265
<CURRENT ASSETS> 73,623
[PP&E] 32,129
[DEPRECIATION] (7,863)
<TOTAL ASSETS> 104,002
<CURRENT LIABILITIES> 12,339
[BONDS] 0
0
[PREFERRED] 0
[COMMON] 65,354
<OTHER SE> 14,828 <FN 1>
<TOTAL LIABILITY AND EQUITY> 104,002
[SALES] 50,744
<TOTAL REVENUE> 50,744
[CGS] 33,328
<TOTAL COSTS> 11,331
<OTHER EXPENSES> 0
<LOSS PROVISION> 0
<INTEREST EXPENSE> 50
<INCOME PRE TAX> 6,236
<INCOME TAX> 2,560
<INCOME CONTINUING> 3,676
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 3,676
<EPS PRIMARY> 0.25
<EPS DILUTED> 0.25
< /TABLE>
<FN1> Retained Earnings
