<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
99 CENTS ONLY STORES
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
CALIFORNIA 95-2411605
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
99 CENTS ONLY STORES
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(213) 980-8145
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
--------------------------
DAVID GOLD, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
99 CENTS ONLY STORES
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(213) 980-8145
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
--------------------------
COPIES TO:
C.N. FRANKLIN REDDICK III, ESQ. ROBERT B. KNAUSS, ESQ.
LINDA GIUNTA MICHAELSON, ESQ. MARY ANN LYMAN, ESQ.
TROOP MEISINGER STEUBER & PASICH, LLP MUNGER, TOLLES & OLSON LLP
10940 WILSHIRE BOULEVARD 355 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90024 LOS ANGELES, CALIFORNIA 90071
(310) 824-7000 (213) 683-9100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the only securities being registered on this form are being offered
pursuant to divided or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF SHARES AMOUNT TO AGGREGATE PRICE OFFERINGS AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value....................... 4,025,000 Shares $35.72 $143,773,000 $42,413.04
</TABLE>
(1) Includes 525,000 shares of Common Stock issuable upon exercise of options
granted to the Underwriters to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(c).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus, one to be used
in connection with an underwritten offering in the United States and Canada (the
"U.S. Prospectus") and one to be used in connection with a concurrent
international offering outside the United States and Canada (the "International
Prospectus"). The two prospectuses relate to a public offering of up to
4,025,000 shares of Common Stock, no par value per share, of 99 CENTS Only
Stores, including up to 525,000 shares that may be sold pursuant to the
underwriters' over-allotment options, if exercised. The complete U.S. Prospectus
follows this explanatory note. After the U.S. Prospectus are the following
alternate pages for the International Prospectus: a front cover page, the
Underwriting section, Certain United States Federal Tax Consequences to
Non-United States Purchasers and a back cover page. All other pages of the U.S.
Prospectus are to be used for both the United States offering and the
international offering. Each alternate page for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus." Final
forms for each Prospectus will be filed with the Securities and Exchange
Commission pursuant to Rule 424(b).
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
3,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 3,500,000 shares of Common Stock, no par value per share (the "Common
Stock"), of 99 CENTS Only Stores ("99 CENTS Only Stores" or the "Company")
offered hereby, 750,000 shares are being offered by the Company and 2,750,000
shares are being offered by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are
being offered initially in the United States and Canada by the U.S. Underwriters
(the "U.S. Offering") and 700,000 shares are being offered in a concurrent
offering outside the United States and Canada by the International Managers (the
"International Offering," and together with the U.S. Offering, the "Offerings").
The initial public offering price and the aggregate underwriting discount per
share will be identical for both Offerings.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "NDN." On March 26, 1998, the last reported sale price of the Common
Stock as reported on the NYSE was $36 3/8 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS 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>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(2)(3)................................ $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $ , payable by the Company and
the Selling Shareholders in proportion to the net proceeds received. See
"Underwriting."
(3) The Company and the Selling Shareholders have granted to the U.S.
Underwriters and the International Managers options, exercisable within 30
days after the date hereof, to purchase up to an aggregate of 420,000 and
105,000 shares of Common Stock, respectively, to cover over-allotments, if
any. If all such additional shares are purchased, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
-------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
-------------------
The date of this Prospectus is , 1998.
2
<PAGE>
PHOTOS INCLUDING EXTERIOR OF A 99 CENTS ONLY
STORE, INTERIOR OF A 99 CENTS ONLY STORE AND
MERCHANDISE SOLD IN A 99 CENTS ONLY STORE.
IN CONNECTION WITH THE OFFERINGS, CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS
MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE
PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE
PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
3
<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 STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTIONS TO PURCHASE UP TO 525,000 ADDITIONAL SHARES
OF COMMON STOCK.
THE COMPANY
99 CENTS Only Stores is a leading deep-discount retailer of primarily
name-brand, consumable general merchandise at an affordable, single price point
of 99 CENTS. The Company's stores offer a wide assortment of regularly available
consumer goods as well as a broad variety of first-quality, close-out
merchandise. In 1997, a majority of the Company's product offerings were
comprised of recognizable name-brand merchandise and were regularly available
for reorder. The Company provides customers significant value on their everyday
household needs and an exciting shopping experience in customer-service-oriented
stores which are attractively merchandised, brightly lit and well-maintained.
The Company believes that its name-brand focus, along with a product mix
emphasizing value-priced food and beverage and other everyday household items,
increases the frequency of consumer visits and impulse purchases and reduces the
Company's exposure to seasonality and economic cycles. The Company believes its
format appeals to value-conscious customers in all socio-economic groups and
results in a high volume of sales. The Company's 54 existing 99 CENTS Only
Stores are located in Southern California and have an average size of
approximately 15,000 square feet. The Company's 99 CENTS Only Stores generated
average net sales per estimated saleable square foot of $354, which the Company
believes is among the highest in the deep-discount convenience store industry,
and average net sales per store of $3.8 million in 1997.
The Company opened its first 99 CENTS Only Store in 1982 and believes that
it operates the nation's oldest existing single price point general merchandise
chain. The Company competes in the deep-discount industry, which is one of the
fastest growing retail sectors in the United States. The Company significantly
increased its rate of store expansion following its initial public offering in
May 1996, expanding its 99 CENTS Only Stores from 36 stores and 332,100
estimated saleable square feet at December 31, 1995 to 53 stores and 631,500
estimated saleable square feet at December 31, 1997, representing a compound
annual growth rate ("CAGR") of 21% and 38%, respectively. The Company believes
that its attractive store-level economics facilitates its expansion.
Historically, the Company's 99 CENTS Only Stores have been profitable within
their first year of operation. In the first quarter of 1998, the Company opened
two stores (including one relocation), and plans to open an additional 11 stores
(including one relocation) during the remainder of the year. The Company intends
to continue its planned store expansion over the next several years at a
targeted growth rate of approximately 20% per year. The Company estimates that
the Southern California market has the potential for over 150 additional
99 CENTS Only Stores.
The Company also sells merchandise through its Bargain Wholesale division at
prices generally below normal wholesale levels to local, regional, and national
discount, drug and grocery store chains and independent retailers, distributors
and exporters. Bargain Wholesale complements the Company's retail operations by
allowing the Company to purchase in larger volumes at more favorable pricing, to
be exposed to a broader selection of opportunistic buys and to generate
additional sales with relatively small incremental increases in operating
expenses, contributing to strong overall operating margins for the Company.
Bargain Wholesale enables the Company to sell merchandise at prices other than
99 CENTS, providing the Company greater flexibility in inventory management.
Bargain Wholesale represented 19.4% of the Company's net sales in 1997.
99 CENTS Only Stores has increased its net sales, operating income and net
income in each of the last five years. In 1997 it had net sales of $230.9
million, operating income of $31.2 million and net income of $19.0 million,
representing a 25.7%, 35.6% and 38.3% increase over 1996, respectively. From
1993 through 1997,
3
<PAGE>
the Company had a CAGR in net sales, operating income and net income of 17.1%,
35.0% and 34.1%, respectively. The Company's operating margin was 13.5% in 1997.
BUSINESS STRATEGY
The Company's goal is to continue to provide significant value to its
customers on a wide variety of consumable merchandise in an exciting store
environment. The Company's strategies to achieve this goal include the
following:
FOCUS ON "NAME-BRAND" CONSUMABLES. The Company strives to exceed its
customers' expectations of the range and quality of name-brand consumable
merchandise that can be purchased for 99 CENTS. During 1997, the Company
purchased merchandise from more than 999 suppliers, including Colgate-Palmolive
Company, Cheseborough Ponds, The Dial Corp., Eveready Battery Company Inc.,
General Electric Company, Gerber Products Company, The Gillette Company, Hershey
Foods Corp., Johnson & Johnson, Kraft General Foods, Inc., Lever Brothers
Company, Mattel Inc., The Mead Corporation, Nabisco Inc., Nestle, The Pillsbury
Company, The Procter & Gamble Company, Revlon Inc. and SmithKline Beecham
Corporation.
BROAD SELECTION OF REGULARLY AVAILABLE MERCHANDISE. The Company's 99 CENTS
Only Stores offer consumer items in each of the following staple product
categories: food and beverages, health and beauty aids, household products
(cleaning supplies, paper goods, etc.), housewares (glassware, kitchen items,
etc.), hardware, stationary and party goods, seasonal goods, baby products and
toys, giftware, pet products and clothing. The Company added a deli and frozen
food section in its stores in the second and third quarters of 1997. The Company
ensures that its merchandise offering is complete by supplementing its
name-brand merchandise with private-label items. By consistently offering a wide
selection of basic household consumable items, the Company encourages customers
to shop 99 CENTS Only Stores for their everyday household needs, leading to a
high frequency of customer visits.
ATTRACTIVELY MERCHANDISED AND WELL-MAINTAINED STORES. The Company strives
to provide its customers an exciting shopping experience in
customer-service-oriented stores which are attractively merchandised, brightly
lit and well-maintained. The Company's 99 CENTS Only Stores are merchandised and
laid out in a "supermarket" format with items in the same category grouped
together. In addition, the shelves are restocked as needed during the day. By
offering merchandise in an attractive, convenient and familiar environment, the
Company believes its stores appeal to a wide demographic of customers.
STRONG LONG-TERM SUPPLIER RELATIONSHIPS. The Company believes that it has
developed a reputation as a leading purchaser of name-brand, reorderable and
close-out merchandise at discount prices through its ability to make immediate
buying decisions, experienced buying staff, willingness to take on large volume
purchases and take possession of merchandise immediately, ability to pay cash or
accept abbreviated credit terms, reputation for prompt payment, commitment to
honor all issued purchase orders and willingness to purchase goods close to a
target season or out of season. The Company's relationship with its suppliers is
further enhanced by its ability to minimize channel conflict for the
manufacturer by quickly selling name-brand merchandise without, if requested by
the supplier, advertising or wholesaling the item. Additionally, the Company
believes its well-maintained, attractively merchandised stores have contributed
to a reputation among suppliers for protecting their brand image.
COMPLEMENTARY BARGAIN WHOLESALE OPERATIONS. Bargain Wholesale complements
the Company's retail operations by allowing the Company to purchase in larger
volumes at more favorable pricing, to be exposed to a broader selection of
opportunistic buys and to generate additional sales with relatively small
incremental increases in operating expenses, contributing to strong overall
operating margins for the Company. Net sales in the Company's wholesale division
grew from $30.3 million in 1995 to $44.8 million in 1997, primarily due to an
increased focus on large domestic and international accounts and expansion
4
<PAGE>
into new geographic markets. The Company opened showrooms in New York City in
February 1997 and Chicago in February 1998 to support its Bargain Wholesale
operation.
ADHERENCE TO DISCIPLINED COST CONTROLS AND SAVVY PURCHASING. The Company is
able to provide its customers with significant value while maintaining strong
operating margins through an adherence to a disciplined cost control program.
The Company purchases merchandise at substantially discounted prices as a result
of its buyers' knowledge, experience and negotiating ability and its established
reputation among its suppliers. The Company applies this same approach to its
relationships with other vendors and strives to maintain a lean operating
environment focused on increasing net income. Operating expenses as a percentage
of net sales have declined from 25.3% in 1993 to 21.6% in 1997.
FOCUS ON LARGER STORES IN CONVENIENT LOCATIONS. The Company's stores are
conveniently located in freestanding buildings, neighborhood shopping centers
(anchored by 99 CENTS Only Stores or co-anchored with a supermarket and/or a
drug store) or downtown central business districts where consumers are more
likely to do their regular household shopping. None of the Company's stores is
located in an indoor shopping mall or small strip center. The Company's 54
existing 99 CENTS Only Stores average approximately 15,000 gross square feet.
Since January 1, 1995, the Company has opened 24 new stores that average over
19,000 gross square feet and currently targets new store locations between
15,000 and 25,000 gross square feet. The Company's larger 99 CENTS Only Stores
allow it to more effectively display a wider assortment of merchandise, carry
deeper stock positions and provide customers with a more inviting and convenient
environment that encourages customers to shop longer and buy more. The Company's
decision to target larger stores reflects higher average annual net sales per
store and operating income typically achieved by these stores.
EXPERIENCED MANAGEMENT TEAM AND DEPTH OF EMPLOYEE OPTION GRANTS. 99 CENTS
Only Stores' management team has many years of retail experience and has
demonstrated its skills through a proven track record of financial performance.
The Company's management strongly believes that employee ownership of the
Company's stock helps build employee pride in the stores and significantly
contributes to the success of the Company and its operations. Accordingly, all
members of management of the Company (other than David Gold, the Company's Chief
Executive Officer, and Sherry Gold, Bargain Wholesale's cash and carry
operations manager) and all employees (part-time or full-time) with tenure of
more than six months with the Company receive an annual grant of stock options.
As of December 31, 1997, the Company's employees (other than executive officers)
held options to purchase an aggregate of 1,057,360 shares, or over 5% of the
fully-diluted shares of Common Stock outstanding.
GROWTH STRATEGY
Management believes that future growth will primarily result from new store
openings facilitated by the following:
SOUTHERN CALIFORNIA HAS SIGNIFICANT POTENTIAL FOR GROWTH. By continuing to
focus 99 CENTS Only Store openings in Southern California for the immediate
future, the Company can leverage its brand awareness in the region and take
advantage of its existing warehouse and distribution facility, regional
advertising and other management and operating efficiencies. The Company's
growth strategy in Southern California will focus on opening locations in
existing markets as well as expanding into markets adjacent to those currently
served. The Company expects to open its first 99 CENTS Only Store in San Diego
County in the second quarter of 1998. The Company has plans for at least 13 new
stores, including two relocations, in 1998 (a net increase of 21%), all in the
Southern California area. As of March 31, 1998, the Company had opened two new
stores, including a relocation, and secured sites for five additional store
locations. The Company intends to continue its planned store expansion over the
next several years at a targeted rate of approximately 20% per year. The Company
estimates that the Southern California market has the potential for over 150
additional 99 CENTS Only Stores.
5
<PAGE>
PORTABLE FORMAT FACILITATES GEOGRAPHIC EXPANSION. The Company believes that
its concept of consistently offering a broad selection of name-brand
consumables, at value pricing, in a convenient store format is portable to most
other densely populated areas of the country. The Company expects to explore the
potential for geographic expansion as opportunities present themselves in the
next several years, focusing on developing clusters of stores that can take
advantage of local warehouse and distribution facilities.
ACQUISITIONS. The Company considers acquisition opportunities as they are
presented to the Company and may make acquisitions of a chain, or chains, of
clustered retail sites in densely populated regions. In February 1998, the
Company announced its intention to acquire control of Universal International,
Inc. ("Universal") and Odd's-N-End's Inc. ("Odd's-N-End's"). See "Pending
Acquisitions."
PENDING ACQUISITIONS
In November 1997, the Company acquired approximately 48% of the outstanding
common stock of Universal for $4 million in cash and merchandise. Universal owns
approximately 41% of the outstanding common stock of its consolidated
subsidiary, Odd's-N-End's. In February 1998, the Company announced its intention
to acquire the balance of the Universal and Odd's-N-End's shares. Together,
Universal and Odd's-N-End's operate 44 Only Deals stores in Minnesota and the
surrounding upper Midwest region, 22 Odd's-N-End's stores in upstate New York
and eight Only Deals Stores in Texas. If the acquisitions are consummated as
proposed, the Company will issue to the shareholders of Universal approximately
305,800 shares of the Company's Common Stock and will pay to the holders of
Odd's-N-End's common stock approximately $830,000 in cash. Universal currently
has a note receivable due from Odd's-N-End's of approximately $8.7 million. The
Company expects the acquisition of Universal to be mildly accretive to earnings
in 1998. Universal is expected to report a loss in the first half of 1998 and to
report a small profit for the full year. There can be no assurances that such
results will be achieved.
Consummation of these acquisitions are subject to certain significant
closing conditions. See "Risk Factors--Pending Acquisitions" and "Pending
Acquisitions."
FORWARD-LOOKING STATEMENTS
The Company has made in this Prospectus forward-looking statements within
the meaning of Section 27A of the Securities Act concerning the Company's
operations, expansion plans, economic performance, financial condition, the
pending acquisitions of Universal and Odd's-N-End's and their effect on the
Company's results of operations and the results of operations of Universal,
store openings, purchasing abilities, sales per square foot and comparable store
net sales trends and capital requirements. Such forward-looking statements may
be identified by the use of words such as "believe", "anticipate," "intend" and
"expect". Such forward-looking statements are subject to various risks and
uncertainties, certain of which are beyond the Company's control. Actual results
could differ materially from those currently anticipated due to a number of
factors, including those discussed under the caption "Risk Factors." Some of
those factors include (i) the Company's ability to open new stores on a timely
basis and operate them profitably, (ii) the Company's ability to integrate
Universal and Odd's-N-End's and to operate their stores at multiple price points
and in different geographic locations, (iii) the orderly operation of the
Company's receiving and distribution process, (iv) inflation, consumer
confidence and other general economic factors, (v) the availability of adequate
inventory and capital resources, (vi) the risk of a disruption in sales volume
in the fourth quarter and other seasonal factors as discussed in "Management's
Discussion and Analysis and Results of Operations--Seasonality and Quarterly
Fluctuations," (vii) dependence on key personnel and control for the Company by
existing shareholders and (viii) increased competition from new entrants into
the deep-discount retail industry. The Company does not ordinarily make
projections of its future operating results and undertakes no obligation to
publicly update
6
<PAGE>
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. See "Risk Factors."
------------------------
The Company is a California corporation. Its executive offices are located
at 4000 Union Pacific Avenue, City of Commerce, California 90023, and its
telephone number is (213) 980-8145.
THE OFFERINGS
Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are
being offered initially in the United States and Canada by the U.S. Underwriters
and 700,000 shares are being offered in a concurrent offering outside the United
States and Canada by the International Managers.
<TABLE>
<S> <C>
Common Stock Offered:
By the Company............................. 750,000 shares
By the Selling Shareholders................ 2,750,000 shares
Total.................................. 3,500,000 shares
Common Stock to be outstanding after the
Offerings(a)............................... 19,336,111 shares
Use of proceeds.............................. The net proceeds to be received by the
Company in connection with the Company's sale
of the shares of Common Stock offered hereby
will be used to retire existing debt and pay
overdue accounts payable of Universal
following the closing of the acquisitions of
Universal and Odd's-N-End's, to expand the
Company's retail operations, to fund working
capital needs and for general corporate
purposes. The Company will not receive any
proceeds from the sale of shares by the
Selling Shareholders. See "Use of Proceeds."
New York Stock Exchange Symbol............... NDN
</TABLE>
- ------------------------------
(a) Excludes (i) 1,171,883 shares of Common Stock available for issuance
pursuant to outstanding options, and (ii) 13,200 shares of Common Stock
available for future issuance under the Company's 1996 Stock Option Plan.
See "Shares Eligible for Future Sale."
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
99 CENTS Only Stores................................ $ 101,828 $ 110,724 $ 121,998 $ 143,163 $ 186,024
Other retail sales(a)............................... 3,093 2,097 492 -- --
Bargain Wholesale................................... 18,028 18,916 30,337 40,480 44,831
--------- --------- --------- --------- ---------
Total............................................. 122,949 131,737 152,827 183,643 230,855
Cost of sales....................................... 81,480 88,045 102,160 120,922 146,797
--------- --------- --------- --------- ---------
Gross profit........................................ 41,469 43,692 50,667 62,721 84,058
Selling, general and administrative expenses:
Operating expenses.................................. 31,053 31,319 32,169 37,683 49,850
Depreciation and amortization....................... 1,028 1,342 1,640 2,009 2,989
--------- --------- --------- --------- ---------
Total operating expenses.......................... 32,081 32,661 33,809 39,692 52,839
--------- --------- --------- --------- ---------
Operating income...................................... 9,388 11,031 16,858 23,029 31,219
Special litigation provision reversal(b).............. -- (2,900) -- -- --
Interest (income) expense, net........................ 45 764 755 (126) (855)
--------- --------- --------- --------- ---------
Income before provision for income taxes.............. 9,343 13,167 16,103 23,155 32,074
Provision for income taxes(c)......................... 3,477 5,163 6,509 9,453 13,124
--------- --------- --------- --------- ---------
Net income(c)......................................... $ 5,866 $ 8,004 $ 9,594 $ 13,702 $ 18,950
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share(c):
Basic............................................... $ 0.47 $ 0.64 $ 0.77 $ 0.85 $ 1.02
Diluted............................................. $ 0.47 $ 0.64 $ 0.77 $ 0.78 $ 1.01
Weighted average number of common shares outstanding:
Basic............................................... 12,411 12,411 12,411 16,103 18,542
Diluted............................................. 12,411 12,411 12,411 17,599(d) 18,756
COMPANY OPERATING DATA:
Sales growth:
99 CENTS Only Stores................................ 6.2% 8.7% 10.2% 17.3% 29.9%
Bargain Wholesale................................... (17.8) 4.9 60.4 33.4 10.8
Total Company sales................................. 1.7 7.1 16.0 20.2 25.7
Gross margin.......................................... 33.7 33.2 33.2 34.2 36.4
Operating margin...................................... 7.6 8.4 11.0 12.6 13.5
Net income margin(c).................................. 4.8 6.1 6.3 7.5 8.2
RETAIL OPERATING DATA(E):
Number of stores end of period...................... 31 34 36 43 53
Change in comparable stores net sales(f)............ (3.5)% (1.4)% (0.2)% 2.8% 1.5%
Average net sales per store open the full year...... $3,349,000 $3,267,000 $3,467,000 $3,667,000 $3,750,000
Average net sales per estimated saleable square
foot(g)........................................... $ 388 $ 396 $ 397 $ 389 $ 354
Estimated saleable square footage at year end....... 269,000 293,000 332,100 455,200 631,500
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Working capital.............................................................................. $ 67,184
Total assets................................................................................. 119,443
Long-term debt............................................................................... --
Capital lease obligation, including current portion.......................................... 8,709
Total shareholders' equity................................................................... 96,308
</TABLE>
- ------------------------------
(a) The Company operated other stores during the periods presented under
different trade names pending conversion to 99 CENTS Only Stores format or
their eventual closing. Only one such store was operated by the Company in
1995 and that store was closed in May 1995.
(b) In 1993, the Company provided a reserve of $3.1 million for estimated
litigation and interest costs. As a result of a settlement of this
litigation in 1995, $200,000 was charged to the reserve and the remaining
$2.9 million was included in income in 1994.
(c) Prior to May 1, 1996 the Company was treated as an S corporation for federal
and state income tax purposes. The presentation for 1993-1996 reflects a pro
forma provision for income taxes as if the Company had always been a C
corporation, at an assumed effective tax rate of 41.0%, plus the effect of
deferred taxes and tax credits.
(d) Diluted weighted average common equivalent shares in 1996 include 1,362,000
shares to fund certain notes issued and dividends payable declared to then
existing shareholders, in connection with the termination of the Company's
status as an S corporation.
(e) Includes retail operating data solely for the Company's 99 CENTS Only
Stores.
(f) For the years 1993-1996, change in comparable stores net sales compares net
sales for stores open the entire two periods compared. Commencing in 1997,
change in comparable stores net sales compares net sales for all stores open
at least 15 months.
(g) Computed based upon estimated total saleable square footage of stores open
for the entire period.
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING 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 1995, 1996 and 1997, the Company opened four, eight and ten
stores, respectively (two, seven and ten stores, respectively, net of relocated
stores). From January 1, 1998 through March 31, 1998, the Company opened two
stores (including one relocation) and expects to open at least eleven additional
stores (including one relocation) in Southern California during the remainder of
the year, including its first store in San Diego County. The Company plans to
open new stores over the next several years at a rate of approximately 20% per
annum. 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.
There can be no assurance that the opening of new stores will improve the
Company's results of operations. A variety of factors, including store location,
store size, rental terms, the level of store sales and the level of initial
advertising 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--Growth
Strategy."
PENDING ACQUISITIONS
The Company acquired 48% of the capital stock of Universal in November 1997.
In February 1998, the Company announced a proposal to acquire, by an exchange
offer, all of the remaining issued and outstanding shares of Universal not
already held by the Company (the "Universal Exchange Offer") and to acquire all
of the issued and outstanding shares of Odd's-N-End's (the "Odd's-N-End's
Merger"). In March 1998, the Company and Odd's-N-End's (which is held
approximately 41% by Universal) entered into a definitive merger agreement. The
Company is seeking to acquire Universal and Odd's-N-End's with the expectation
that the transactions will enable the Company to provide a retail outlet for
merchandise it acquires at prices other than the Company's single price point,
increase the Company's distribution
9
<PAGE>
capabilities, diversify its geographic presence and to further capitalize on
greater volume discounts in merchandise purchases.
Achieving these anticipated benefits depends in part on the efficient,
effective and timely integration of the operations of Universal and
Odd's-N-End's with those of the Company. The combination of these businesses
requires, among other things, integration of the companies' management staffs,
coordination of the companies' sales and marketing efforts, integration and
coordination of the companies' purchasing departments and the identification and
elimination of redundant overhead and under-performing retail stores. Further,
the Company believes that the continued employment of Richard Ennen, President
and Chief Executive Officer of Universal and Odd's-N-End's, is integral to the
successful integration and operation of Universal and Odd's-N-End's following
consummation of the acquisitions. Both the Universal and Odd's-N-End's
acquisitions will require the Company to offer discount general merchandise at
multiple price points, a new strategy for the Company's retail business.
Further, the acquisitions of Universal and Odd's-N-End's expand the Company's
operations into geographic locations outside of Southern California. There can
be no assurance that the Company will be successful in these markets.
Full integration of these businesses will require considerable effort on the
part of the Company's management. During the integration period, it is
anticipated that the Company's accounting staff, operations personnel and other
staff will be required to dedicate considerable time toward integrating the
financial and information systems, management staffs and organizational cultures
of the three geographically separated organizations. There can be no assurance
that the Company will not experience problems associated with the integration or
that the integration will proceed efficiently or successfully. Furthermore, even
if the operations of the three companies are ultimately successfully integrated,
it is anticipated that the integration will be accomplished over time and, in
the interim, the combination may have an adverse effect on the Company's
business and results of operations.
The Company's acquisition of 48% of the Universal common stock in November
1997, while unanimously approved by Universal's full board of directors
(including all disinterested directors), was not approved by a separate
committee of Universal's board of directors consisting solely of disinterested
directors. Accordingly, under Minnesota law, upon completion of the Universal
Exchange Offer, the Company may not be able to acquire, for a period of four
years, by way of merger or other form of business combination, any shares of
Universal common stock that are not tendered to the Company in the Universal
Exchange Offer. See "Pending Acquisitions."
CONCENTRATION OF OPERATIONS
All of the Company's 99 CENTS Only Stores are currently located in Southern
California. In addition, the Company's current retail expansion plans anticipate
that new stores will be primarily located in this geographic region.
Consequently, the Company's results of operations and financial condition are
dependent upon general trends in this regional economy. Although the recession
in the Southern California economy in the early 1990s had no material effect on
the Company's results of operations, 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 has continued from 1995 through 1997, 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. These
events pose physical risks to the Company's properties and 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--Properties,"
"--Warehousing and Distribution."
Following the acquisitions of Universal and Odd's-N-End's, the Company will
have stores clustered in geographic regions in the upper Midwest, upstate New
York and Texas. The upper Midwest, upstate New
10
<PAGE>
York and Texas regions have economic characteristics unique to their particular
locale. In addition, unlike Southern California, extreme winter weather
conditions in the Midwest and New York may cause decreases in retail spending
during certain times of the year. See "Pending Acquisitions."
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 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 current expansion plans in Southern California, 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 Company's stores. In addition, because the Company's receiving
and distribution operations are concentrated at a 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. Such a
disaster could be particularly damaging because a significant portion of the
Company's 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."
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 and
deep-discount chains, mass merchandisers, food markets, drug chains, club
stores, other retailers and 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. Further, although
the Company believes it has longstanding relationships with its suppliers and is
competitively positioned to continue to seek new sources, there can be no
assurance that the Company will be successful in maintaining an adequate supply
of quality merchandise at attractive prices.
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 quickly sell items in
its inventory that are subject to such restrictions. See "Business--Purchasing."
LARGE VOLUME PURCHASES; INVENTORY CONCENTRATION
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, 1995, 1996 and 1997, the
Company had net inventory recorded of $34.3 million, $36.9 million and $43.1
million, respectively.
11
<PAGE>
The Company periodically reviews 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."
COMPETITION
The Company faces competition in both the acquisition of inventory and sale
of merchandise from other wholesalers, discount and deep-discount stores, single
price point merchandisers, mass merchandisers, food markets, drug chains, club
stores and other retailers. Industry competitors also include a large number of
privately held companies and individuals. In some instances these competitors
are also customers of the Company's Bargain Wholesale division. There is
increasing competition with other wholesalers and retailers, including other
deep-discount retailers, for the purchase of quality close-out and other
special-situation merchandise. Some of these competitors have substantially
greater financial resources and buying power than the Company. The Company's
ability to compete will depend on many factors including the success of its
purchase and resale of such merchandise at lower prices than the competition.
The Company may face intense competition in the future from new entrants in the
deep-discount retail industry, among others, that could have an adverse effect
on the Company's business and results of operations. See
"Business--Competition."
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 or, in
particular, that health care costs or the Company's wages will remain at current
levels. Currently, none of the Company's employees is party to a collective
bargaining agreement. Further, the minimum wage in California was increased in
March 1997 from $4.75 to $5.00 per hour, in September 1997 to $5.15 per hour and
again in March 1998 to $5.75 per hour. Further, legislation has been introduced
in California to increase the minimum wage to $6.75 per hour as of January 1,
1999. The federal minimum wage increased in September 1997 to $5.15 per hour.
Further, a bill has been proposed in Congress to increase the minimum wage to
$6.15 per hour beginning September 1, 1999, and $6.65 per hour beginning
September 1, 2000, with adjustments on such date and each September 1 thereafter
to reflect increases in the Consumer Price Index for All Urban Consumers during
the most recent 12-month period for which data are available. 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.
INTERNATIONAL SALES AND PURCHASES
Although international sales historically have not been material to the
Company's consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales. 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
12
<PAGE>
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.
AFFILIATE TRANSACTIONS
As of March 31, 1998, the Company leased 13 of its 54 stores and a parking
lot associated with one of these stores from certain members of the Gold family
and their affiliates (the "Gold Family"). Annual rental expense for the
facilities owned by the Gold Family was approximately $1.6 million, $1.8 million
and $2.0 million in 1995, 1996 and 1997, respectively. The Company believes that
such leases are no less favorable to the Company than those an unrelated party
would have provided after arm's-length negotiations. It is the Company's current
policy not to enter into real estate transactions with affiliated parties,
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. Moreover, all real estate transactions between the Company and
affiliated parties requires 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 Gold Family will be able to agree on renewal terms for the properties
currently leased by the Company from the Gold Family, 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.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on
David Gold, the Company's Chief Executive Officer. The Company is also dependent
on the continued service of its executive officers and other key management,
particularly Helen Pipkin, its Senior Vice President of Wholesale Operations.
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
occurred during the fourth quarter, which includes the Christmas and Halloween
selling seasons. During 1995, 1996 and 1997, approximately 29.3%, 28.8% and
29.2%, respectively, of the Company's net sales and approximately 33.0%, 32.6%
and 32.3%, respectively, of its operating income were generated during the
fourth quarter. Further, the operations of Universal and Odd's-N-End's are more
dependent upon results in the fourth quarter and even without the acquisition of
Universal, the Company's investment in Universal is expected to further increase
the impact of fourth quarter sales on the Company's results of operations.
Accordingly, any adverse trend in net sales for the fourth quarter 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 number and timing of sales
contributed to new stores, the level of advertising and pre-
13
<PAGE>
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.
MANAGEMENT INFORMATION SYSTEMS; YEAR 2000 COMPLIANCE
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 on a
Hewlett-Packard RISC-based computer. The Company believes that its accounting
and management information system and inventory control system adequately
provide for its current needs. The Company intends to continue to update and
enhance its systems in order to improve capabilities and provide for planned
growth. If the Company should experience faster than anticipated growth, the
Company may be required to install a new management information or inventory
control system or undergo a significant modification of its current systems to
accommodate a larger business.
The Company has completed an assessment and determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. Although the year 2000 project is estimated to be completed in
mid-1999 and is not anticipated to have a material effect on results of
operations, there can be no assurance that the Company will not encounter
unanticipated problems in modifying its systems or that there will not be delays
in completing the project. Any difficulties in modifying its systems could
impact the Company's ability to communicate with and effectively make purchases
from its suppliers.
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 but three of its stores, as well as its warehouse
and distribution facility (where its executive offices are located). The Company
currently intends to exercise an option to purchase the warehouse and
distribution facility in December 2000, the end of the lease term. 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.
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.
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 the
Common Stock offered hereby, the Company will have 19,336,111 shares of Common
Stock outstanding (19,448,611 shares if the Underwriters' over-allotment options
are exercised in full). Immediately following the Offerings, the 3,500,000
shares offered hereby (4,025,000 if the Underwriters' over-allotment options are
exercised in full), will be eligible
14
<PAGE>
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 90 days after the
date of this Prospectus, or earlier if Merrill Lynch & Co. consents,
approximately 9,200,621 (8,788,121 if the Underwriters' over-allotment options
are exercised in full) additional shares will be eligible for immediate sale in
the public market, subject to compliance with Rule 144 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"). Further, upon consummation of the Universal Exchange Offer,
approximately an additional 305,800 shares will be eligible for immediate sale
in the public market without restriction. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECT; CONTROL BY EXISTING SHAREHOLDERS
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. In addition, upon consummation of the Offerings,
David Gold, the Company's Chairman and Chief Executive Officer, members of his
immediate family and certain of their respective affiliates will beneficially
own 9,131,246 (8,718,746 if the Underwriters' over-allotment options are
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 and Selling Shareholders."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has risen substantially since Company's
initial public offering on May 23, 1996. Trading prices for the Common Stock
could be subject to significant fluctuations due to many factors, including the
depth of the market for the Common Stock, investor perception of the Company,
fluctuations in the Company's operating results and changes in conditions or
trends in the Company's industry or in the industries of any of the Company's
significant clients, changes in any securities analysts' estimates of the
Company's future performance or general market conditions. In addition, future
sales of substantial amounts of Common Stock by existing shareholders could also
adversely affect the prevailing market price of the Common Stock. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
INFLATION
The Company's ability to provide quality merchandise at the 99 CENTS price
point is subject to certain economic factors which are beyond the Company's
control, including inflation. Inflation could have a material adverse effect on
the Company's business and results of operations, especially given the
constraints on the Company to pass on any incremental costs due to price
increases or other factors. The Company believes that it will be able to respond
to ordinary price increases resulting from inflationary pressures by adjusting
the number of items sold at the single price point (e.g., two items for 99 CENTS
instead of three items for 99 CENTS) and by changing its selection of
merchandise. Nevertheless, a sustained trend of significantly increased
inflationary pressure could require the Company to abandon its single price
point of 99 CENTS per item, which could have a material adverse effect on the
Company's business and results of operations.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common Stock
offered hereby, after deducting underwriting discounts and estimated offering
expenses payable by the Company, are approximately $ million
($ million if the Underwriters exercise their over-allotment option in
full), based on a public offering price of $ per share. The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Shareholders. The Selling Shareholders will pay their pro rata share of
expenses.
The net proceeds to be received by the Company in connection with the
Offerings will be used to retire existing debt and pay overdue accounts payable
of Universal of approximately $17 million following the closing of the Universal
Exchange Offer and Odd's-N-End's Merger, and the balance of which will be used
to expand the Company's retail operations, to fund working capital needs and for
general corporate purposes. As of March 26, 1998, $12.8 million (including
accrued interest) was outstanding under Universal's credit facility (which
amount was incurred to support store operations). The maturity date of the
credit facility is June 30, 1998 and the current interest rate on the
outstanding amount thereunder is 2% over the prime rate (which as of December
31, 1997 was 8.5%). As of March 26, 1998, Universal had overdue accounts payable
of approximately $4.1 million.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the New York Stock Exchange under the symbol
"NDN." The following table sets forth, for the calendar periods indicated, the
high and low closing prices per share of the Common Stock as reported by the New
York Stock Exchange. The Common Stock was not publicly traded prior to the
Company's initial public offering on May 23, 1996. All stock prices have been
restated to reflect a five-for-four stock split effected in the form of a stock
dividend which was paid on December 1, 1997.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
<S> <C> <C>
HIGH LOW
--------- ---------
1996:
Second Quarter (from May 23, 1996)................................................. $ 12.70 $ 10.91
Third Quarter...................................................................... 12.20 10.50
Fourth Quarter..................................................................... 13.91 10.70
1997:
First Quarter...................................................................... $ 16.09 $ 12.80
Second Quarter..................................................................... 24.09 15.50
Third Quarter...................................................................... 27.59 21.60
Fourth Quarter..................................................................... 30.56 25.60
1998:
First Quarter (through March 26, 1998)............................................. $ 39.50 $ 27.00
</TABLE>
The closing price as reported on March 26, 1998 on the New York Stock
Exchange is set forth on the cover page of this Prospectus. As of March 26,
1998, the Company had approximately 3,100 holders of record of the Common Stock.
The Company has not paid any cash dividends with respect to the Common
Stock. The Company presently intends to retain future earnings to finance its
development and expansion and therefore does not anticipate the payment of any
cash dividends in the foreseeable future. Payment of future dividends, if any,
will depend upon future earnings and capital requirements of the Company and
other factors which the Board of Directors considers appropriate.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1997, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization, giving effect
to the acquisition of Universal, and (iii) pro forma, as adjusted to give effect
to the acquisition of Universal and the Offerings and the application of the
estimated net proceeds therefrom (assuming the retirement of debt and the
balance added to working capital).
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA(B) (B)(C)
---------- ------------- -----------
(AMOUNTS IN THOUSANDS)
Cash and cash equivalents and short-term investments.............. $ 33,466 $ 33,689 $ 43,955
---------- ------------- -----------
---------- ------------- -----------
Revolving line of credit.......................................... $ -- $ 9,270 $ --
Long-term debt, including current portion......................... -- 2,128 --
Capitalized lease obligation, including current portion........... 8,709 8,709 8,709
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;
18,578,759 shares issued and outstanding; 18,884,559 shares
issued and outstanding on a pro forma basis; and 19,634,559
shares issued and outstanding pro forma, as adjusted(a)....... 66,207 77,332 103,225
Retained earnings................................................. 30,101 30,101 30,101
---------- ------------- -----------
Total shareholders' equity........................................ 96,308 107,433 133,326
---------- ------------- -----------
Total capitalization.......................................... $ 105,017 $ 127,540 $ 142,035
---------- ------------- -----------
---------- ------------- -----------
</TABLE>
- ------------------------------
(a) The Company has granted options to purchase 1,236,800 shares of Common Stock
under the 1996 Stock Option Plan (of which 57,565 shares have been
exercised), and expects to issue additional options to purchase 13,200
shares of Common Stock.
(b) Reflects the issuance of approximately 305,800 shares at $36 3/8 per share
to acquire 52% of Universal not currently owned by the Company and the
payment of $830,000 in cash to acquire 59% of Odd's-N-End's not owned by
Universal.
(c) Reflects the issuance of 750,000 of shares of the Company's stock in the
offering at $36 3/8 per share, the price per share set forth on the cover of
this Prospectus, net of offering costs, and the payoff of all existing debt
and accrued interest of Universal and approximately $4.1 million of overdue
accounts payable of Universal.
17
<PAGE>
PENDING ACQUISITIONS
In November 1997, the Company acquired approximately 48% of the common stock
of Universal for $4 million in cash and merchandise. Universal owns
approximately 41% of the outstanding common stock of its consolidated
subsidiary, Odd's-N-End's. Together, Universal and Odd's-N-End's own and operate
44 Only Deals stores in Minnesota and the surrounding upper Midwest region, 22
Odd's-N-End's stores in upstate New York and eight Only Deals stores in Texas.
These stores are deep discount retail stores offering primarily close-out
merchandise featuring a broad range of general household items at multiple price
points. Universal sells about one-half of the items it offers for $1.00 or less.
In 1997, Universal had consolidated net sales, operating loss and net loss from
continuing operations of $68.7 million, $6.0 million and $7.4 million,
respectively.
In February 1998, the Company announced its intention to acquire the balance
of the Universal and Odd's-N-End's shares. The Company intends to acquire the
Universal shares pursuant to an exchange offer in which it will offer to
exchange one share of the Company's Common Stock for each 16 outstanding shares
of Universal common stock for an aggregate of approximately 305,800 shares of
Company Common Stock. The Company intends to acquire the balance of the
Odd's-N-End's shares in a merger for an aggregate consideration of approximately
$830,000 cash. Universal currently has a note receivable due from Odd's-N-End's
of approximately $8.7 million. Following the transactions, the Company intends
to retire approximately $12.8 million of existing debt and pay $4.1 million of
overdue accounts payable of Universal. See "Use of Proceeds." The Company
intends to file with the Securities and Exchange Commission definitive tender
offer and proxy documents necessary to consummate the Universal Exchange Offer
and Odd's-N-End's Merger in early April 1998. The Universal Exchange Offer and
Odd's-N-End's Merger are subject to the approval by the stockholders of
Universal and Odd's-N-End's and other customary closing conditions. Assuming
satisfaction of all conditions, the Universal Exchange Offer and Odd's-N-End's
Merger are expected to be consummated at the end of the second quarter of 1998.
The Company's investment in Universal in November 1997 was motivated by an
opportunity to apply the Company's core competencies to two under-performing
retail chains which the Company believes have significant upside potential.
Universal's strengths include its many attractive store locations, strong trade
name identity and inventory of first-quality, close-out merchandise. In
addition, Universal has built a strong management team led by its Chief
Executive Officer, Richard Ennen, who was hired in September 1996 as Vice
President of Merchandising and assumed his current position in February 1998,
and a solid corporate infrastructure and operating systems. The Company believes
Universal's historical performance has been impaired by a lack of capital, which
has limited its access to merchandise and its ability to purchase merchandise at
attractive prices, a failure to focus attention on store merchandising and
layout to create an attractive store environment and a failure to identify and
take advantage of cost saving opportunities. In addition, Universal's historical
performance has been adversely impacted by a wholesale business and inventory
appraisal and consulting service which were discontinued in 1997.
Since the Company acquired its 48% interest in Universal in November 1997,
Universal has appointed Richard Ennen its new Chief Executive Officer, gained
greater access to name-brand, close-out and regularly available goods,
implemented more savvy purchasing procedures, and developed and begun to
implement a new merchandising program that places greater emphasis on
consumables and focuses on attractive, convenient store layouts. Further,
Universal has determined to close two unprofitable stores and has completed the
consolidation of its three warehouse and distribution facilities into a single
facility. In addition, Universal has identified several areas for cost savings,
including freight, supplies and advertising. Universal introduced its new
merchandising program into one store in late January 1998 with positive initial
results and has expanded its reach to include two additional stores in February
and March 1998. The new merchandising program is expected to be implemented in
all stores by the end of the second quarter of 1998. The full effect of the
measures discussed above are not expected to be reflected in Universal's results
of operations until the third and fourth quarters of 1998. The Company believes
that its strong reputation among suppliers and the depth of its operating
experience in the deep-discount industry has contributed to these changes. The
Company and Universal continue to review Universal's operations to
18
<PAGE>
identify other opportunities for cost savings and improvements to operations. In
addition, the Company and Universal are reviewing less profitable stores to
determine whether any should be relocated or closed.
In light of Universal's on-going capital requirements, insights gained by
the Company's management into Universal's operations and the opportunities the
Company's management believes exist for operating synergies, the Company has
determined to acquire the balance of the Universal and Odd's-N-End's shares.
Universal's Only Deals and Odd's-N-End's stores will provide the Company a
retail channel for merchandise at prices other than the Company's single price
point and will enable the Company to increase the volume of merchandise sold by
it. The Company believes that this greater distribution capability will provide
the Company an opportunity to strengthen its relationship with its suppliers,
increase the Company's exposure to opportunistic buying opportunities, allow the
Company to capture a wider range of merchandise and enable the Company to take
greater advantage of volume discounts. Further, the acquisitions allow the
Company to diversify its geographic presence and provide the Company valuable
experience in other merchandising formats. This geographic presence could serve
as a basis for launching the Company's 99 CENTS Only Stores retail format into
these regions in future periods. The Company believes further opportunities
exist for improving store level economics. In addition, it is anticipated that
the acquisition will provide the combined businesses with opportunities to
realize the efficiencies and synergies available by operating on a cooperative
basis which include economies of scale in purchasing, freight, retail expenses,
insurance, marketing, advertising, human resources and administration. It is
estimated that, had the companies been combined in 1997, the cost savings during
the year would have approximated $5.0 million. However there can be no
assurances that all of these savings could or would be realized. The Company
expects the acquisition of Universal to be mildly accretive to earnings in 1998.
Universal is expected to report a loss in the first half of 1998 and to report a
small profit for the full year. There can be no assurances that such results
will be achieved.
The pro forma financial statements set forth below reflect the operations of
Universal under prior management and may not necessarily reflect the Company's
future results of operations. See "Risk Factors--Pending Acquisitions."
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following information sets forth the unaudited pro forma condensed
combined financial information of the Company for the year ended December 31,
1997. The Unaudited Pro Forma Condensed Combined Statements of Operations for
the year ended December 31, 1997 gives effect to the acquisitions of Universal
and Odd's-N-End's, which is included in Universal's historical financial
statements, as if they had occurred on January 1, 1997. The Unaudited Pro Forma
Condensed Combined Balance Sheet as of December 31, 1997 gives effect to the
acquisitions as if they had occurred on December 31, 1997.
The historical balances represent the financial position and results of
operations for each company and were derived from the respective financial
statements filed with the Securities and Exchange Commission for the indicated
period. The historical results of Universal are for continuing results of
operations and exclude losses on discontinued operations of approximately $4.5
million. The acquisitions will be accounted for as purchase transactions. The
estimated total purchase price plus transaction costs will be allocated to the
fair value of the assets and liabilities acquired. The excess of the purchase
price over the fair value of net assets acquired will be allocated to goodwill
and as such amortized on a straight-line basis over a 30-year period. At
December 31, 1997, the preliminary amount allocated to goodwill is estimated to
be $7.4 million (resulting from both the Company's initial purchase of 48% of
Universal in November 1997 and the Universal Exchange Offer) but will vary
depending on the actual closing price of 99 CENTS Only Stores' Common Stock on
the effective date of closing and in relation to additional gains or losses
recorded by Universal in the intervening period. Due to the seasonality of
Universal's business, it is expected that the goodwill to be recorded at the
time of closing will be of greater magnitude than that reflected below. To the
extent that the market price of 99 CENTS Only Stores' Common Stock on the
effective date of closing is different than $36 3/8 per share, the per share
price set forth on the front cover of the Prospectus, the amount of the purchase
price and the corresponding amount charged to goodwill would
19
<PAGE>
change. Pro forma adjustments for Universal and Odd's-N-End's include
elimination of the accounts of Odd's-N-End's which have been included in the
Universal financial statements.
The pro forma financial information presented does not purport to be
indicative of the financial position or operating results which would have been
achieved had the transactions described above taken place at the dates indicated
and are not necessarily indicative of the Company's financial position or
results of operations for any future date or period.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
HISTORICAL
------------------------ PRO FORMA
99 CENTS ------------------------
ONLY STORES UNIVERSAL ADJUSTMENT COMBINED
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales:
Retail........................................................... $ 186,024 $ 68,705 $ -- $ 254,729
Wholesale........................................................ 44,831 -- -- 44,831
----------- ----------- ----------- -----------
Total.......................................................... 230,855 68,705 -- 299,560
Cost of sales...................................................... 146,797 39,229 -- 186,026
----------- ----------- ----------- -----------
Gross profit....................................................... 84,058 29,476 113,534
Selling, general and administrative expenses....................... 52,839 35,483 245(a) 88,567
----------- ----------- ----------- -----------
Operating income (loss)(e)....................................... 31,219 (6,007) (245) 24,967
----------- ----------- ----------- -----------
Other (income) expense:
Interest income.................................................. (1,613) (27) 693(b) (947)
Interest expense................................................. 758 1,399 (1,399)(b) 758
----------- ----------- ----------- -----------
(855) 1,372 (706) (189)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes(e)............... 32,074 (7,379) 461 25,156
Provision for income taxes:........................................ 13,124 -- (2,729)(c) 10,395
----------- ----------- ----------- -----------
Net income (loss)(e)............................................... $ 18,950 $ (7,379) $ 3,190 $ 14,761
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share:
Basic............................................................ $ 1.02 $ 0.78
Diluted.......................................................... 1.01 0.77
Weighted average number of common shares outstanding:
Basic............................................................ 18,542 306(d) 18,848
Diluted.......................................................... 18,756 306(d) 19,062
</TABLE>
- ------------------------------
(a) Represents the amortization of estimated goodwill over a 30-year period
based on a December 31, 1997 acquisition date.
(b) Represents the elimination of Universal's interest expense based on the
Company paying off all of Universal's debt with excess cash and the
reduction in interest income of the Company as a result of using cash that
would otherwise be invested in marketable securities.
(c) Represents the net tax effect of the pro forma adjustments and the loss of
Universal.
(d) Represents the estimated increase in the number of shares to acquire the
remaining 52% ownership of Universal.
(e) The accompanying Pro Forma Condensed Combined Statements of Operations do
not give effect to certain other efficiencies and synergies available by
operating on a cooperative basis which include economies of scale in
purchasing, freight, retail expenses, insurance, marketing, advertising,
human resources and administration. Management estimates that, had the
companies been combined, the cost savings during the year following the
acquisition would have been approximately $5.0 million. However, there can
be no assurances that all of these savings could, or would, be realized.
20
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
HISTORICAL
------------------------ PRO FORMA
99 CENTS ------------------------
ONLY STORES UNIVERSAL ADJUSTMENT COMBINED
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................................. $ 882 $ 1,053 (830)(a) $ 1,105
Short-term investments........................................... 32,584 -- -- 32,584
Accounts receivable, net......................................... 1,510 312 -- 1,822
Inventory........................................................ 43,114 18,901 (292)(b) 61,723
Other current assets............................................. 673 2,105 -- 2,778
----------- ----------- ----------- -----------
Total current assets........................................... 78,763 22,371 (1,122) 100,012
Property and equipment, net...................................... 29,441 8,880 -- 38,321
Deferred taxes................................................... 5,947 -- -- 5,947
Investment in Universal International, Inc....................... 3,708 -- (3,708)(c) --
Goodwill......................................................... -- -- 11,125(c) 7,354
830(c)
292(c)
(4,893)(c)
Other assets..................................................... 1,584 137 -- 1,721
----------- ----------- ----------- -----------
$ 119,443 $ 31,388 $ 2,524 $ 153,355
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit......................................... $ -- $ 9,270 $ -- $ 9,270
Current portion of long term debt................................ -- 634 -- 634
Current portion of capital lease obligation...................... 704 -- -- 704
Accounts payable................................................. 5,534 7,014 -- 12,548
Accrued expenses................................................. 5,341 4,348 9,689
----------- ----------- ----------- -----------
Total current liabilities...................................... 11,579 21,266 -- 32,845
Long Term Liabilities:
Long term debt, net.............................................. -- 1,494 -- 1,494
Capital lease obligation......................................... 8,005 -- -- 8,005
Interest on capital lease obligation............................. 2,075 -- -- 2,075
Deferred rent.................................................... 1,476 -- -- 1,476
Deferred taxes................................................... -- 27 -- 27
----------- ----------- ----------- -----------
Total long term liabilities.................................... 11,556 1,521 -- 13,077
Shareholders' Equity:
Common Stock, 40,000,000 authorized, 18,578,759 outstanding...... 66,207 470 10,655(a) 77,332
Additional paid-in-capital....................................... -- 26,692 (26,692)(d) --
Retained Earnings................................................ 30,101 (18,561) 18,561(d) 30,101
----------- ----------- ----------- -----------
Total shareholders equity...................................... 96,308 8,601 2,524 107,433
----------- ----------- ----------- -----------
$ 119,443 $ 31,388 $ 2,524 $ 153,355
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(a) Represents the issuance of approximately 305,800 shares of the Company's
Common Stock for the 52% of Universal not owned by the Company and payment
of $830,000 for the remaining 2.8 million Odd's-N-End's shares.
Odd's-N-End's is included in the consolidated historical balances of
Universal.
(b) Represents the required reduction in inventory due to the elimination of
intercompany profit recorded in inventory shipped to Universal by the
Company as part of the initial acquisition of 48% of Universal stock.
(c) To record goodwill associated with the excess of the aggregate purchase
price for 100% of Universal and Odd's-N-End's (including the original $3.7
million investment for 48% of Universal, the estimated purchase price of $12
million of Company Common Stock for the remaining 52% of Universal common
stock and the payment of $830,000 for the remaining 2.8 million shares of
Odd's-N-End's) over the net asset value of Universal (net of the required
adjustment to eliminate intercompany profit in inventory as described in (b)
above) as if the transaction had occurred at December 31, 1997 at the Common
Stock price as set forth on the cover of this Prospectus.
(d) Represents the elimination of additional paid in capital and related deficit
of Universal and the original investment of Universal.
21
<PAGE>
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected financial and operating data of the
Company for the periods indicated. The following selected statement of
operations data for each of the three years ended December 31, 1995, 1996, and
1997, and the balance sheet data as of December 31, 1996 and 1997 are derived
from the financial statements and the notes thereto included elsewhere herein
audited by Arthur Andersen LLP, independent public accountants, as set forth in
their report also included elsewhere herein. The selected statements of
operations data for the years ended December 31, 1993 and 1994, and the balance
sheet data as of December 31, 1993, 1994 and 1995 are derived from financial
statements audited by Arthur Andersen LLP not included herein. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales:
99 CENTS Only Stores................................ $ 101,828 $ 110,724 $ 121,998 $ 143,163 $ 186,024
Other retail sales(a)............................... 3,093 2,097 492 -- --
Bargain Wholesale................................... 18,028 18,916 30,337 40,480 44,831
--------- --------- --------- --------- ---------
Total........................................... 122,949 131,737 152,827 183,643 230,855
Cost of sales......................................... 81,480 88,045 102,160 120,922 146,797
--------- --------- --------- --------- ---------
Gross profit.......................................... 41,469 43,692 50,667 62,721 84,058
Selling, general and administrative expenses:
Operating expenses.................................. 31,053 31,319 32,169 37,683 49,850
Depreciation and amortization....................... 1,028 1,342 1,640 2,009 2,989
--------- --------- --------- --------- ---------
Total operating expenses........................ 32,081 32,661 33,809 39,692 52,839
--------- --------- --------- --------- ---------
Operating income...................................... 9,388 11,031 16,858 23,029 31,219
Special litigation provision reversal(b).............. -- (2,900) -- -- --
Interest (income) expense, net........................ 45 764 755 (126) (855)
--------- --------- --------- --------- ---------
Income before provision for income taxes.............. 9,343 13,167 16,103 23,155 32,074
Provision for income taxes(c):
Pro forma........................................... 3,477 5,163 6,509 9,453
--------- --------- --------- ---------
Historical.......................................... 280 62 156 2,418 13,124
--------- --------- --------- --------- ---------
Net income(c):
Pro forma........................................... $ 5,866 $ 8,004 $ 9,594 $ 13,702
--------- --------- --------- ---------
--------- --------- --------- ---------
Historical.......................................... $ 9,063 $ 13,105 $ 15,947 $ 20,737 $ 18,950
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share(c)(h):
Pro forma--Basic.................................... $ 0.47 $ 0.64 $ 0.77 $ 0.85
Pro forma--Diluted.................................. 0.47 0.64 0.77 0.78
Historical--Basic................................... 0.73 1.06 1.28 1.29 $ 1.02
Historical--Diluted................................. 0.73 1.06 1.28 1.18 1.01
Weighted average number of common shares outstanding:
Pro forma--Basic.................................... 12,411 12,411 12,411 16,103
Pro forma--Diluted.................................. 12,411 12,411 12,411 17,599(d)
Historical--Basic................................... 12,411 12,411 12,411 16,103 18,542
Historical--Diluted................................. 12,411 12,411 12,411 17,599(d) 18,756
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
22
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
COMPANY OPERATING DATA:
Sales Growth
99 CENTS Only Stores................................ 6.2% 8.7% 10.2% 17.3% 29.9%
Bargain Wholesale................................... (17.8) 4.9 60.4 33.4 10.8
Total Company sales................................. 1.7 7.1 16.0 20.2 25.7
Gross margin.......................................... 33.7 33.2 33.2 34.2 36.4
Operating margin...................................... 7.6 8.4 11.0 12.6 13.5
Net income margin:
Pro forma........................................... 4.8 6.1 6.3 7.5 --
Historical.......................................... 7.4 9.9 10.4 11.3 8.2
RETAIL OPERATING DATA(E):
Number of stores end of period........................ 31 34 36 43 53
Change in comparable stores net sales(f).............. (3.5)% (1.4)% (0.2)% 2.8% 1.5%
Average net sales per store open the full year........ $3,349,000 $3,267,000 $3,467,000 $3,667,000 $3,750,000
Average net sales per estimated saleable square
foot(g)............................................. $ 388 $ 396 $ 397 $ 389 $ 354
Estimated saleable square footage at year end......... 269,000 293,000 332,100 455,200 631,500
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital..................................... $ 19,242 $ 24,713 $ 28,690 $ 58,822 $ 67,184
Total assets........................................ 46,960 51,419 57,598 98,997 119,443
Long-term debt...................................... -- -- -- -- --
Capital lease obligation, including current
portion........................................... 11,080 10,548 9,977 9,365 8,709
Total shareholders' equity.......................... 23,307 30,811 35,558 76,505 96,308
</TABLE>
- ------------------------------
(a) The Company operated other stores during the periods presented under
different trade names pending conversion to 99 CENTS Only Stores format or
their eventual closing. Only one such store was operated by the Company in
1995 and that store was closed in May 1995.
(b) In 1993, the Company provided a reserve of $3.1 million for estimated
litigation and interest costs. As a result of a settlement of this
litigation in 1995, $200,000 was charged to the reserve and the remaining
$2.9 million was included in income in 1994.
(c) Prior to May 1, 1996 the Company was treated as an S corporation for federal
and state income tax purposes. The presentation for 1993-1996 reflects a pro
forma provision for income taxes as if the Company had always been a C
corporation, at an assumed effective tax rate of 41.0%, plus the effect of
deferred taxes and tax credits.
(d) Diluted weighted average common equivalent shares in 1996 include 1,362,000
shares to fund certain notes issued and dividends payable declared to then
existing shareholders, in connection with the termination of the Company's
status as an S corporation.
(e) Includes retail operating data solely for the Company's 99 CENTS Only
Stores.
(f) For the years 1993-1996, change in comparable stores net sales compares net
sales for stores open the entire two periods compared. Commencing in 1997,
change in comparable stores net sales compares net sales for all stores open
at least 15 months.
(g) Computed based upon estimated total saleable square footage of stores open
for the entire period.
(h) All earnings per share amounts have been restated to reflect the adoption of
SFAS No. 128, "Earnings per Share," effective December 15, 1997. For further
discussion of the change in accounting, refer to Note 4 of the Notes to the
Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONNECTION WITH
"SELECTED FINANCIAL DATA," "PENDING ACQUISITIONS--UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS" AND THE RESPECTIVE FINANCIAL STATEMENTS OF THE
COMPANY AND UNIVERSAL AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN.
GENERAL
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company has sold its merchandise on a wholesale basis through its
Bargain Wholesale division. On August 13, 1982, the Company opened its first
99 CENTS Only Stores location and as of March 31, 1998, operates a chain of 54
deep-discount 99 CENTS Only Stores. The Company's growth during the last three
years has come primarily from new store openings and growth in its Bargain
Wholesale division. The Company opened four, eight and ten stores in 1995, 1996
and 1997, respectively (two, seven and ten respectively, net of relocated
stores). The Company opened two stores (including one relocation) in the first
three months of 1998, one each in San Bernardino, California and North
Hollywood, California and plans to open an additional 11 stores (including one
relocation) during the remainder of the year. Of the additional stores planned
for 1998, the Company has secured sites for five additional store locations.
Bargain Wholesale's growth over the three years ended December 31, 1997 was
primarily attributable to an increased focus on large domestic and international
accounts and expansion into new geographic markets. The Company generally
realizes a lower gross profit margin on Bargain Wholesale's net sales compared
to 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 improved in 1996 and 1997, after declining
during the period from 1993 to 1995. The Company believes that this trend has
resulted in part from its expansion strategies. In the past, as part of its
strategy to expand retail operations, the Company has at times opened larger new
stores in close proximity to existing stores where the Company determined that
the trade area could support a larger facility. In some of these situations, the
Company retained its existing store so long as it continued to contribute
store-level operating income. While this strategy was designed to increase
revenues and store-level operating income, it has had a negative impact on
comparable store net sales as some customers migrated from the existing store to
the larger new store. The Company believes that this strategy has impacted its
historical comparable sales growth.
During the three years in the period from January 1, 1995 to December 31,
1997, average net sales per estimated saleable square foot (computed on 99 CENTS
Only Stores open for a full year) declined from $397 per square foot to $354 per
square foot. This trend reflects the Company's determination to target larger
locations for new store development. Existing stores average approximately
15,000 gross square feet. Since January 1, 1995, the Company has opened 24 new
stores (including two relocations in 1995 and one in 1996) that average over
19,000 gross square feet. The Company currently targets new store locations
between 15,000 and 25,000 gross feet. Although it is the Company's experience
that larger stores generally have lower average net sales per square foot than
smaller stores, larger stores generally achieve higher average annual store
revenues and operating income.
99 CENTS Only Stores has increased its net sales, operating income and net
income in each of the last five years. In 1997 it had net sales of $230.9
million, operating income of $31.2 million and net income of $19.0 million,
representing a 25.7%, 35.6% and 38.3% increase over 1996, respectively. From
1993 through 1997, the Company had a CAGR in net sales, operating income and net
income of 17.1%, 35.0% and 34.1%, respectively.
24
<PAGE>
PENDING ACQUISITIONS
In November 1997, the Company acquired approximately 48% of the outstanding
Common Stock of Universal. In February 1998, the Company announced a proposal to
acquire all of the issued and to-be-issued shares of the Common Stock of
Universal and Odd's-N-End's. Together, these two companies operate 44 retail
stores in Minnesota and the surrounding upper Midwest region, eight retail
stores in Texas and 22 retail stores in upper New York State. If the
acquisitions are consummated as proposed, the Company will issue to the
shareholders of Universal approximately 305,800 shares of the Company's Common
Stock and will pay to the holders of Odd's-N-End's common stock approximately
$830,000 in cash. Universal has a note receivable due from Odd's-N-End's of
approximately $8.7 million.
Currently the Company's ownership interest in Universal is accounted for
using the equity method. The impact of the inclusion of Universal in the
Company's financial statements for the year ended December 31, 1997 was
immaterial. Upon consummation of the Universal Exchange Offer, the Company will
consolidate the results of operations of Universal with those of the Company,
and will preliminarily record approximately $7.4 million in goodwill on its
balance sheet, which will be amortized over 30 years and will result in
increased amortization expense in future periods. Universal's business is
seasonal. Historically, all of its earnings have been generated in the fourth
quarter, and it has incurred losses during the first three quarters of the
calendar year. As a result, shareholders' equity is likely to be lower and the
amount of goodwill related to the acquisition of Universal is likely to be of a
greater magnitude at the closing date compared to the pro forma amount of $7.4
million reflected in the December 31, 1997 pro forma financial statements.
A portion of the net proceeds of the Offerings will be used to pay down, as
of March 26, 1998, approximately $12.8 million of existing debt and
approximately $4.1 million of overdue accounts payable of Universal.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data, including such data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997
-------------------- -------------------- --------------------
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
99 CENTS Only Stores...................................... $ 121,998 79.8% $ 143,163 78.0% $ 186,024 80.6%
Other retail.............................................. 492 0.3 -- -- -- --
Bargain Wholesale......................................... 30,337 19.9 40,480 22.0 44,831 19.4
--------- --------- --------- --------- --------- ---------
Total................................................... 152,827 100.0 183,643 100.0 230,855 100.0
Cost of sales............................................... 102,160 66.8 120,922 65.8 146,797 63.6
--------- --------- --------- --------- --------- ---------
Gross profit.............................................. 50,667 33.2 62,721 34.2 84,058 36.4
Selling, general and administrative expenses:
Operating expenses........................................ 32,169 21.1 37,683 20.5 49,850 21.6
Depreciation and amortization............................. 1,640 1.1 2,009 1.1 2,989 1.3
--------- --------- --------- --------- --------- ---------
Total................................................... 33,809 22.2 39,692 21.6 52,839 22.9
--------- --------- --------- --------- --------- ---------
Operating income............................................ 16,858 11.0 23,029 12.6 31,219 13.5
Interest (income) expense, net.............................. 755 0.5 (126) -- (855) (0.4)
--------- --------- --------- --------- --------- ---------
Income before provision for income taxes.................... 16,103 10.5 23,155 12.6 32,074 13.9
Provision for income taxes(a):
Pro forma................................................. 6,509 4.2 9,453 5.1
--------- --------- --------- ---------
Historical................................................ 156 0.1 2,418 1.3 13,124 5.7
--------- --------- --------- --------- --------- ---------
Net income(a):
Pro forma................................................. $ 9,594 6.3 $ 13,702 7.5
--------- --------- --------- ---------
--------- --------- --------- ---------
Historical................................................ $ 15,947 10.4% $ 20,737 11.3% $ 18,950 8.2%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
25
<PAGE>
- ------------------------
(a) Reflects a pro forma provision for federal income taxes in 1995 and 1996.
Effective May 1, 1996 the Company changed in form from an S corporation to
a C corporation, a change that affected its operations and financial
condition by an increase in the level of federal and state income taxes. As
an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal income tax purposes. For
California franchise tax purposes, S corporations were taxed at 1.5% of
taxable income in 1995 and 1996. Currently, the top federal tax rate for C
corporations is 35% and the corporate tax rate in California is 8.84%. The
pro forma provision for income taxes in the accompanying selected income
statement data for the Company shows results as if the Company had always
been a C corporation and had adopted Statement of Financial Accountings
Standards No. 109 "Accounting for Income Taxes" prior to January 1, 1991.
The change in form has affected the earnings and cash flow of the Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Total net sales increased $47.2 million, or 25.7%, from $183.6
million in 1996 to $230.9 million in 1997. 99 CENTS Only Stores net sales
increased approximately $42.9 million, or 29.9%, from $143.2 million in 1996 to
$186.0 million in 1997, and Bargain Wholesale net sales increased approximately
$4.4 million, or 10.7%, from $40.5 million in 1996 to $44.8 million in 1997.
There were no other retail operations in 1997. The increase in 99 CENTS Only
Stores net sales was attributed to the effect of ten stores opened in 1997 and
the full effect of seven stores opened in 1996. Comparable stores net sales
increased 1.5%, or $2.8 million, from 1996 to 1997. The increase in Bargain
Wholesale net sales was primarily attributed to an increased focus on large
international and domestic accounts and expansion into new geographic markets.
Offsetting these positive developments was the adverse effect of the slow-down
in the Asian markets in which the Company markets its goods.
GROSS PROFIT. Gross profit, which consists of total net sales less cost of
sales, increased approximately $21.3 million, or 34.0%, from $62.7 million in
1996 to $84.1 million in 1997. The increase in gross profit was primarily due to
higher net sales. As a percentage of net sales, gross profit improved from 34.2%
in 1996 to 36.4% in 1997 reflecting favorable merchandise cost and mix factors
at its 99 CENTS Only Stores and the effect of a large percentage of net sales
derived from 99 CENTS Only Stores, which typically operate at higher gross
margins than Bargain Wholesale.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A"), which include operating expenses and depreciation and
amortization, increased $13.1 million, or 33.1%, from $39.7 million in 1996 to
$52.8 million in 1997, primarily due to increased costs associated with new
store growth and increased executive compensation expense of approximately $0.8
million. SG&A increased as a percentage of net sales from 21.6% in 1996 to 22.9%
in 1997. The increase as a percentage of net sales was primarily due to
increased payroll costs primarily resulting from state and federally mandated
increases in the minimum wage. In addition, the minimum wage in California
increased to $5.75 per hour in March 1998. Legislation has been introduced in
California to further increase the minimum wage from $5.75 to $6.75 per hour
effective January 1999.
OPERATING INCOME. Operating income increased $8.2 million, or 35.6%, from
$23.0 million in the 1996 period to $31.2 million in 1997. Operating income
increased as a percentage of net sales from 12.6% in 1996 to 13.5% in 1997 for
the reasons discussed above.
INTEREST (INCOME) EXPENSE. Interest (income) expense relates to the
interest income on the Company's marketable securities net of interest expense
on the Company's capitalized warehouse lease. The Company had no bank debt
during 1997. Interest income earned on the Company's marketable securities was
$1.6 million in 1997. At December 31, 1997, the Company held $32.6 million in
short-term investments. The Company's short-term investments are comprised
primarily of investment grade federal and municipal bonds and commercial paper,
all with short-term maturities. The Company generally holds investments until
maturity.
PROVISION FOR INCOME TAXES. The provision for income taxes in 1997 was
$13.1 million, or 5.7% of net sales, compared to the pro forma provision of $9.5
million, or 5.1% of net sales, in 1996. The effective rates
26
<PAGE>
of the provision for income taxes were 40.9% and 40.8% in 1997 and 1996,
respectively. The effective rates are less than the statutory rates in each
period due to the benefit of certain tax credits. See Note 5 of "Notes to
Financial Statements."
NET INCOME. As a result of the items discussed above, net income increased
$5.2 million, or 38.3%, from pro forma $13.7 million in 1996 to $19.0 million in
1997. Net income increased as a percentage of net sales from 7.5% in 1996 to
8.2% in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Total net sales increased $30.8 million, or 20.2%, from $152.8
million in 1995 to $183.6 million in 1996. 99 CENTS Only Stores net sales
increased approximately $21.2 million, or 17.3%, from $122.0 million in 1995 to
$143.2 million in 1996, and Bargain Wholesale net sales increased approximately
$10.1 million, or 33.4%, from $30.3 million in 1995 to $40.5 million in 1996.
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 seven stores opened in 1996 and four stores opened in 1995 that were
not open for the full year in 1995, and a 2.8%, or $2.6 million, increase in
comparable stores net sales from 1995 to 1996. The increase in Bargain Wholesale
net sales was primarily attributable to increased marketing activity during
1996, as well as a shift in focus to large domestic and international accounts
and the expansion of its geographic markets.
GROSS PROFIT. Gross profit increased approximately $12.1 million, or 23.8%,
from $50.7 million in 1995 to $62.7 million in 1996. The increase in gross
profit was primarily due to higher net sales. As a percentage of net sales,
gross profit improved from 33.2% in 1995 to 34.2% in 1996 reflecting favorable
merchandise cost and mix factors, as well as the retail stores representing a
greater proportion of sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A increased $5.9 million, or 17.4%,
from $33.8 million in 1995 to $39.7 million in 1996, primarily due to increased
costs associated with new store growth and increased executive compensation
expense of approximately $0.8 million. SG&A decreased as a percentage of net
sales from 22.2% in 1995 to 21.6% in 1996. 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 $6.2 million, or 36.6%, from $16.9 million in 1995 to $23.0
million in 1996. Operating income increased as a percentage of net sales from
11.0% in 1995 to 12.6% in 1996.
INTEREST (INCOME) EXPENSE. Interest (income) expense relates to the
interest income on the Company's marketable securities net of interest expense
on the Company's capitalized warehouse lease. The change in interest expense
between 1995 and 1996 was not material. During the 1995 and the 1996 periods,
the Company had no bank debt. Interest income earned on marketable securities
was $0.9 million in 1996. At December 31, 1996, the Company held $27.6 million
in short-term investments. The Company's short-term investments are comprised
primarily of investment grade federal and municipal bonds and commercial paper,
all with short-term maturities. The Company generally holds investments until
maturity.
PRO FORMA PROVISION FOR INCOME TAXES. The pro forma provision for income
taxes in 1996 was $9.5 million, or 5.1% of net sales, compared to $6.5 million,
or 4.2% of net sales, in 1995. The effective rate of the pro forma provision for
income taxes was 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 5 of "Notes to
Financial Statements."
PRO FORMA NET INCOME. As a result of the items discussed above, pro forma
net income increased $4.1 million, or 42.8%, from $9.6 million in the 1995
period to $13.7 million in the 1996 period. Pro forma net income increased as a
percentage of net sales from 6.3% in 1995 to 7.5% in 1996.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations principally from cash
provided by operations, and has not generally relied upon external sources of
financing. The Company's capital requirements result primarily from purchases of
inventory, expenditures related to new store openings and working capital
requirements for new and existing stores. The Company takes advantage of
close-out and other special-situation opportunities which frequently result in
large volume purchases, and as a consequence, its cash requirements are not
constant or predictable during the year and can be affected by the timing and
size of its purchases.
During 1995, 1996 and 1997, net cash provided by operations was $17.3
million, $15.6 million and $13.7 million, respectively. Net cash provided by
operations reflects increases in inventories in the amount of $1.8 million, $2.6
million and $6.2 million during 1995, 1996 and 1997, respectively. During 1995,
1996 and 1997, net cash used in investing activities for purchases of property
and equipment was $2.7 million, $7.3 million and $9.4 million, respectively.
Cash used in investing activities for the purchase of short-term investments was
$27.6 million and $5.0 million in 1996 and 1997, respectively. Net cash used in
financing activities in 1995 was $11.8 million; these funds represented payments
of capital lease obligations and distributions to shareholders to cover, in
part, federal and state income taxes payable with respect to the net income of
the Company. In 1996, proceeds from financing activities were $19.6 million,
which included $65.2 million from the Company's initial public offering. In
addition, the Company paid $35.5 million of notes payable to shareholders and
issued dividends to shareholders for $4.4 million. Another $5.0 million
represented payments of capital lease obligations and distributions to
shareholders to cover, in part, federal and state income taxes payable by the
shareholders with respect to the net income of the Company prior to the change
of the corporate tax status from an S corporation to a C corporation. In 1997,
net cash used in financing activities was $0.2 million; these funds represented
payments of capital lease obligations and proceeds from the exercise of employee
stock options.
The Company has a $7.0 million bank credit facility bearing interest at the
bank's prime rate (8.50% at December 31, 1997). Under the terms of its credit
facility, the Company must comply with certain restrictive covenants.
Non-compliance with respect to these covenants would constitute an event of
default that gives the bank the right to call the credit facility and to pursue
certain remedies. At December 31, 1997, the Company was in compliance with this
covenant. The credit agreement expires in June 1998, at which time the Company
expects that it will be renewed. As of December 31, 1997, there were no
borrowings outstanding under the line of credit and outstanding letters of
credit were approximately $1.2 million ($1.1 million of which related to a
standby letter of credit required by the State of California to be self-insured
for worker's compensation).
The Company leases its 880,000 square foot single level warehouse and
distribution facility under a lease accounted for as a capital lease. The lease
requires monthly payments of $70,000 and accrues interest at an annual rate of
7.0%. At the lease expiration in December 2000, the Company has the option to
purchase the facility for $10.5 million. The Company currently intends to
exercise the option at the end of the lease. If the Company does not exercise
the purchase option, the Company will be subject to a $7.6 million penalty.
The Company plans to open new stores at a targeted annual rate of 20%. The
average investment per new store opened in 1996, including leasehold
improvements, furniture, fixtures and equipment, inventory and pre-opening
expenses, was approximately $650,000. Inventory and pre-opening expenses are not
capitalized by the Company. The Company's cash needs for new store openings are
expected to total approximately $8.5 million in each of 1998 and 1999. The
Company's total planned expenditures in each of 1998 and 1999 for additions to
fixtures and leasehold improvements of existing stores are approximately
$600,000. The Company believes that its total capital expenditure requirements
(including new store openings) will increase to approximately $11.4 million and
$11.6 million in 1998 and 1999, respectively. Capital expenditures in 1998 and
1999 are currently expected to be incurred primarily for new store
28
<PAGE>
openings, improvements to existing stores and system and general corporate
infrastructure. The Company believes that cash flow from operations,
availability under its credit agreement and the net proceeds from the Offerings
will be sufficient to meet operating needs, capital spending requirements and
the retirement of Universal debt and payment of overdue accounts payable of
Universal for at least the next twelve months.
The Company has completed an assessment and has determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Year 2000 project cost is not anticipated to have a material
effect on the results of operations. The project is scheduled to be completed no
later than mid-1999.
The Company expects to continue to provide financial support to Universal
through the date of closing through trade credit and other advances. Such
amounts will be provided from the Company's ongoing cash flow from operations
and its existing working capital.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience some seasonal fluctuation in its net sales, operating income and net
income. The highest sales periods for the Company are the Christmas and
Halloween seasons. A greater amount of the Company's net sales and operating and
net income is generally realized during the fourth quarter. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of certain holidays (e.g.,
Easter) and the timing of new store openings and the merchandise mix.
Further, the operations of Universal and Odd's-N-End's are even more
dependent upon results in the fourth quarter and, even without the acquisition
of Universal, the Company's investment in Universal is expected to further
increase the impact of fourth quarter sales on the Company's results of
operations.
The following table sets forth certain unaudited results of operations for
each quarter during 1996 and 1997 and such information as a percentage of net
sales. The unaudited information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus and includes
all adjustments, which management considers necessary for a fair presentation of
the financial data shown. The operating results for any quarter are not
necessarily indicative of the results to be attained for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1997
------------------------------------------ ------------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
99 CENTS Only Stores............. $ 32,256 $ 34,136 $ 35,211 $ 41,560 $ 39,168 $ 42,567 $ 46,991 $ 57,298
Bargain Wholesale................ 10,020 9,037 10,173 11,250 11,576 11,247 11,995 10,013
--------- --------- --------- --------- --------- --------- --------- ---------
Total.......................... 42,276 43,173 45,384 52,810 50,744 53,814 58,986 67,311
Gross profit....................... 13,466 14,934 16,118 18,203 17,416 19,313 21,192 26,137
Operating income................... 4,400 5,327 5,784 7,518 6,085 7,157 7,879 10,098
(% OF NET SALES)
Net sales:
99 CENTS Only Stores............. 76.3% 79.1% 77.6% 78.7% 77.2% 79.1% 79.7% 85.1%
Bargain Wholesale................ 23.7 20.9 22.4 21.3 22.8 20.9 20.3 14.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit....................... 31.9 34.6 35.5 34.5 34.3 35.9 35.9 38.8
Operating income................... 10.4 12.3 12.7 14.2 12.0 13.3 13.4 15.0
</TABLE>
29
<PAGE>
INFLATION
The Company's ability to provide quality merchandise at the 99 CENTS price
point is subject to certain economic factors which are beyond the Company's
control, including inflation. Inflation could have a material adverse effect on
the Company's business and results of operations, especially given the
constraints on the Company to pass on any incremental costs due to price
increases or other factors. The Company believes that it will be able to respond
to ordinary price increases resulting from inflationary pressures by adjusting
the number of items sold at the single price point (e.g., two items for 99 CENTS
instead of three items for 99 CENTS) and by changing its selection of
merchandise. Nevertheless, a sustained trend of significantly increased
inflationary pressure could require the Company to abandon its single price
point of 99 CENTS per item, which could have a material adverse effect on the
Company's business and results of operations. See also "Risk Factors--Adverse
Economic Trends; Change in Minimum Wage" for a discussion of additional risks
attendant to inflationary conditions.
NEW AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 and SFAS
131 are effective in 1998; however, management does not expect adoption of these
standards to have a material impact on the Company's financial reporting.
30
<PAGE>
BUSINESS
99 CENTS Only Stores is a leading deep-discount retailer of primarily
name-brand, consumable general merchandise at an affordable, single price point
of 99 CENTS. The Company's stores offer a wide assortment of regularly available
consumer goods as well as a broad variety of first-quality, close-out
merchandise. In 1997, a majority of the Company's product offerings were
comprised of recognizable name-brand merchandise and were regularly available
for reorder. The Company provides customers significant value on their everyday
household needs and an exciting shopping experience in customer-service-oriented
stores which are attractively merchandised, brightly lit and well-maintained.
The Company believes that its name-brand focus, along with a product mix
emphasizing value-priced food and beverage and other everyday household items,
increases the frequency of consumer visits and impulse purchases and reduces the
Company's exposure to seasonality and economic cycles. The Company believes its
format appeals to value-conscious customers in all socio-economic groups and
results in a high volume of sales. The Company's 54 existing 99 CENTS Only
Stores are located in Southern California and have an average size of
approximately 15,000 square feet. The Company's 99 CENTS Only Stores generated
average net sales per estimated saleable square foot of $354, which the Company
believes is among the highest in the deep-discount convenience store industry,
and average net sales per store of $3.8 million in 1997.
The Company opened its first 99 CENTS Only Store in 1982 and believes that
it operates the nation's oldest existing single price point general merchandise
chain. The Company competes in the deep-discount industry, which is one of the
fastest growing retail sectors in the United States. The Company significantly
increased its rate of store expansion following its initial public offering in
May 1996, expanding its 99 CENTS Only Stores from 36 stores and 332,100
estimated saleable square feet at December 31, 1995 to 53 stores and 631,500
estimated saleable square feet at December 31, 1997, representing a compound
annual growth rate ("CAGR") of 21% and 38%, respectively. The Company believes
that its attractive store-level economics facilitates its expansion.
Historically, the Company's 99 CENTS Only Stores have been profitable within
their first year of operation. In the first quarter of 1998, the Company opened
two stores (including one relocation), and plans to open an additional 11 stores
(including one relocation) during the remainder of the year. The Company intends
to continue its planned store expansion over the next several years at a
targeted growth rate of approximately 20% per year. The Company estimates that
the Southern California market has the potential for over 150 additional
99 CENTS Only Stores.
The Company also sells merchandise through its Bargain Wholesale division at
prices generally below normal wholesale levels to local, regional, and national
discount, drug and grocery store chains and independent retailers, distributors
and exporters. Bargain Wholesale complements the Company's retail operations by
allowing the Company to purchase in larger volumes at more favorable pricing, to
be exposed to a broader selection of opportunistic buys and to generate
additional sales with relatively small incremental increases in operating
expenses, contributing to strong overall operating margins for the Company.
Bargain Wholesale enables the Company to sell merchandise at prices other than
99 CENTS, providing the Company greater flexibility in inventory management.
Bargain Wholesale represented 19.4% of the Company's net sales in 1997.
INDUSTRY
The Company participates primarily in the deep-discount retail industry,
which is distinguished from other retail formats by the purchase of close-out
and other special-situation merchandise at prices substantially below original
wholesale cost, and the subsequent sale of this merchandise at prices
significantly below regular retail. This results in a continually changing
selection of specific brands of products. The deep-discount retail industry is
one of the fastest growing retail sectors in the United States.
The sale of close-out or special-situation merchandise develops in response
to the need of manufacturers, wholesalers and others to distribute merchandise
outside their normal channels. Close-out or special-situation merchandise
becomes available for a variety of reasons, including a manufacturer's over-
31
<PAGE>
production, discontinuance due to a change in style, color, size, formulation or
packaging, the inability to move merchandise effectively through regular
channels, reduction of excess seasonal inventory, discontinuation of
test-marketed items and the financial needs of the manufacturer.
Many deep-discount retailers also sell merchandise that can be purchased
from a manufacturer or wholesaler on a regular basis. Although this merchandise
can usually be purchased at less than original wholesale and sold below normal
retail, the discount, if any, is generally less than with close-out merchandise.
Deep-discount retailers sell regularly available merchandise to ensure a degree
of consistency in their product offerings and to establish themselves as a
reliable source of basic goods.
BUSINESS STRATEGY
The Company's goal is to continue to provide significant value to its
customers on a wide variety of consumable merchandise in an exciting store
environment. The Company's strategies to achieve this goal include the
following:
FOCUS ON "NAME-BRAND" CONSUMABLES. The Company strives to exceed its
customers' expectations of the range and quality of name-brand consumable
merchandise that can be purchased for 99 CENTS. During 1997, the Company
purchased merchandise from more than 999 suppliers, including Colgate-Palmolive
Company, Cheseborough Ponds, The Dial Corp., Eveready Battery Company Inc.,
General Electric Company, Gerber Products Company, The Gillette Company, Hershey
Foods Corp., Johnson & Johnson, Kraft General Foods, Inc., Lever Brothers
Company, Mattel Inc., The Mead Corporation, Nabisco Inc., Nestle, The Pillsbury
Company, The Procter & Gamble Company, Revlon Inc. and SmithKline Beecham
Corporation.
BROAD SELECTION OF REGULARLY AVAILABLE MERCHANDISE. The Company's 99 CENTS
Only Stores offer consumer items in each of the following staple product
categories: food and beverages, health and beauty aids, household products
(cleaning supplies, paper goods, etc.), housewares (glassware, kitchen items,
etc.), hardware, stationary and party goods, seasonal goods, baby products and
toys, giftware, pet products and clothing. The Company added a deli and frozen
food section in its stores in the second and third quarters of 1997. The Company
ensures that its merchandise offering is complete by supplementing its
name-brand merchandise with private-label items. By consistently offering a wide
selection of basic household consumable items, the Company encourages customers
to shop 99 CENTS Only Stores for their everyday household needs, leading to a
high frequency of customer visits.
ATTRACTIVELY MERCHANDISED AND WELL-MAINTAINED STORES. The Company strives
to provide its customers an exciting shopping experience in
customer-service-oriented stores which are attractively merchandised, brightly
lit and well-maintained. The Company's 99 CENTS Only Stores are merchandised and
laid out in a "supermarket" format with items in the same category grouped
together. In addition, the shelves are restocked as needed during the day. By
offering merchandise in an attractive, convenient and familiar environment, the
Company believes its stores appeal to a wide demographic of customers.
STRONG LONG-TERM SUPPLIER RELATIONSHIPS. The Company believes that it has
developed a reputation as a leading purchaser of name-brand, reorderable and
close-out merchandise at discount prices through its ability to make immediate
buying decisions, experienced buying staff, willingness to take on large volume
purchases and take possession of merchandise immediately, ability to pay cash or
accept abbreviated credit terms, reputation for prompt payment, commitment to
honor all issued purchase orders and willingness to purchase goods close to a
target season or out of season. The Company's relationship with its suppliers is
further enhanced by its ability to minimize channel conflict for the
manufacturer by quickly selling name-brand merchandise without, if requested by
the supplier, advertising or wholesaling the item. Additionally, the Company
believes its well-maintained, attractively merchandised stores have contributed
to a reputation among suppliers for protecting their brand image.
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<PAGE>
COMPLEMENTARY BARGAIN WHOLESALE OPERATIONS. Bargain Wholesale complements
the Company's retail operations by allowing the Company to purchase in larger
volumes at more favorable pricing to be exposed to a broader selection of
opportunistic buys and to generate additional sales with relatively small
incremental increases in operating expenses, contributing to strong overall
operating margins for the Company. Net sales in the Company's wholesale division
grew from $30.3 million in 1995 to $44.8 million in 1997, primarily due to an
increased focus on large domestic and international accounts and expansion into
new geographic markets. The Company opened showrooms in New York City in
February 1997 and Chicago in February 1998 to support its Bargain Wholesale
operation.
ADHERENCE TO DISCIPLINED COST CONTROLS AND SAVVY PURCHASING. The Company is
able to provide its customers with significant value while maintaining strong
operating margins through an adherence to a disciplined cost control program.
The Company purchases merchandise at substantially discounted prices as a result
of its buyers' knowledge, experience and negotiating ability and its established
reputation among its suppliers. The Company applies this same approach to its
relationships with other vendors and strives to maintain a lean operating
environment focused on increasing net income. Operating expenses as a percentage
of net sales have declined from 25.3% in 1993 to 21.6% in 1997.
FOCUS ON LARGER STORES IN CONVENIENT LOCATIONS. The Company's stores are
conveniently located in freestanding buildings, neighborhood shopping centers
(anchored by 99 CENTS Only Stores or co-anchored with a supermarket and/or a
drug store) or downtown central business districts where consumers are more
likely to do their regular household shopping. None of the Company's stores is
located in an indoor shopping mall or small strip center. The Company's 54
existing 99 CENTS Only Stores average approximately 15,000 gross square feet.
Since January 1, 1995, the Company has opened 24 new stores that average over
19,000 gross square feet and currently targets new store locations between
15,000 and 25,000 gross square feet. The Company's larger 99 CENTS Only Stores
allow it to more effectively display a wider assortment of merchandise, carry
deeper stock positions and provide customers with a more inviting and convenient
environment that encourages customers to shop longer and buy more. The Company's
decision to target larger stores reflects higher average annual net sales per
store and operating income typically achieved by these stores.
EXPERIENCED MANAGEMENT TEAM AND DEPTH OF EMPLOYEE OPTION GRANTS. 99 CENTS
Only Stores' management team has many years of retail experience and has
demonstrated its skills through a proven track record of financial performance.
The Company's management strongly believes that employee ownership of the
Company's stock helps build employee pride in the stores that significantly
contributes to the success of the Company and its operations. Accordingly, all
members of management of the Company (other than David Gold, the Company's Chief
Executive Officer and Sherry Gold, Bargain Wholesale's cash and carry operations
manager) and all employees (part-time or full-time) with tenure of more than six
months with the Company receive an annual grant of stock options. As of December
31, 1997, the Company's employees (other than executive officers) held options
to purchase an aggregate of 1,057,360 shares, or over 5% of the fully-diluted
shares of Common Stock outstanding.
GROWTH STRATEGY
Management believes that future growth will primarily result from new store
openings facilitated by the following:
SOUTHERN CALIFORNIA HAS SIGNIFICANT POTENTIAL FOR GROWTH. By continuing to
focus 99 CENTS Only Store openings in Southern California for the immediate
future, the Company can leverage its brand awareness in the region and take
advantage of its existing warehouse and distribution facility, regional
advertising and other management and operating efficiencies. The Company's
growth strategy in Southern California will focus on opening locations in
existing markets as well as expanding into markets adjacent to those currently
served. The Company expects to open its first 99 CENTS Only Store in San Diego
County in the second quarter of 1998. The Company has plans for at least 13 new
stores, including two relocations, in 1998 (a net increase of 21%), all in the
Southern California area. As of March 31, 1998, the Company had opened two
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<PAGE>
new stores, including a relocation, and secured sites for five additional store
locations. The Company intends to continue its planned store expansion over the
next several years at a targeted rate of approximately 20% per year. The Company
estimates that the Southern California market has the potential for over 150
additional 99 CENTS Only Stores.
PORTABLE FORMAT FACILITATES GEOGRAPHIC EXPANSION. The Company believes that
its concept of consistently offering a broad selection of name-brand
consumables, at value pricing, in a convenient store format is portable to most
other densely populated areas of the country. The Company expects to explore the
potential for geographic expansion as opportunities present themselves in the
next several years, focusing on developing clusters of stores that can take
advantage of local warehouse and distribution facilities.
ACQUISITIONS. The Company considers acquisition opportunities as they are
presented to the Company and may make acquisitions of a chain, or chains, of
clustered retail sites in densely populated regions. In February 1998, the
Company announced its intention to acquire the balance of the Universal and
Odd's-N-End's shares it does not own.
99 CENTS ONLY STORES--RETAIL OPERATIONS
The Company's 99 CENTS Only Stores offer customers a wide assortment of
regularly available consumer goods, as well as a broad variety of first-quality,
close-out merchandise, generally at a significant discount from normal retail.
All merchandise is sold in the Company's retail stores for 99 CENTS per item or
two or more items for 99 CENTS. The Company strives to exceed its customers'
expectations of the range and quality of name-brand consumables that can be
purchased for 99 CENTS.
The following table sets forth relevant information with respect to the
growth of the Company's existing 99 CENTS Only Store operations (amounts in
thousands, except sales per square foot):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
99 CENTS Only Stores net sales.................... $ 101,828 $ 110,724 $ 121,998 $ 143,163 $ 186,024
Annual net sales growth rate...................... 6.2% 8.7% 10.2% 17.3% 29.9%
Store count at beginning of year.................. 30 31 34 36 43
New stores........................................ 1 4 4 8 10
Stores closed..................................... 0 1(a) 2(b) 1(b) 0
Store count at year end........................... 31 34 36 43 53
Average net sales per store open the full
year(c)......................................... $ 3,349 $ 3,267 $ 3,467 $ 3,667 $ 3,750
Estimated saleable square footage at year end..... 269,000 293,000 332,100 455,200 631,500
Average net sales per estimated saleable square
foot(c)......................................... $ 388 $ 396 $ 397 $ 389 $ 354
Change in comparable stores net sales(d).......... (3.5)% (1.4)% (0.2)% 2.8% 1.5%
</TABLE>
-----------------------------------------------
(a) Store closed September 1994 due to fire.
(b) Stores closed due to relocation to larger nearby site.
(c) For stores open for the entire fiscal year.
(d) For the years 1993-1996 change in comparable stores net sales
compares net sales for stores open for the entire two years compared.
Commencing
in 1997, change in comparable stores net sales compares net sales for all
stores open at least 15 months.
MERCHANDISING. The Company's stores offer a broad variety of first-quality,
name-brand and other close-out merchandise as well as a wide assortment of
regularly available consumer goods. The Company also carries a line of private
label consumer products made exclusively for the Company. The Company believes
that the success of its 99 CENTS Only Stores concept arises from the value
inherent in selling primarily name-brand consumables, most of which retail
elsewhere from $1.19 to $9.99, for only 99 CENTS per item or group of items.
Each store typically carries over five thousand different stock keeping units
("SKUs"). The merchandise sold in the Company's stores primarily consists of a
wide variety of basic consumer items including beverages and food, health and
beauty aids and household products (cleaning supplies, paper goods, etc.). The
stores also carry housewares (glassware, kitchen items, etc.), hardware,
stationary and party goods, seasonal, baby products and toys, giftware, pet
products and clothing. In the second and third quarters of 1997, the Company
added a deli and frozen foods section to each store.
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<PAGE>
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
majority of the merchandise purchased by the Company is available for reorder,
the mix of specific brands of merchandise frequently changes, depending upon the
availability of close-out and other special-situation merchandise at suitable
prices. Since commencing its close-out purchasing strategy in 1976, the Company
has not experienced difficulty in obtaining name-brand close-outs as well as
reorderable merchandise at attractive prices. Management believes that
continuously changing specific name-brands found in its stores from one week to
the next encourages impulse and larger volume purchases, results in customers
shopping more frequently and helps to create a sense of urgency, awareness and
excitement. Unlike many discount retailers, the Company rarely imposes
limitations on the quantity of specific items that may be purchased by a single
consumer.
The Company targets value-conscious consumers from a wide range of
socio-economic backgrounds with diverse demographic characteristics. Purchases
are by cash, credit or debit card. The Company's stores do not accept checks or
manufacturers' coupons. The Company's stores are open every day with opening
hours designated to meet the needs of family consumers. The Company advertises
that its stores are open "9:00 a.m. to 9:00 p.m., 9 days a week."
STORE SIZE, LAYOUT AND LOCATIONS. The Company's 54 existing 99 CENTS Only
Stores are located in Southern California and average over 15,000 gross square
feet. Since January 1, 1995, the Company has opened 24 new stores (including two
relocations in 1995, one in 1996 and one in 1998) that average over 19,000 gross
square feet and currently targets new store locations between 15,000 and 25,000
gross square feet. The Company's larger 99 CENTS Only Stores allow it to more
effectively display a wider assortment of merchandise, carry deeper stock
positions and provide customers with a more inviting and convenient environment
that encourages customers to shop longer and buy more. The Company's decision to
target larger stores reflects higher average annual store revenues typically
achieved by these stores.
The Company's stores are conveniently located in freestanding buildings,
neighborhood shopping centers (anchored by 99 CENTS Only Stores, a supermarket
and/or a drug store) or downtown central business districts where consumers are
more likely to do their regular household shopping. None of the Company's stores
is located in an indoor shopping mall or small strip center. The stores are
located primarily in densely populated, demographically diverse neighborhoods.
The Company's 54 existing 99 CENTS Only Stores are located in three counties: 46
in Los Angeles County, five in Orange County and three in San Bernardino County.
The Company's stores are attractively merchandised, brightly lit,
well-maintained, "destination" locations. The layout of each of the Company's
99 CENTS Only Stores is customized to the actual size and configuration of the
individual location. The interior of each store is, however, designed to reflect
a uniform format, like a typical supermarket, featuring attractively displayed
products in windows, consistent merchandise display techniques, bright lighting,
lower shelving height that allows unobstructed visibility throughout the store,
distinctive color scheme, interior and exterior signage and customized check-out
counters, floors, price tags, shopping carts and shopping bags. The Company
emphasizes a strong visual presentation in all key traffic areas of the store.
Merchandising displays are maintained throughout the day, change frequently and
often incorporate seasonal themes. The Company believes that due to the
continuously changing brand-names, the lower shelving height and the absence of
aisle description signs, the typical customer tends to shop the whole store.
The Company leases 51 of its 54 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,
information provided by vendors, customers and employees and through the efforts
of the Company's real estate department.
35
<PAGE>
As part of its strategy to expand retail operations, the Company has, at
times, opened new stores in close proximity to existing stores where the Company
determined that the trade area could support a larger facility. In some of these
situations, the Company retained its existing store so long as it continued to
contribute store-level operating income. While this strategy was designed to
increase revenues and store-level operating income, it has had a negative effect
on comparable stores net sales as some customers migrated from the existing
store to the close-by larger new store. Except for four relocations to larger,
nearby sites and one store closure as a result of a fire, the Company has never
closed one of its 99 CENTS Only Stores.
STORE MANAGEMENT. Substantially all merchandise decisions with respect to
pricing and advertising are made at the Company's headquarters. The Company
employs ten district managers responsible for store operations. Each district
manager is responsible for up to seven stores. Reporting to each district
manager is one merchandising supervisor responsible for store merchandising in
that district. The store managers also report to the district manager. These
district managers are supervised by the Company's Vice President of Retail
Operations. District managers visit each store in their district at least twice
a week and focus on the implementation of the Company's policies, operations and
merchandising philosophy. District managers also help train store management and
assist store management with scheduling. The Vice President of Retail Operations
also supervises a cashiers training school located at the Company's corporate
offices. Each merchandising supervisor and his crew (usually six to ten
experienced stock people) visit each of the stores at least once a week and help
the store managers to maintain and improve the appearance of the sales floor,
move merchandise sections, organize the stockroom and train store personnel.
Typically the Company's stores are staffed with a manager and two or three
assistant managers. Store managers are responsible for assessing their
respective store's stocking needs and ordering accordingly.
ADVERTISING. Advertising expenditures were $1.2 million, $1.5 million and
$2.0 million for 1995, 1996 and 1997, respectively, or 0.8%, 0.8% and 0.9% of
net sales, respectively. The Company manages its advertising without the
assistance of an outside agency. The Company allocates the majority of its
advertising budget to newspaper and radio advertising. The Company's advertising
strategy emphasizes the offering of nationally recognized, name-brand
merchandise at significant savings. The Company minimizes its advertising
expenditures by an efficient implementation of its advertising program combined
with word-of-mouth publicity, locations with good visibility and efficient
signage. Because of the Company's distinctive grand opening promotional
campaign, which includes the sale of nine televisions for 99 CENTS each and nine
microwave ovens for 99 CENTS each, grand openings often attract long lines of
customers and receive media coverage. The Company believes that one of its
biggest challenges is attracting affluent customers to shop its stores. In
October 1997, the Company test marketed the use of a direct mail campaign for
new customers who are homeowners in more upscale neighborhoods. The Company
believes the direct mail campaign has been successful in attracting new
customers.
BARGAIN WHOLESALE
In 1997, Bargain Wholesale sold merchandise to over 999 customers, including
other wholesalers, small local retailers, large regional and national retailers
and exporters. During 1997, no single customer accounted for more than 3% of
Bargain Wholesale's net sales. The Company advertises its wholesale operations
primarily through direct mail. The Company plans to continue to expand its
wholesale operations by continuing its focus on the needs of large domestic and
international accounts, expansion into new geographic markets, increasing its
marketing and promotional programs, increasing the number of trade shows at
which it exhibits, focusing on its recently opened showrooms in Chicago and New
York City, enhancing customer service and aggressively contacting its customers
on a more frequent basis through telephone, facsimile and mail.
The Company's wholesale product line is substantially similar to its retail
product line, although the Company has seen strong growth in reorderable and
private label merchandise within its wholesale
36
<PAGE>
operations. Bargain Wholesale has recently begun a program to provide
merchandise for the "dollar" promotional aisles of certain supermarkets and
drugstores. The Company offers 15-day payment terms to its Bargain Wholesale
customers who meet the Company's credit standards. Customers located abroad,
certain smaller customers or others who do not meet the Company's credit
standards must pay cash upon pickup or before shipment of merchandise.
Bargain Wholesale complements the Company's retail operations by allowing
the Company to purchase in larger volumes at more favorable pricing, to be
exposed to a broader selection of opportunistic buys and to generate additional
net sales with relatively small incremental increases in operating expenses
contributing to strong overall margins for the Company. Bargain Wholesale also
allows the Company to purchase goods which it would not otherwise purchase for
distribution through its 99 CENTS Only Stores and provides the Company with a
channel by which it may distribute merchandise at prices other than 99 CENTS.
Bargain Wholesale conducts its wholesale operations through its 15,000
square foot product showroom located at the Company's warehouse and distribution
facility. In February 1997 and February 1998, Bargain Wholesale opened new
showrooms in New York City and Chicago, respectively. The Company's showrooms
support Bargain Wholesale's operations.
PURCHASING
The Company's purchasing department staff consists of eight 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 99 CENTS Only Stores and Bargain Wholesale. The Company
believes a primary factor contributing to its success is its ability to identify
and take advantage of opportunities to purchase merchandise with high customer
interest at lower than regular wholesale prices. The Company purchases most of
its merchandise directly from the manufacturer. The Company's other sources of
merchandise include wholesalers, manufacturers' representatives, importers,
barter companies, auctions, professional finders and other retailers. The
Company develops new sources of merchandise primarily by attending industry
trade shows, advertising, marketing brochures and referrals.
The Company has no continuing contracts for the purchase of merchandise and
must continuously seek out buying opportunities from both its existing suppliers
and new sources. No single supplier accounted for more than 4% of the Company's
total purchases in 1997. During 1997, the Company purchased merchandise from
more than 999 suppliers, including Colgate-Palmolive Company, Cheseborough
Ponds, The Dial Corp., Eveready Battery Company Inc., General Electric Company,
Gerber Products Company, The Gillette Company, Hershey Foods Corp., Johnson &
Johnson, Kraft General Foods Inc., Lever Brothers Company, Mattel Inc., The Mead
Corporation, Nabisco Inc., Nestle, The Pillsbury Company, The Procter & Gamble
Company, Revlon Inc. and SmithKline Beecham Corporation. Many of these companies
have been supplying products for the Company in excess of three years.
A significant portion of the merchandise purchased by the Company in 1997
was close-out or special-situation merchandise. 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. The sale of close-out or special-situation
merchanidse develops in response to the need of manufacturers, wholesalers and
others to distribute merchandise outside their normal channels. The Company's
buyers search continuously for close-out opportunities. The Company's experience
and expertise in buying merchandise has enabled it to develop relationships with
many manufacturers that often offer some or all of their close-out merchandise
to the Company prior to attempting to sell it through other channels. The key
elements to these supplier relationships include the Company's (i) ability to
make immediate buy decisions, (ii) experienced buying staff, (iii) willingness
to take on large volume purchases and take possession of merchandise
immediately, (iv) ability to pay cash or accept abbreviated credit terms, (v)
reputation for prompt payment, (vi) commitment to honor all issued purchase
orders and (vii) willingness to purchase goods close to a target season or out
of season. The
37
<PAGE>
Company's relationship with its suppliers is further enhanced by its ability to
minimize channel conflict for the manufacturer by quickly selling name-brand
merchandise without, if requested by the supplier, advertising or wholesaling
the item. The Company believes this reputation along with its well-maintained,
attractively merchandised stores have contributed to a reputation among
suppliers for protecting their brand image.
In 1997, reorderable merchandise accounted for a majority of the Company's
purchases. The Company's strong relationships with many manufacturers and
distributors, along with its ability to purchase in large volumes, also enable
the Company to purchase reorderable name-brand goods at discounted wholesale
prices. The Company focuses its purchases of reorderable merchandise on a
limited number of SKUs, which allows the Company to make purchases in large
volumes.
The Company has increased its offering of private label consumer products,
which in 1997 represented approximately 8% of the total cost of merchandise sold
in 1997. The Company is continuously developing new private label consumer
products to broaden the assortment of merchandise that is consistently
available. The Company also has an in-house import operation which primarily
purchases reorderable merchandise. The Company imports products mainly from
Southeast Asia. Merchandise directly imported by the Company accounted for
approximately 5% of total merchandise purchased in 1997. The Company primarily
imports merchandise in product categories which are not brand sensitive to
consumers such as kitchen items, housewares, toys, seasonal products, petcare
and hardware.
WAREHOUSING AND DISTRIBUTION
The Company maintains an 880,000 square foot, single level warehouse and
distribution facility located on approximately 23 acres in the City of Commerce,
California. The Company's headquarters are also located in this facility. The
site is located near downtown Los Angeles and has close access to the Southern
California freeway and rail systems and the ports of Los Angeles and Long Beach.
The warehouse has 129 dock doors available for receiving or shipping, over 25
dock levers and, new racking with over 10,000 pallet positions. Most of the
Company's merchandise is shipped by truck directly from manufacturers and other
suppliers to the Company's warehouse and distribution facility. As part of its
distribution network, the Company owns a fleet of 17 tractors and 34 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
scheduled order. Most of the merchandise is requested by the store in
conjunction with the Company's buyers (i.e., ordered by the store manager) as
opposed to being determined by the distribution center (i.e., sent by order of
the Company's distribution personnel). Approximately 6% of the total cost of
merchandise shipped to the stores is delivered directly to the store by vendors.
Most of these direct store delivered products are perishable food and beverage
items. The Company attempts to optimally utilize its fleet by a combination of
filling outbound trucks to capacity and instituting a backhaul program whereby
products are picked up from suppliers in conjunction with deliveries to stores
in the same general area. Backhauls accounted for approximately half of all
merchandise picked up by the Company's trucks. The Company also uses its own
vehicles to pick up certain shipments at local ports and rail yards. The size of
the Company's distribution center allows storage of bulk one-time close-out
purchases and seasonal or holiday items without incurring additional costs. The
Company believes that its current warehouse and distribution facility will be
able to support distribution to approximately 150 additional stores in Southern
California. There can be no assurance that the Company's existing warehouse will
provide adequate storage space for the Company's long-term storage needs. See
"Risk Factors--Concentration of Operations" and "--Disruptions in Receiving and
Distribution."
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<PAGE>
PROPERTIES
As of March 31, 1998, the Company leased 51 of its 54 store locations. The
Company currently leases 13 store locations and a parking lot associated with
one of these stores from the Gold Family. See "Risk Factors--Affiliate
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. Certain of the
Company's store leases contain provisions that grant the Company a right of
first refusal to acquire the subject site.
The following table sets forth, as of the date of this filing, information
relating to the expiration dates of the Company's current 99 CENTS Only Stores
leases assuming the exercise of all options to extend:
<TABLE>
<CAPTION>
EXPIRING EXPIRING EXPIRING EXPIRING 2004
1998 1999-2000 2001-2003 AND BEYOND
- ------------- --------------- --------------- -----------------
<S> <C> <C> <C>
7(a) 0 2 42
</TABLE>
----------------------------
(a) Includes six stores leased on a month to month basis.
The Company has purchased three locations, one opened in each of November
1996, February 1997 and November 1997. The Company may also purchase other
locations in the future.
The Company leases its 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, which is accounted for on the Company's financial statements as a
capitalized lease obligation. The lease included the Company's initial payment
of $2.75 million and eighty-four monthly payments of $70,000. As part of the
lease agreement, the Company received $500,000 in 1993 and $1.0 million in 1994
to apply to renovation costs. The facility's fire prevention and lighting
systems were completely upgraded. A state-of-the-art sprinkler system, hundreds
of new smoke-vents (skylights) and energy efficient lighting with motion
detectors were installed. The Company has the option to purchase the property
for $10.5 million at the end of the lease and the Company currently intends to
exercise the option. If the Company does not exercise the purchase option, the
Company will be subject to a $7.6 million penalty.
INFORMATION SYSTEMS
The Company's business is currently supported by a standard accounting and
financial reporting system utilizing a PC-based local area network (LAN) and a
separate partially customized inventory control system processed by a
Hewlett-Packard RISC-based computer. The Company's inventory management system
is designed to track all inventory received at the Company's distribution center
and shipped to each 99 CENTS Only Stores location or Bargain Wholesale customer.
The Company's systems allow management to monitor inventory and assist store
operations. In light of the Company's continuously changing merchandise, single
price point and other factors, the Company has determined not to install a point
of sale system. The retail order processing system has been designed to expedite
the processing of retail store orders for both store and warehouse personnel.
Buyers use inventory and historical shipment information to assist in reordering
and inventory planning functions. The Company employs an accounts payable and
general ledger software package that shares information with the inventory
management, order processing and accounts receivable system. 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 is in the process of installing personal computers in each 99 CENTS Only
Store location for initial use with a popular suite of retail applications
purchased in late 1997. The Company is internally referring to this store-level
personal computer implementation as its "C.E.N.T.S." system. The first phase of
C.E.N.T.S.
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<PAGE>
will include electronic mail, electronic forms and time and attendance modules,
scheduled for completion at the end of the second quarter of 1998. The second
phase of the C.E.N.T.S. project will include sales forecasting and labor
scheduling modules and will be implemented beginning in the third quarter of
1998. Future modules will include daily sales reporting and sales/payroll
analysis, and may include certain store-level human resources functions.
The Company's accounting and management systems are overseen by a director
of information systems who manages a staff of five employees. The Company
believes that its accounting and management information system and inventory
control system adequately provide for its current needs. The Company intends to
continue to update and enhance its systems in order to improve capabilities and
provide for planned growth. If the Company should experience faster than
anticipated growth, the Company may be required to install a new management
information or inventory control system or undergo a significant modification of
its current systems to accommodate a larger business. The Company has completed
an assessment and has determined that it will be required to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The project cost is not
anticipated to have a material effect on the results of operations and is
scheduled to be completed no later than mid-1999.
COMPETITION
The Company faces competition in both the acquisition of inventory and sale
of merchandise from other wholesalers, discount stores, single price point
merchandisers, mass merchandisers, food markets, drug chains, club stores and
other retailers. Industry competitors also include a large number of privately
held companies and individuals. In some instances these competitors are also
customers of the Company's Bargain Wholesale division. There is increasing
competition with other wholesalers and retailers, including other deep-discount
retailers, for the purchase of quality close-out and other special-situation
merchandise. Some of these competitors have substantially greater financial
resources and buying power than the Company. The Company's ability to compete
will depend on many factors including the success of its purchase and resale of
such merchandise at lower prices than the competition. The Company may face
intense competition in the future from new entrants in the deep-discount retail
industry, among others, that could have an adverse effect on the Company's
business and results of operations.
EMPLOYEES
At December 31, 1997, the Company had 2,189 employees (1,883 in its retail
operation, 206 in its warehouse and distribution facility, 85 in its corporate
offices and 15 in its wholesale division), of which approximately 230 are
part-time employees. None of the Company's employees is party to a collective
bargaining agreement. The Company considers relations with its employees to be
good. The Company offers certain benefits, including health insurance and 401(k)
benefits to its full time employees. All members of management of the Company
(other than David Gold, Chief Executive Officer of the Company, and Sherry Gold,
Bargain Wholesale's cash and carry operations manager) and all employees,
part-time or full-time, with tenure of more than six months with the Company
receive an annual grant of stock options.
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.
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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 51 of its 54 existing stores, as well as its warehouse
and distribution facility (where its executive offices are located). The Company
currently intends to exercise an option to purchase the warehouse and
distribution facility in December 2000, the end of the lease term. In connection
with such properties, the Company could be held liable for the costs of remedial
actions with respect to hazardous substances. In addition, the Company operates
one underground diesel storage tank and one above-ground propane tank at its
warehouse and distribution facility. Although the Company has not been notified
of, and is not otherwise aware of, any specific current environmental liability,
claim or non-compliance, there can be no assurance that the Company will not be
required to incur redemption or other costs in the future in connection with its
leased properties or its storage tanks or otherwise. In the ordinary course of
its business, the Company from time to time handles or disposes of ordinary
household products that are classified as hazardous materials under various
federal, state and local environmental laws and regulations. The Company has
adopted policies regarding the handling and disposal of these products, and has
implemented a training program for employees on hazardous material handling and
disposal. There can be no assurance, however, that such policies or training
will be successful in assisting the Company in avoiding violations of
environmental laws and regulations relating to the handling and disposal of such
products in the future.
41
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES.
The following table sets forth certain information with respect to the
directors and the executive officers of the Company as of March 31, 1998.
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
David Gold............................. 65 Chairman of the Board and Chief Executive Officer
Howard Gold............................ 38 Senior Vice President of Distribution and Director
Eric Schiffer.......................... 37 Senior Vice President of Finance and Operations, Treasurer and
Director
Jeff Gold.............................. 30 Senior Vice President of Real Estate and Information Systems and
Director
Andy Farina............................ 51 Chief Financial Officer
Helen Pipkin........................... 55 Senior Vice President of Wholesale Operations
William O. Christy..................... 66 Director
Marvin Holen........................... 68 Director
Ben Schwartz........................... 80 Director
Lawrence Glascott...................... 63 Director
<CAPTION>
CERTAIN KEY EMPLOYEES
- ---------------------------------------
<S> <C> <C>
Larry Borenstein....................... 46 Vice President of Construction and Advertising
Carolyn J. Brock....................... 47 Vice President of Human Resources
Jose Gomez............................. 38 Vice President of Retail Operations
Kenneth R. Phipps...................... 47 Vice President of Distribution
</TABLE>
The executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors. David Gold is the father of Howard Gold
and Jeff Gold and the father-in-law of Eric Schiffer.
DAVID GOLD has been Chairman of the Board 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.
HOWARD GOLD has been a director of the Company since 1991. He joined the
Company in 1982 and has served in various managerial capacities. He currently
serves as Senior Vice President of Distribution. 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 served in various managerial capacities. He currently serves
as Senior Vice President of Finance and Operations and Treasurer. Prior to
joining the Company, from 1987 to 1992, he was employed by Oxford Partners, a
venture capital firm. Mr. Schiffer received his B.S.E. degree from Duke
University in 1983 and his M.B.A. from the 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 Information
Systems. Mr. Gold received his B.A. degree from the University of California at
Berkeley in 1989.
ANDY FARINA joined the Company in September 1996 as Chief Financial Officer.
Prior to joining the Company, from April 1993 through August 1996, Mr. Farina
was Vice President of Finance of Crown BBK, Inc., a food brokerage business. Mr.
Farina was employed by a division of Sara Lee from 1976 through 1988, ultimately
in the capacity of President. Mr. Farina began his career with Arthur Andersen
LLP.
42
<PAGE>
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,
Ms. Pipkin served as Controller and Manager of Wholesale and Import Operations
of Cobra Associated International, a wholesaler of variety merchandise. Prior to
1985, for many years Ms. Pipkin was an owner, Vice President and Controller of
Markell Imports, a general merchandise wholesaler.
WILLIAM O. CHRISTY has been a director of the Company since 1992. He was
President and Chief Executive Officer of Certified Grocers of California from
1977 to 1990 where he spent the majority of his career. He has 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 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 Californian Rapid Transit District from 1976 to 1993
(six of those years as the Board's President). 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 on 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 thereto, 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, Mr. Schwartz sits on
a number of industry trade boards, including the Food Marketing Institute (FMI).
LAWRENCE GLASCOTT has been a director of the Company since October 1996. He
was the former Vice President--Finance of Waste Management International. Prior
thereto, Mr. Glascott was a partner at Arthur Andersen LLP and was the Arthur
Andersen LLP partner in charge of the 99 CENTS Only Stores account for six
years. Additionally, Mr. Glascott was in charge of the Los Angeles based Arthur
Andersen LLP Enterprise Group practice for over 15 years.
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.
JOSE GOMEZ joined the Company in 1980 and has served in many different
managerial capacities, most recently as Vice President of Retail Operations. He
has over 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 SE 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.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer and the top
four executive officers of the Company at December 31, 1997, whose aggregate
cash and cash equivalent compensation exceeded
43
<PAGE>
$100,000 in 1997 (the "Named Executive Officers"), information concerning all
compensation paid for services to the Company in all capacities during the last
three fiscal years or accrued within the current fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(A) COMPENSATION(B)
- --------------------------------- ---------- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
David Gold ...................... 1997 $ 175,000 -- -- $ 325,000
Chairman of the Board and Chief 1996 175,000 -- -- 324,000
Executive Officer 1995 65,000 -- -- 317,000
Helen Pipkin .................... 1997 135,200 $ 25,000 18,750 --
Senior Vice President 1996 125,000 25,000 18,750 --
of Wholesale Operations 1995 104,000 20,000 -- --
Jeff Gold .......................
Senior Vice President 1997 120,000 -- 11,250 --
of Real Estate and Information 1996 120,000 -- 11,250 --
Systems 1995 52,000 -- -- --
Howard Gold ..................... 1997 120,000 -- 11,250 --
Senior Vice President 1996 120,000 -- 11,250 --
of Distribution 1995 52,000 -- -- --
Eric Schiffer ...................
Senior Vice President 1997 120,000 -- 11,250 --
of Finance and Operations, 1996 120,000 -- 11,250 --
Treasurer 1995 52,000 -- -- --
</TABLE>
- ------------------------
(a) All numbers reflect the number of shares of Common Stock subject to options
granted to the Named Executive Officers during the fiscal year.
(b) Represents life insurance premiums on policies (one of which is "split
dollar") insuring the lives of David and Sherry Gold. Under the "split
dollar" life insurance policy, upon the deaths of David and Sherry Gold, the
Company will be reimbursed for all premiums paid. Also includes $2,000 of
automobile insurance premiums paid in 1995 on policies insuring David Gold's
automobile.
44
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 31, 1998 and as adjusted to reflect
the sale of 750,000 shares of Common Stock by the Company and the sale of
2,750,000 shares of Common Stock by the Selling Shareholders: (i) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) by each director; (iii) by each of the Named Executive
Officers; (iv) by all executive officers and directors of the Company as a group
and (v) by each Selling Shareholder. The address for each individual and entity
listed below is in care of the Company, 4000 Union Pacific Avenue, City of
Commerce, California 90023.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED NUMBER OF OWNED AFTER THE
PRIOR TO OFFERING(A) SHARES OFFERING(A)(B)
------------------------ BEING OFFERED -----------------
NUMBER OF PERCENT --------------------- NUMBER OF
NAME AND ADDRESS SHARES OF CLASS NUMBER SHARES
- ------------------------------------------------------ ----------- ----------- --------------------- -----------------
<S> <C> <C> <C> <C>
David Gold(c)(f)...................................... 8,112,944 43.7%
Sherry Gold(d)(f)..................................... 8,112,944 43.7
Howard Gold(e)(f)..................................... 5,005,490 26.9
Jeff Gold(e)(f)....................................... 5,005,490 26.9
Eric and Karen Schiffer(f)(g)......................... 5,016,740 27.0
Au Zone Investments #3, LLC(f)........................ 3,753,098 20.2
William O. Christy(h)................................. 6,875 *
Marvin Holen(i)....................................... 12,500 *
Ben Schwartz(j)....................................... 22,500 *
Lawrence Glascott(k).................................. 2,500 *
Helen Pipkin(l)....................................... 20,000 *
All of the Company's executive officers and directors
as a group (10 persons)(m)........................... 11,951,246 64.0%
<CAPTION>
PERCENT
NAME AND ADDRESS OF CLASS
- ------------------------------------------------------ ---------------
<S> <C>
David Gold(c)(f)...................................... %
Sherry Gold(d)(f).....................................
Howard Gold(e)(f).....................................
Jeff Gold(e)(f).......................................
Eric and Karen Schiffer(f)(g).........................
Au Zone Investments #3, LLC(f)........................
William O. Christy(h).................................
Marvin Holen(i).......................................
Ben Schwartz(j).......................................
Lawrence Glascott(k)..................................
Helen Pipkin(l).......................................
All of the Company's executive officers and directors
as a group (10 persons)(m)...........................
</TABLE>
- ------------------------
* Less than 1%
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. Unless otherwise indicated, the persons named in this table
have sole voting and sole investment power for all shares shown as
beneficially owned, subject to community property laws where applicable.
(b) Assumes no exercise of the over-allotment option.
(c) Includes 2,179,861 shares owned by Sherry Gold, David Gold's spouse, and
3,753,098 shares controlled through Au Zone Investments #3, LLC, a
California limited liability company ("Au Zone").
(d) Includes 2,179,985 shares owned by David Gold, Sherry Gold's spouse, and
3,753,098 shares controlled through Au Zone.
(e) Includes 3,753,098 shares controlled through Au Zone and 11,250 shares
reserved for issuance upon exercise of stock options which are or will
become exercisable on or before May 30, 1998.
(f) 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 3,753,098 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.
(g) Includes 3,753,098 shares controlled through Au Zone and 22,500 shares
reserved for issuance upon exercise of stock options which are or will
become exercisable on or before May 30, 1998.
(h) Includes 6,250 shares of Common Stock reserved for issuance upon exercise of
stock options which are or will become exercisable on or before May 30,
1998.
(i) Includes 8,750 shares of Common Stock reserved for issuance upon exercise of
stock options which are or will become exercisable on or before May 30,
1998.
(j) Includes 3,750 shares of Common Stock reserved for issuance upon exercise of
stock options which are or will become exercisable on or before May 30,
1998.
(k) Includes 1,875 shares of Common Stock reserved for issuance upon exercise of
stock options which are or will become exercisable on or before May 30,
1998.
(l) Includes 18,750 shares of Common Stock reserved for issuance upon exercise
of stock options which are or will become exercisable on or before May 30,
1998.
(m) Includes (i) 2,179,861 shares owned by Sherry Gold, the spouse of David
Gold, (ii) 3,753,098 shares controlled through Au Zone and (iii) 90,000
shares of Common Stock reserved for issuance upon exercise of stock options
which are or will become exercisable on or before May 30, 1998.
The number of shares to be offered by each Selling Shareholder will be
completed by pre-effective amendment to the Registration Statement of which this
Prospectus is a part.
45
<PAGE>
UNDERWRITING
Merrill Lynch Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Goldman, Sachs & Co., Smith Barney Inc., EVEREN Securities, Inc. and Piper
Jaffray Inc. are acting as representatives (the "U.S. Representatives") for each
of the Underwriters named below (the "U.S. Underwriters"). Subject to the terms
and conditions set forth in a U.S. purchase agreement (the "U.S. Purchase
Agreement") among the Company, the Selling Shareholders and concurrently with
the sale of 700,000 shares of Common Stock to the International Managers (as
defined below), the Company and the Selling Shareholders have agreed to sell to
the U.S. Underwriters, and each of the U.S. Underwriters severally and not
jointly has agreed to purchase from the Company and the Selling Shareholders,
the number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
----------------------------------------------------------------------------- ----------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................................
Goldman, Sachs & Co........................................................................
Smith Barney Inc...........................................................................
EVEREN Securities, Inc.....................................................................
Piper Jaffray Inc..........................................................................
----------
Total........................................................................ 2,800,000
----------
----------
</TABLE>
The Company and the Selling Shareholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom
Merrill Lynch International, Goldman Sachs International, Smith Barney Inc.,
EVEREN Securities, Inc. and Piper Jaffray Inc. are acting as lead managers (the
"Lead Managers"). Subject to the terms and conditions set forth in the Purchase
Agreement, and concurrently with the sale of 2,800,000 shares of Common Stock to
the U.S. Underwriters pursuant to the Purchase Agreement, the Company and the
Selling Shareholders have agreed to sell to the International Managers, and the
International Managers severally have agreed to purchase from the Company and
the Selling Shareholders, an aggregate of 700,000 shares of Common Stock. The
public offering price per share and the total underwriting discount per share of
Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers, respectively,
have agreed, subject to the terms and conditions set forth herein, to purchase
all of the shares of Common Stock being sold pursuant to each such agreement if
any of the shares of Common Stock being sold pursuant to each such agreement are
purchased. Under certain circumstances, under the U.S. Purchase Agreement and
the International Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased. The closings with respect to the sale of shares
of Common Stock to be purchased by the U.S. Underwriters and the International
Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose initially to offer the shares of Common Stock offered hereby to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. After the Offerings, the public
offering price, concession and discount may be changed.
46
<PAGE>
The Company and the Selling Shareholders have granted options to the U.S.
Underwriters, exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of 90,000 and 330,000 additional shares of Common
Stock, respectively, at the public offering price set forth on the cover page of
this Prospectus, less the underwriting discount. The U.S. Underwriters may
exercise these options only to cover over-allotments, if any, made on the sale
of the Common Stock offered hereby. To the extent that the U.S. Underwriters
exercise these options, each U.S. Underwriter will be obligated, subject to
certain conditions, to purchase a number of additional shares of Common Stock
proportionate to such U.S. Underwriter's initial amount reflected in the
foregoing table. The Company and the Selling Shareholders have also granted
options to the International Managers, exercisable for 30 days after the date of
this Prospectus, to purchase up to an aggregate of 22,500 and 82,500 additional
shares of Common Stock, respectively, to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
The Company, the Selling Shareholders and the Company's directors and
executive officers have agreed, subject to certain exceptions, not to directly
or indirectly (i) 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 for the sale of or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, without the prior written consent of Merrill Lynch on behalf
of the Underwriters for a period of 90 days after the date of this Prospectus.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. or Canadian
persons or to persons they believe intend to resell to persons who are U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
The Company and the Selling Shareholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the U.S. Underwriters and the International Managers may
be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
47
<PAGE>
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain legal
matters will be passed upon for the Company and the Selling Shareholders by
Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California. Munger, Tolles &
Olson LLP, Los Angeles, California, has acted as counsel to the Underwriters in
connection with certain legal matters relating to the Offerings.
EXPERTS
The audited financial statements of the Company as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997
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 such firm as experts in giving said reports.
The audited consolidated financial statements of Universal as of December
31, 1997, and for the year ended December 31, 1997 incorporated by reference 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 such firm as experts in giving said reports. Reference is made to
said report which includes an explanatory paragraph that describes Universal's
ability to continue as a going concern.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a Registration Statement on Form S-3 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
omitted in accordance with the rules and regulations of the Commission. The
Company is subject to the informational requirements of the Exchange Act, and in
accordance therewith files reports, proxy statements and other information with
the Commission. Copies of all or any portion of the Registration Statement and
copies of such reports, proxy statements and other information filed by the
Company can be inspected and copied at the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
at its New York Regional Office, Seven World Trade Center, 13th Floor, New York,
New York 10048 and its Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained at
prescribed rates. Such documents filed by the Company can also be inspected at
the offices of the New York Stock Exchange located at 20 Broad Street, New York,
New York
48
<PAGE>
10005. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement 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, and each such statement shall be
deemed qualified in its entirety by such reference.
INCORPORATION BY REFERENCE
The following documents are hereby incorporated by reference: (i) Annual
Report on Form 10-K for the fiscal year ended December 31, 1997; (ii) Current
Report on Form 8-K dated February 19, 1998; and (iii) Registration Statement on
Form 8-A, declared effective on May 22, 1996.
All documents and reports filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date on which the Offerings are completed shall be
deemed to be incorporated by reference herein and to be a part hereof from the
respective dates of filing of such document or reports. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein,
modified or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference relating to the Company
which are not presented herein or delivered herewith. These documents (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference) are available to any person to whom this Prospectus
is delivered, upon written or oral request, without charge, from the Company,
4000 Union Pacific Avenue, City of Commerce, California 90023, Attention: Eric
Schiffer, Telephone: (213) 980-8145.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1996 and 1997............................................................ F-3
Statements of Income for the years ended December 31, 1995, 1996 and 1997.................................. F-5
Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997.................... F-6
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.............................. F-7
Notes to the Financial Statements.......................................................................... F-8
</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, 1996 and 1997, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 2, 1998
F-2
<PAGE>
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................................... $ 3,375 $ 882
Short-term investments................................................................... 27,619 32,584
Accounts receivable, net of allowance for doubtful accounts of $211 and $178 as of
December 31, 1996 and 1997, respectively............................................... 1,561 1,510
Inventories.............................................................................. 36,933 43,114
Other.................................................................................... 323 673
--------- ----------
Total current assets................................................................... 69,811 78,763
--------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land..................................................................................... 7,159 8,072
Building and improvement................................................................. 10,195 10,804
Leasehold improvements................................................................... 6,546 10,986
Fixtures and equipment................................................................... 5,840 8,473
Transportation equipment................................................................. 438 558
Construction in progress................................................................. 134 776
--------- ----------
30,312 39,669
Less--Accumulated depreciation and amortization.......................................... (7,239) (10,228)
--------- ----------
23,073 29,441
--------- ----------
OTHER ASSETS:
Deferred income taxes.................................................................... 5,702 5,947
Deposits................................................................................. 246 234
Receivable from affiliated entity........................................................ 165 230
Investment in Universal International, Inc............................................... -- 3,708
Other.................................................................................... -- 1,120
--------- ----------
6,113 11,239
--------- ----------
$ 98,997 $ 119,443
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
99 CENTS ONLY STORES
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligation.............................................. $ 656 $ 704
Accounts payable......................................................................... 6,577 5,534
Accrued expenses:
Payroll and payroll-related............................................................ 1,086 1,352
Sales tax.............................................................................. 1,056 1,467
Liability for claims................................................................... 706 396
Other.................................................................................. 34 824
Workers compensation..................................................................... 771 1,091
Income taxes payable..................................................................... 103 211
--------- ----------
10,989 11,579
--------- ----------
LONG-TERM LIABILITIES:
Deferred rent............................................................................ 1,294 1,476
Accrued interest......................................................................... 1,500 2,075
Capital lease obligation, net of current portion......................................... 8,709 8,005
--------- ----------
11,503 11,556
--------- ----------
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--18,520,794 at December 31, 1996 and 18,578,759 at December 31,
1997................................................................................. 65,354 66,207
Retained earnings........................................................................ 11,151 30,101
--------- ----------
76,505 96,308
--------- ----------
$ 98,997 $ 119,443
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
99 CENTS ONLY STORES
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES:
99 CENTS Only Stores $ 121,998 $ 143,163 $ 186,024
Other retail............................................................... 492 -- --
Bargain Wholesale.......................................................... 30,337 40,480 44,831
---------- ---------- ----------
152,827 183,643 230,855
COST OF SALES................................................................ 102,160 120,922 146,797
---------- ---------- ----------
Gross profit............................................................... 50,667 62,721 84,058
---------- ---------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses......................................................... 32,169 37,683 49,850
Depreciation and amortization.............................................. 1,640 2,009 2,989
---------- ---------- ----------
33,809 39,692 52,839
---------- ---------- ----------
Operating income......................................................... 16,858 23,029 31,219
---------- ---------- ----------
OTHER (INCOME) EXPENSE:
Interest income............................................................ (14) (890) (1,613)
Interest expense........................................................... 769 764 758
---------- ---------- ----------
755 (126) (855)
---------- ---------- ----------
Income before pro forma and historical provision for income taxes.......... 16,103 23,155 32,074
PROVISION FOR INCOME TAXES:
Pro forma (unaudited)...................................................... 6,509 9,453
---------- ----------
Historical................................................................. 156 2,418 13,124
---------- ---------- ----------
NET INCOME:
Pro forma (unaudited)...................................................... $ 9,594 $ 13,702
---------- ----------
---------- ----------
Historical................................................................. $ 15,947 $ 20,737 $ 18,950
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER COMMON SHARE:
Pro forma--Basic (unaudited)............................................... $ 0.77 $ 0.85 $ --
Pro forma--Diluted (unaudited)............................................. $ 0.77 $ 0.78 $ --
Historical--Basic.......................................................... $ 1.28 $ 1.29 $ 1.02
Historical--Diluted........................................................ $ 1.28 $ 1.18 $ 1.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Pro forma--Basic (unaudited)............................................... 12,411 16,103 --
Pro forma--Diluted (unaudited)............................................. 12,411 17,599 --
Historical--Basic.......................................................... 12,411 16,103 18,542
Historical--Diluted........................................................ 12,411 17,599 18,756
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
99 CENTS ONLY STORES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS
--------- --------- ---------
<S> <C> <C> <C>
BALANCE, December 31, 1994........................................................ 12,411 $ 195 $ 30,616
Net income...................................................................... -- -- 15,947
Cash distributions to shareholders.............................................. -- -- (11,200)
--------- --------- ---------
BALANCE, December 31, 1995........................................................ 12,411 195 35,363
Net income...................................................................... -- -- 20,737
Cash distributions to shareholders.............................................. -- -- (5,000)
Distributions to shareholders in the form of notes payable...................... -- -- (35,549)
Distributions to shareholders in the form of dividends payable.................. -- -- (4,400)
Net proceeds from initial public offering....................................... 6,110 65,159 --
--------- --------- ---------
BALANCE, December 31, 1996........................................................ 18,521 65,354 11,151
Net income...................................................................... -- -- 18,950
Tax benefit from exercise of stock options...................................... -- 350 --
Proceeds from exercise of stock options......................................... 58 503 --
--------- --------- ---------
BALANCE, December 31, 1997........................................................ 18,579 $ 66,207 $ 30,101
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
99 CENTS ONLY STORES
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 15,947 $ 20,737 $ 18,950
Adjustment to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts....................... -- 177 20
Depreciation and amortization......................... 1,640 2,009 2,989
Loss on disposition of property and equipment......... 32 13 --
Benefit for deferred income taxes..................... (145) (5,324) (245)
Changes in asset and liabilities associated with
operating activities:
Accounts receivable................................... (466) (378) 31
Inventories........................................... (1,795) (2,620) (6,181)
Other assets.......................................... 77 42 (1,470)
Deposits.............................................. 90 (15) 12
Receivable from affiliated entity..................... (107) (58) (65)
Accounts payable...................................... 1,018 827 (1,043)
Accrued expenses...................................... (291) 185 (843)
Worker's compensation................................. 147 (438) 320
Income taxes payable.................................. 96 7 458
Deferred rent......................................... 534 (52) 182
Accrued interest...................................... 499 535 575
------------ ------------ ------------
Net cash provided by operating activities........... 17,276 15,647 13,690
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (2,660) (7,308) (9,357)
Purchases of short-term investments..................... -- (27,619) (4,965)
Investment in Universal International, Inc.............. -- -- (1,708)
------------ ------------ ------------
Net cash used in investing activities............... (2,660) (34,927) (16,030)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation.................... (571) (612) (656)
Net proceeds from initial public offering............... -- 65,159 --
Proceeds from exercise of stock options................. -- -- 503
Payment of notes payable to shareholders................ -- (35,549) --
Payment of dividend payable............................. -- (4,400) --
Distributions to shareholders........................... (11,200) (5,000) --
------------ ------------ ------------
Net cash provided (used in) financing activities.... (11,771) 19,598 (153)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH........................... 2,845 318 (2,493)
CASH, beginning of period................................. 212 3,057 3,375
------------ ------------ ------------
CASH, end of period....................................... $ 3,057 $ 3,375 $ 882
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. LINE OF BUSINESS
The Company, 99 CENTS Only Stores, is primarily a retailer of various
consumable products and operated 43 and 53 stores at December 31, 1996 and 1997,
respectively. The Company is also a wholesale distributor of various consumable
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. PUBLIC OFFERING OF STOCK
In May 1996, the Company completed its initial public offering of 6,109,375
shares (including 796,875 shares from the exercise of the over allotment option
granted to the underwriters) of common stock at an offering price of $11.60 per
share. In connection with the Offerings, the Company received net proceeds of
$65,159,000.
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.
DEPRECIATION AND AMORTIZATION
Property and equipment are depreciated and amortized on the straight-line
basis over the following 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>
The Company follows the policy of capitalizing expenditures that materially
increase asset lives and charging ordinary repairs and maintenance to operations
as incurred.
F-8
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
All common shares and per share amounts have been adjusted to give
retroactive effect for a five and four stock split effected in the form of a
stock dividend distributed on November 28, 1997 to holders of record on November
17, 1997.
EARNINGS PER SHARE
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by dividing
net income by the total of the weighted average number of shares outstanding
plus the dilutive effect of outstanding stock options (applying the treasury
stock method). All earnings per share amounts for 1995 and 1996 have been
restated to reflect the adoption of SFAS No. 128.
A reconciliation of the basic weighted average number of shares outstanding
and the diluted weighted average number of shares outstanding for each of the
three years in the period ended December 31, 1997 follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of common shares outstanding-Basic....... 12,411 16,103 18,542
Dilutive effect of outstanding stock options..................... -- 134 214
Weighted average shares offered as a part of the public offering;
the proceeds from such shares being used to fund a $39.9
million distribution to shareholders........................... -- 1,362 --
--------- --------- ---------
Weighted average number of common shares outstanding-Diluted..... 12,411 17,599 18,756
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pro forma earnings per common share have been computed by dividing pro forma
net income by the pro forma weighted average number of common shares outstanding
plus the dilutive effect of common stock equivalents.
CONCENTRATION OF RISK
The Company maintains cash and short-term investments with highly qualified
financial institutions. At various times such amounts may be in excess of
insured limits.
PRO FORMA STATEMENTS OF INCOME
Through April 30, 1996, the Company had elected treatment as an S
corporation under provisions of the Internal Revenue Code. Effective May 1,
1996, the Company terminated its S corporation election and became a C
corporation.
See Note 5 for explanation of pro forma provision for income taxes and
related pro forma net income.
F-9
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT
Certain of the Company's operating leases for its retail locations include
scheduled increasing monthly payments. In accordance with generally accepted
accounting principles, the Company has accounted for the leases to provide
straight line charges to operations over the lives of the leases.
REVENUE RECOGNITION
Revenue is recognized at the point of sale for retail sales and at the time
of shipment for wholesale sales.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the
opening of new retail stores.
STOCK BASED COMPENSATION
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (SFAS 123). The Company has
elected to comply with the pro forma disclosure requirements of this standard
(see note 10) and to continue to account for stock options issued to employees
under the provisions of APB 25.
STATEMENTS OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method
as prescribed by the Statement of Financial Accounting Standards No. 95. The
Company considers all investments with original maturities of three months or
less to be cash equivalents.
Cash payments for income taxes were $200,000, $7,735,000 and $12,911,000 in
1995, 1996 and 1997, respectively. Interest payments totaled approximately
$269,000, $228,000 and $184,000 for the years December 31, 1995, 1996 and 1997,
respectively.
NEW AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130 and SFAS
131 are effective in 1998; however, management does not expect adoption of these
standards to have material impact on the Company's financial reporting.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to the
current year's presentation.
5. PRO FORMA AND HISTORICAL INCOME TAX PROVISION
Effective May 1, 1996, the Company terminated its S corporation election and
became a C corporation. As such, the actual taxes due by the Company through
December 31, 1996 are based on S corporation
F-10
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. PRO FORMA AND HISTORICAL INCOME TAX PROVISION (CONTINUED)
tax rates for income from January 1, 1996 through April 30, 1996 and C
corporation tax rates from May 1, 1996 through December 31, 1996. In connection
with the Company's change in tax status, the Company recorded an increase in the
deferred tax asset of $4,570,000. As a C corporation, the computation of
deferred taxes is based on federal C corporation tax rates, which are not
applicable to S corporations, and C corporation state tax rates, which are
significantly larger than S corporation state tax rates. In accordance with SFAS
109, the gain resulting from the increase in the deferred tax asset is included
as a credit to tax expense during the period ended December 31, 1996.
The historical provision (benefit) for income taxes and resulting historical
net income, based on S corporation and C corporation tax rates as discussed
above and including the effect of the increase in deferred tax asset as
discussed above, for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
-----------
<S> <C>
Income before provision (benefit) for income taxes............................... $ 23,155
Historical provision (benefit) for income taxes:
During period as an S corporation.............................................. 75
During period as a C corporation............................................... 6,913
Change in tax status........................................................... (4,570)
-----------
2,418
-----------
Historical net income............................................................ $ 20,737
-----------
-----------
</TABLE>
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,
F-11
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. PRO FORMA AND HISTORICAL INCOME TAX PROVISION (CONTINUED)
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
The pro forma provisions for income taxes for the years ended December 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
(AMOUNTS IN
THOUSANDS)
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Current:
Federal............................................................... $ 5,952 $ 8,695
State................................................................. 1,020 1,490
--------- ---------
6,972 10,185
Deferred................................................................ (463) (732)
--------- ---------
Pro forma provisions for income taxes................................... $ 6,509 $ 9,453
--------- ---------
--------- ---------
</TABLE>
The historical provisions for income taxes for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
---------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ---------
Current:
Federal.................................................. $ -- $ 6,111 $ 10,678
State.................................................... 301 1,631 2,691
---------- ---------- ---------
301 7,742 13,369
Deferred................................................... (145) (5,324) (245)
---------- ---------- ---------
Provisions for income taxes................................ $ 156 $ 2,418 $ 13,124
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-12
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. PRO FORMA AND HISTORICAL INCOME TAX PROVISION (CONTINUED)
Differences between the pro forma provisions for income taxes and income
taxes at the statutory federal income tax rate for the years ended December 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
------------------------------------------
1995 1996
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income tax at statutory Federal rate................... $ 5,636 35% $ 8,104 35%
State income taxes, net of federal income tax effect... 966 6.0 1,389 6.0
Effect of permanent differences........................ 14 -- 60 0.2
LARZ and targeted jobs credits......................... (107) (0.6) (100) (0.4)
--------- --------- --------- ---------
$ 6,509 40.4% $ 9,453 40.8%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Differences between the historical provisions for income taxes and income
taxes at the statutory federal income tax rate for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997
-------------------- -------------------- --------------------
<CAPTION>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory federal rate....................... $ -- --% $ 6,122 26.4% $ 11,226 35.0%
State income taxes, net of federal income tax effect....... -- -- 1,049 4.5 1,924 6.0
State income taxes as an S corporation..................... 242 1.5 85 0.4 -- --
Effect of permanent differences............................ (1) -- 31 0.1 (204) (0.6)
LARZ and targeted job credits.............................. (40) (0.2) (100) (0.4) (280) (0.9)
Change in tax status....................................... -- -- (4,570) (19.7) -- --
Other...................................................... (45) (0.3) (199) (0.9) 458 1.4
--------- --------- --------- --------- --------- ---------
$ 156 1.0% $ 2,418 10.4% $ 13,124 40.9%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-13
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. PRO FORMA AND HISTORICAL INCOME TAX PROVISION (CONTINUED)
A detail of the Company's deferred tax asset as of December 31, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
(AMOUNTS IN
THOUSANDS)
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Inventory reserve.......................................................... $ 1,661 $ 1,542
Uniform inventory capitalization........................................... 912 886
Depreciation............................................................... 1,180 1,656
Liability for claims....................................................... 289 162
Workers' compensation...................................................... 316 447
Deferred rent.............................................................. 531 605
LARZ credit................................................................ 300 195
State taxes................................................................ 491 511
Other, net................................................................. 22 (57)
--------- ---------
$ 5,702 $ 5,947
--------- ---------
--------- ---------
</TABLE>
6. SHORT-TERM INVESTMENTS
Investment in debt and equity securities are recorded as required by SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper, all with short-term maturities. The
Company generally holds investments until maturity. Any premium or discount
recognized in connection with the purchase of an investment is amortized over
the term of the investment. As of December 31, 1996 and 1997, the fair value of
investments approximated the carrying values and were invested as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Federal bonds........................................................... $ -- $ 1,500
Municipal bonds......................................................... 18,456 18,583
Commercial paper........................................................ 9,163 12,501
--------- ---------
$ 27,619 $ 32,584
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. CAPITAL LEASE OBLIGATIONS
The Company leases its warehouse, distribution and corporate facility
(approximately 880,000 square feet) under a lease accounted for as a capital
lease. Included in property and equipment is approximately $13.7 million of land
and building, at cost, related to this lease.
The lease requires fixed payments of $70,000 per month and bears interest at
7 percent per annum. At the lease expiration in December 2000, the Company has
the option to purchase the facility for $10.5 million. The Company plans to
exercise the option at the end of the lease. In the event the option is not
exercised, there is a $7.6 million penalty.
Total minimum payments under the lease are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
-----------
<S> <C>
Year ending December 31:
1998....................................................................... $ 840
1999....................................................................... 840
2000....................................................................... 11,340
-----------
13,020
Less--Amount representing interest............................................... (4,311)
-----------
Present value of minimum lease payment........................................... 8,709
Less--Current portion............................................................ (704)
-----------
$ 8,005
-----------
-----------
</TABLE>
8. RELATED-PARTY TRANSACTIONS
The Company leases certain retail facilities from its principal
shareholders. Rental expense for these facilities was approximately $1.6
million, $1.8 million and $2.0 million in 1995, 1996 and 1997, 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 $165,000 and $230,000 as of December 31, 1996 and 1997,
respectively, from an affiliated entity in the accompanying balance sheets for
the present value, not exceeding the cash surrender value of the policy, based
on mortality tables, of the premiums paid through December 31, 1996 and 1997.
During 1995, 1996 and 1997 the Company incurred legal fees of $109,000,
$82,000 and $61,000, respectively, to the law firm in which a director of the
Company is a partner.
9. COMMITMENTS AND CONTINGENCIES
CREDIT FACILITY
In December, 1997, the Company renewed the line of credit facility with a
bank. The 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 bears interest at the bank's prime interest rate (8.50% at December 31,
1997). The line of credit expires on June 30, 1998 at which time the Company
expects that it will be renewed.
F-15
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company must comply with one covenant, the ratio of total liabilities to
tangible net worth. At December 31, 1997 the Company was in compliance with this
covenant.
As of December 31, 1997, there were no borrowings outstanding under the line
of credit and outstanding letters of credit were approximately $1.2 million
($1.1 million of which related to a standby letter of credit for self-insured
workers' compensation).
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 1995, 1996 and 1997 was approximately $5.1 million, $5.6 million
and $7.3 million, respectively.
As of December 31, 1997, the minimum annual rentals payable under all
non-cancelable operating leases were as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN
THOUSANDS)
-----------
<S> <C>
Year ending December 31:
1998....................................................................... $ 7,731
1999....................................................................... 7,514
2000....................................................................... 7,361
2001....................................................................... 6,057
2002....................................................................... 5,424
Thereafter................................................................. 13,935
-----------
$ 48,022
-----------
-----------
</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, 1997 were approximately $52,000.
WORKERS' COMPENSATION
Effective August 11, 1993, the Company became self insured as to workers'
compensation claims. The Company carries excess workers' compensation insurance
which covers any individual claim in excess of $250,000 with a $2.0 million
ceiling. Through March 2, 1998, 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, 1997, the Company had accrued approximately $1.1 million for
estimated workers' compensation claims.
F-16
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1997, there was $1.1 million under the standby letter of
credit.
The Company is named as a defendant in various legal matters arising in the
normal course of business. In management's opinion, none of these matters will
have a material effect on the Company's financial position or its results of
operations.
10. STOCK OPTION PLAN
The Company's 1996 Stock Option Plan is a fixed plan, which provides for the
granting of non-qualified and incentive options to purchase up to 1,250,000
shares of common stock. Options may be granted to officers, employees, directors
and consultants. Grants may be at fair market value at the date of grant or at a
price determined by the compensation committee consisting of three outside
members of the board of directors (the "Committee"). Options vest over a three
year period, 33 1/3% one year from the date of grant and 33 1/3% per year
thereafter. Options expire ten years from the date of grant.
The following table summarizes stock options available for grant.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Beginning Balance................................................ -- 688,938
Authorized....................................................... 1,250,000 --
Granted.......................................................... (638,500) (708,564)
Canceled......................................................... 77,438 32,826
------------ ------------
Available for future grant....................................... 688,938 13,200
------------ ------------
------------ ------------
</TABLE>
A summary of the status of the Plan for the years ended December 31, 1996
and 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ----------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ---------- ---------- ----------
Outstanding at the beginning of the year.................................. -- $ -- 561,062 $ 8.85
Granted................................................................... 638,500 8.84 708,564 17.65
Exercised................................................................. -- -- (57,565) 8.75
Canceled.................................................................. (77,438) 8.79 (32,826) 13.59
--------- ----------
Outstanding at the end of the year........................................ 561,062 8.85 1,179,235 13.97
--------- ----------
--------- ----------
Exercisable at the end of the year........................................ -- -- 132,715 $ 8.89
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average fair value of options granted during the year............ $ 4.53 $ 14.44
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ----------------------------- ----------- ------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$8.79 479,986 8.3 $ 8.79 127,933 $ 8.79
$10.70--$11.15 13,500 8.8 11.00 4,500 11.00
$14.55 3,750 9.2 14.55 -- --
$17.60--$18.50 675,249 9.4 17.60 282 17.60
$21.30--$21.75 3,000 9.5 21.53 -- --
$26.50 3,750 9.8 26.50 -- --
----------- -----------
1,179,235 8.9 $ 13.97 132,715 $ 8.89
----------- -----------
----------- -----------
</TABLE>
The Company has elected to continue to measure compensation costs associated
with its stock option plan under APB 25, "Accounting for Stock Issued to
Employees" and accordingly, under SFAS No. 123, the expected impact on the
Company's financial statements is included in this expanded footnote disclosure.
Had the Company applied the fair value based method of accounting, which is
not required, to all grants of stock options, under SFAS 123, the Company would
have recorded additional compensation expense and computed pro forma net income
and earnings per share amounts as follows for the years ended December 31, 1996
and 1997 (amounts in thousands, except for per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
Additional compensation expense......................................... $ 850 $ 3,112
Pro forma net income.................................................... 20,227 17,083
Pro forma earnings per share:
Basic............................................................. $ 1.26 $ 0.92
Diluted........................................................... $ 1.15 $ 0.91
</TABLE>
These pro forma amounts were determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Risk free interest rate............................................... 5.0% 5.4%
Expected life......................................................... 5.6 years 10 years
Expected stock price volatility....................................... 28% 77%
Expected dividend yield............................................... none none
</TABLE>
F-18
<PAGE>
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. INVESTMENT IN UNIVERSAL INTERNATIONAL, INC.
In November 1997, the Company acquired approximately 48% of the outstanding
common stock of Universal International, Inc. ("Universal") for $4 million in
cash and inventory. The investment in Universal is accounted for using the
equity method of accounting. The investment is increased (reduced) by a credit
(charge) to income for 48% of the Universal income (loss). Summary information
relating to the results of operations and the financial condition of Universal
for fiscal 1997 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Sales............................................................ $ 68,705
<S> <C>
Net loss......................................................... (11,887)
Total assets..................................................... 31,388
Shareholders' equity............................................. 8,601
</TABLE>
During the period from the purchase of 48% of the Universal common stock to
December 31, 1997, the Company did not have any sales to Universal. During the
same period, the Company shipped approximately $1.2 million of inventory to
Universal towards fulfillment of the initial acquisition price.
In February 1998, the Company announced a proposal to acquire all of the
issued and to-be-issued shares of the common stock of Universal and
Odd's-N-End's Inc. ("Odd's-N-End's")(40.5% of Odd's-N-End's is owned by
Universal). If the acquisitions are consummated as proposed, the Company will
issue to the shareholders of Universal approximately 305,800 shares of the
Company's common stock and will pay to the holders of Odd's-N-End's common stock
approximately $830,000 in cash. As of December 31, 1997, Universal had a note
receivable due from Odd's-N-End's of approximately $8.7 million.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE,
OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 16
Price Range of Common Stock and Dividend Policy........................... 16
Capitalization............................................................ 17
Pending Acquisitions...................................................... 18
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 24
Business.................................................................. 31
Management................................................................ 42
Principal and Selling Shareholders........................................ 45
Underwriting.............................................................. 46
Legal Matters............................................................. 48
Experts................................................................... 48
Additional Information.................................................... 48
Incorporation by Reference................................................ 49
Index to Financial Statements............................................. F-1
</TABLE>
3,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
3,500,000 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 3,500,000 shares of Common Stock, no par value per share (the "Common
Stock"), of 99 CENTS Only Stores ("99 CENTS Only Stores" or the "Company")
offered hereby, 750,000 shares are being offered by the Company and 2,750,000
shares are being offered by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
Of the 3,500,000 shares of Common Stock offered hereby, 2,800,000 shares are
being offered initially in the United States and Canada by the U.S. Underwriters
(the "U.S. Offering") and 700,000 shares are being offered in a concurrent
offering outside the United States and Canada by the International Managers (the
"International Offering," and together with the U.S. Offering, the "Offerings").
The initial public offering price and the aggregate underwriting discount per
share will be identical for both Offerings.
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "NDN." On March 26, 1998, the last reported sale price of the Common
Stock as reported on the NYSE was $36 3/8 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS 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>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(2)(3)................................ $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company and the
Selling Shareholders, in proportion to the net proceeds received. See
"Underwriting."
(3) The Company and the Selling Shareholders have granted to the U.S.
Underwriters and the International Managers options, exercisable within 30
days after the date hereof, to purchase up to an aggregate of 420,000 and
105,000 shares of Common Stock, respectively, to cover over-allotments, if
any. If all such additional shares are purchased, the total Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Shareholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
-------------------
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
-------------------
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES PURCHASERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership and disposition of Common Stock by a
holder that, for United States Federal income tax purposes, is not a "United
States person" (as defined below) (a "Non-United States Holder"). This
discussion is based upon the United States Federal tax laws now in effect, which
are subject to change, possibly retroactively. This discussion does not consider
any specific facts or circumstances that may apply to a particular Non-United
States Holder in light of their individual circumstances. Prospective investors
are urged to consult their tax advisors regarding the United States Federal tax
consequences of acquiring, holding, and disposing of Common Stock, as well as
any tax consequences that may arise under the laws of any foreign state, local,
or other tax jurisdiction.
For purposes of this discussion, a "United States person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity created or organized in the United States or under the laws of the
United States or of any political subdivision thereof, (iii) an estate whose
income is includible in gross income for United States Federal income tax
purposes regardless of its source, or (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has one or
more United States fiduciaries who have the authority to control all substantial
decisions of the trusts.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder, in which case the dividend
will be subject to the United States Federal income tax on net income that
applies to United States persons generally (and, with respect to corporate
holders and under certain circumstances, the branch profits tax). The
withholding tax will apply to amounts distributed to a Non-United States Holder
without regard to whether such amounts are less than, equal to, or in excess of,
current and accumulated earnings and profits of the Company. However, beginning
January 1, 1999, the withholding tax may be applied, at the election of the
Company (or intermediate payor), to the estimated current and accumulated
earnings and profits of the Company. In any case, to the extent that an amount
distributed to a Non-United States Holder exceeds the current and accumulated
profits of the Company, such holder may obtain a refund of excess amounts
withheld by filing an appropriate claim therefor with the IRS. Non-United States
Holders should consult any applicable income tax treaties, which may provide for
a lower rate of withholding or other rules different from those described above.
A Non-United States Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or otherwise claim a reduction of
or exemption from withholding under the foregoing rules. The current rules
applicable to the requirements for claiming treaty benefits have been changed.
Beginning January 1, 1999, a Non-United States Holder generally must submit,
directly or through any nominee, custodian or other intermediary receiving
distributions from the Company for its account, a statement certifying that the
Non-United States Holder is the beneficial owner of amounts distributed by the
Company and is a resident of the country under whose tax treaty with the United
States the Non-United States Holder claims benefits. In certain circumstances,
the Company may elect to require the foregoing statement from a Non-United
States Holder on or after January 1, 1998.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder, (ii) in
the case of a Non-United States Holder who is a non-resident alien individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and
46
<PAGE>
certain other requirements are met or (iii) the Company is a "United States real
property holding corporation" for United States Federal income tax purposes. The
Company does not believe that it has been, currently is, or will be, a United
States real property holding corporation. Gain that is effectively connected
with the conduct of a trade or business within the United States by the
Non-United States Holder will be subject to the United States Federal income tax
on net income that applies to United States persons generally (and, with respect
to corporate holders and under certain circumstances, the branch profits tax)
but will not be subject to withholding. Non-United States Holders should consult
applicable treaties which may provide for different rules.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the U.S. Internal Revenue Service may make its
reports available to tax authorities in the recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payor.
The payment of the proceeds of the disposition of Common Stock to or through
the United States office of a broker is subject to information reporting and
backup withholding at a rate of 31% unless the beneficial owner certifies under
penalties of perjury that it is a Non-United States Holder or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-United States office of a
non-United States broker. However, information reporting requirements (but not
backup withholding) will apply to a payment of disposition proceeds outside the
United States through an office outside the United States of a broker that is
(a) a United States person; (b) a United States controlled foreign corporation
or (c) a foreign person 50% or more of whose gross income for certain periods is
from a United States trade or business unless such broker has documentary
evidence in its files of the owner's foreign status and has no actual knowledge
to the contrary.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
Under United States Treasury regulations issued on October 6, 1997 and
generally effective for payments made beginning January 1, 1999, the payment of
dividends or the payment of proceeds from the disposition of Common Stock to a
Non-United States Holder may be subject to information reporting and backup
withholding unless such recipient provides to the payor certain documentation as
to its status as a Non-United States Holder or otherwise establishes an
exemption.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specially defined for United States Federal estate tax purposes)
of the United States on the date of death will be included in such individual's
estate for United States Federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
47
<PAGE>
UNDERWRITING
Merrill Lynch International ("Merrill Lynch") Goldman Sachs International,
Smith Barney Inc., EVEREN Securities, Inc. and Piper Jaffray Inc. are acting as
lead managers (the "Lead Managers") for each of the International Managers named
below (the "International Managers"). Subject to the terms and conditions set
forth in an international purchase agreement (the "International Purchase
Agreement") among the Company, the Selling Shareholders and concurrently with
the sale of 2,800,000 shares of Common Stock to the U.S. Underwriters (as
defined below), the Company and the Selling Shareholders have agreed to sell to
the International Managers, and each of the International Managers severally and
not jointly has agreed to purchase from the Company and the Selling
Shareholders, the number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
------------------------------------------------------------------- -----------
<S> <C> <C>
Merrill Lynch International......................................................
Goldman Sachs International......................................................
Smith Barney Inc.................................................................
EVEREN Securities, Inc...........................................................
Piper Jaffray Inc................................................................
-----------
Total.............................................................. 700,000
-----------
-----------
</TABLE>
The Company and the Selling Shareholders have also entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in
the United States and Canada (the "U.S. Underwriters" and, together with the
International Managers, the "Underwriters") for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Goldman, Sachs & Co., Smith Barney Inc., EVEREN
Securities, Inc. and Piper Jaffray Inc. are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 700,000 shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company and the Selling Shareholders have agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters severally have agreed to purchase
from the Company and the Selling Shareholders, an aggregate of 2,800,000 shares
of Common Stock. The public offering price per share and the total underwriting
discount per share of Common Stock are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters respectively,
have agreed, subject to the terms and conditions set forth herein, to purchase
all of the shares of Common Stock being sold pursuant to each such agreement if
any of the shares of Common Stock being sold pursuant to each such agreement are
purchased. Under certain circumstances, under the U.S. Purchase Agreement and
the International Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased. The closings with respect to the sale of shares
of Common Stock to be purchased by the International Managers and the U.S.
Underwriters are conditioned upon one another.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock offered hereby to the
public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The International Managers may allow,
and such dealers may reallow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. After the Offerings, the public
offering price, concession and discount may be changed.
48
<PAGE>
The Company and the Selling Shareholders have granted options to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 22,500 and 82,500 additional
shares of Common Stock, respectively, at the public offering price set forth on
the cover page of this Prospectus, less the underwriting discount. The
International Managers may exercise these options only to cover over-allotments,
if any, made on the sale of the Common Stock offered hereby. To the extent that
the International Managers exercise these options, each International Manager
will be obligated, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such International Manager's
initial amount reflected in the foregoing table. The Company and the Selling
Shareholders have also granted options to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
90,000 and 330,000 additional shares of Common Stock, respectively, to cover
over-allotments, if any, on terms similar to those granted to the International
Managers.
The Company, the Selling Shareholders and the Company's directors and
executive officers have agreed, subject to certain exceptions, not to directly
or indirectly (i) 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 for the sale of or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, without the prior written consent of Merrill Lynch on behalf
of the Underwriters for a period of 90 days after the date of this Prospectus.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. or Canadian
persons or to persons they believe intend to resell to persons who are U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
The Company and the Selling Shareholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the U.S. Underwriters and the International Managers may
be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market.
49
<PAGE>
The U.S. Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration period of six months from the Closing Date, will
not offer or sell any shares of Common Stock to persons in the United Kingdom,
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
their businesses or otherwise in circumstances which do not constitute an offer
to the public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 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 issuance of Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisement) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or any
other material relating to the Company, the Selling Shareholders or shares of
Common Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of Common Stock may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the shares of Common Stock may be distributed
or published, in or from any country or jurisdiction except in compliance with
any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
IN THIS PROSPECTUS, REFERENCE TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS UNLESS STATED OTHERWISE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 16
Price Range of Common Stock and Dividend Policy........................... 16
Capitalization............................................................ 17
Pending Acquisitions...................................................... 18
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 24
Business.................................................................. 31
Management................................................................ 42
Principal and Selling Shareholders........................................ 45
Certain United States Federal Tax Consequences to Non-United States
Purchasers.............................................................. 46
Underwriting.............................................................. 48
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 51
Incorporation by Reference................................................ 52
Index to Financial Statements............................................. F-1
</TABLE>
3,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
SALOMON SMITH BARNEY
INTERNATIONAL
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on March 30, 1998.
<TABLE>
<S> <C> <C>
99 CENTS ONLY STORES
By: /s/ ERIC SCHIFFER
-----------------------------------------
Eric Schiffer
SENIOR VICE PRESIDENT OF FINANCE AND
OPERATIONS AND TREASURER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints David
Gold and Eric Schiffer, as his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and his name, place and
stead, in any and all capacities, to sign any or all amendments (including post
effective amendments) to this Registration Statement and a new Registration
Statement filed pursuant to Rule 462(b) of the Securities Act of 1933 and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons, in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DAVID GOLD Chairman of the Board,
- ------------------------------ Chief Executive Officer March 30, 1998
David Gold and President
/s/ HOWARD GOLD Senior Vice President of
- ------------------------------ Distribution and March 30, 1998
Howard Gold Director
Senior Vice President of
/s/ JEFF GOLD Real Estate and
- ------------------------------ Information Systems and March 30, 1998
Jeff Gold Director
/s/ ERIC SCHIFFER Senior Vice President of
- ------------------------------ Finance and Operations March 30, 1998
Eric Schiffer and Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ANDY FARINA
- ------------------------------ Chief Financial Officer March 30, 1998
Andy Farina
/s/ LAWRENCE GLASCOTT
- ------------------------------ Director March 30, 1998
Lawrence Glascott
/s/ MARVIN L. HOLEN
- ------------------------------ Director March 30, 1998
Marvin L. Holen
/s/ BEN SCHWARTZ
- ------------------------------ Director March 30, 1998
Ben Schwartz
</TABLE>
II-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
NASD fee and the NYSE additional listing fee.
<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission........... $42,413.04
NYSE Additional Listing Fee.................................... 14,750.00
NASD Fee....................................................... 14,877.00
Accounting fees and expenses................................... 100,000.00
Legal fees and expenses (other than blue sky).................. 125,000.00
Blue sky fees and expenses..................................... 2,000.00
Printing; stock certificates................................... 100,000.00
Transfer agent and registrar fees.............................. 5,000.00
Miscellaneous.................................................. 95,959.96
----------
Total...................................................... $500,000.00
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Registrant and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Registrant or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code") (concerning contracts or
transactions between the Registrant and a director) or (vii) under Section 316
of the California Code (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Registrant's shareholders for any violation of a director's fiduciary duty to
the Registrant or its shareholders.
The Registrant's Articles of Incorporation also include an authorization for
the Registrant to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this latter provision, the
Registrant's Bylaws provide for indemnification of the Registrant's directors,
officers and employees. In addition, the Registrant, at its discretion, may
provide indemnification to persons whom the Registrant is not obligated to
indemnify. The Bylaws also allow the Registrant to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and provide
the maximum indemnification permitted by law. These agreements, together with
the Registrant's Bylaws and Articles of Incorporation, may require the
Registrant, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status
II-1
<PAGE>
or service as directors (other than liabilities resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms.
Section 317 of the California Code and the Registrant's Bylaws make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act.
The Purchase Agreements filed as Exhibits 1.1 and 1.2 hereto set forth
certain provisions with respect to the indemnification of certain controlling
persons, directors and officers against certain losses and liabilities,
including certain liabilities under the Securities Act.
The Registrant maintains director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of U.S. Purchase Agreement.*
1.2 Form of International Purchase Agreement.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen certificate evidencing Common Stock of the Registrant.(1)
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP.**
10.1 Form of Indemnification Agreement and Schedule of Indemnified Parties.(1)
10.2 Business Loan Agreement, dated January 21, 1997, by and between the Registrant and Bank of America
National Trust and Savings Association; Amendment No. 1 thereto, dated May 20, 1997; and Amendment No.
2 thereto, dated December 11, 1997.*
10.3 Form of Tax Indemnification Agreement, between and among the Registrant and the Existing
Shareholders.(1)
10.4 1996 Stock Option Plan.(1)
10.5 Lease for 730 West Foothill Boulevard, Azusa, California, dated as of December 1, 1995, by and between
the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended(1).
10.6 Lease for 13023 Hawthorne Boulevard, Hawthorne, California, dated April 1 1994, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
10.7 Lease for 6161 Atlantic Boulevard, Maywood, California, dated November 11, 1985, by and between the
Registrant as Lessee and David and Sherry Gold, among others, as Lessors.(1)
10.8 Lease for 14139 Paramount Boulevard, Paramount, California, dated as of March 1 1996, by and between the
Registrant as Tenant and 14139 Paramount Properties as Landlord, as amended.(1)
10.9 Release Agreement, dated March 25, 1996, regarding 11382 Beach Boulevard, Stanton, California, by and
between the Registrant and 11382 Beach Partnership.(1)
10.10 Lease for 6124 Pacific Boulevard, Huntington Park, California, dated January 31, 1991, by and between
the Registrant as Tenant and David and Sherry Gold as the Landlord, as amended.(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.11 Lease for 14901 Hawthorne Boulevard, Lawndale, California, dated November 1, 1991, by and between Howard
Gold, Karen Schiffer and Jeff Gold, dba 14901 Hawthorne Boulevard Partnership as Landlord and the
Registrant as Tenant, as amended.(1)
10.12 Lease for 5599 Atlantic Avenue, North Long Beach, California, dated August 13, 1992, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
10.13 Lease for 1514 North Main Street, Santa Ana, California, dated as of November 12, 1993, by and between
the Registrant as Tenant and Howard Gold, Jeff Gold, Eric J. Schiffer and Karen R. Schiffer as
Landlord, as amended.(1)
10.14 Lease for 6121 Wilshire Boulevard, Los Angeles, California, dated as of July 1, 1993, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended; and lease for 6101 Wilshire
Boulevard, Los Angeles, California, dated as of December 1, 1995, by and between the Registrant as
Tenant and David and Sherry Gold as Landlord, as amended.(1)
10.15 Lease for 8625 Woodman Avenue, Arlets, California, dated as of July 8, 1993, by and between the
Registrant as Tenant and David and Sherry Gold as Landlord, as amended.(1)
10.16 Lease for 2566 East Florence Avenue, Walnut Park, California, dated as of April 18, 1994, by and between
HKJ Gold, Inc. as Landlord and the Registrant as Tenant, as amended.(1)
10.17 Lease for 3420 West Lincoln Avenue, Anaheim, California, dated as of March 1, 1996, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
10.18. Master Lease for 4000 East Union Pacific Avenue, City of Commerce, California ("Warehouse and
Distribution Facility Lease"), dated as of December 20, 1993, by and between the Registrant as Lessee
and TBC Realty II Corporation ("TBC") as Lessor, together with Lease Guaranty ("Lease Guaranty"),
dated December 20, 1993, by and between Sherry and David Gold and TBC with respect thereto and Letter
Agreement, dated December 15, 1993, among Registrant, The Mead Corporation, TBC and Citicorp Leasing,
Inc. with respect to the Lease Guaranty.(1)
10.10 Hawaiian Gardens Indemnity Agreement, dated as of March 25, 1996, by and between the Registrant and HKJ
Gold, Inc.(1)
10.20 North Broadway Indemnity Agreement, dated as of May 1, 1996, by and between HKJ Gold, Inc. and the
Registrant.(1)
10.21 Lease for 2606 North Broadway, Los Angeles, California, dated as of May 1, 1996, by and between HKJ
Gold, Inc. as Landlord and the Registrant as Tenant.(1)
10.22 Grant Deed concerning 8625 Woodman Avenue, Arleta, California, dated May 2, 1996, made by David Gold and
Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(1)
10.23 Grant Deed concerning 6101 Wilshire Boulevard, Los Angeles, California, dated May 2, 1996, made by David
Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(1)
10.24 Grant Deed concerning 6124 Pacific Boulevard, Huntington Park, California, dated May 2, 1996, made by
David Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.25 Grant Deed concerning 14901 Hawthorne Boulevard, Lawndale, California, dated May 2, 1996, made by Howard
Gold, Karen Schiffer and Jeff Gold in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.26 Lease for 12125 Carson Boulevard, Hawaiian Gardens, California dated April 1996, by and between Au Zone
Investments #2, L.P., a California limited partnership.**
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.*
23.3 Consent of Arthur Andersen LLP.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
24.1 Power of Attorney (included on page II-5).*
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on May 21, 1996.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer of controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of U.S. Purchase Agreement.*
1.2 Form of International Purchase Agreement.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
4.1 Specimen certificate evidencing Common Stock of the Registrant.(1)
5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP.**
10.1 Form of Indemnification Agreement and Schedule of Indemnified Parties.(1)
10.2 Business Loan Agreement, dated January 21, 1997, by and between the Registrant and Bank of America
National Trust and Savings Association; Amendment No. 1 thereto, dated May 20, 1997; and Amendment No.
2 thereto, dated December 11, 1997.*
10.3 Form of Tax Indemnification Agreement, between and among the Registrant and the Existing
Shareholders.(1)
10.4 1996 Stock Option Plan.(1)
10.5 Lease for 730 West Foothill Boulevard, Azusa, California, dated as of December 1, 1995, by and between
the Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended(1).
10.6 Lease for 13023 Hawthorne Boulevard, Hawthorne, California, dated April 1 1994, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
10.7 Lease for 6161 Atlantic Boulevard, Maywood, California, dated November 11, 1985, by and between the
Registrant as Lessee and David and Sherry Gold, among others, as Lessors.(1)
10.8 Lease for 14139 Paramount Boulevard, Paramount, California, dated as of March 1 1996, by and between the
Registrant as Tenant and 14139 Paramount Properties as Landlord, as amended.(1)
10.9 Release Agreement, dated March 25, 1996, regarding 11382 Beach Boulevard, Stanton, California, by and
between the Registrant and 11382 Beach Partnership.(1)
10.10 Lease for 6124 Pacific Boulevard, Huntington Park, California, dated January 31, 1991, by and between
the Registrant as Tenant and David and Sherry Gold as the Landlord, as amended.(1)
10.11 Lease for 14901 Hawthorne Boulevard, Lawndale, California, dated November 1, 1991, by and between Howard
Gold, Karen Schiffer and Jeff Gold, dba 14901 Hawthorne Boulevard Partnership as Landlord and the
Registrant as Tenant, as amended.(1)
10.12 Lease for 5599 Atlantic Avenue, North Long Beach, California, dated August 13, 1992, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
10.13 Lease for 1514 North Main Street, Santa Ana, California, dated as of November 12, 1993, by and between
the Registrant as Tenant and Howard Gold, Jeff Gold, Eric J. Schiffer and Karen R. Schiffer as
Landlord, as amended.(1)
10.14 Lease for 6121 Wilshire Boulevard, Los Angeles, California, dated as of July 1, 1993, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended; and lease for 6101 Wilshire
Boulevard, Los Angeles, California, dated as of December 1, 1995, by and between the Registrant as
Tenant and David and Sherry Gold as Landlord, as amended.(1)
10.15 Lease for 8625 Woodman Avenue, Arlets, California, dated as of July 8, 1993, by and between the
Registrant as Tenant and David and Sherry Gold as Landlord, as amended.(1)
10.16 Lease for 2566 East Florence Avenue, Walnut Park, California, dated as of April 18, 1994, by and between
HKJ Gold, Inc. as Landlord and the Registrant as Tenant, as amended.(1)
10.17 Lease for 3420 West Lincoln Avenue, Anaheim, California, dated as of March 1, 1996, by and between the
Registrant as Tenant and HKJ Gold, Inc. as Landlord, as amended.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.18. Master Lease for 4000 East Union Pacific Avenue, City of Commerce, California ("Warehouse and
Distribution Facility Lease"), dated as of December 20, 1993, by and between the Registrant as Lessee
and TBC Realty II Corporation ("TBC") as Lessor, together with Lease Guaranty ("Lease Guaranty"),
dated December 20, 1993, by and between Sherry and David Gold and TBC with respect thereto and Letter
Agreement, dated December 15, 1993, among Registrant, The Mead Corporation, TBC and Citicorp Leasing,
Inc. with respect to the Lease Guaranty.(1)
10.10 Hawaiian Gardens Indemnity Agreement, dated as of March 25, 1996, by and between the Registrant and HKJ
Gold, Inc.(1)
10.20 North Broadway Indemnity Agreement, dated as of May 1, 1996, by and between HKJ Gold, Inc. and the
Registrant.(1)
10.21 Lease for 2606 North Broadway, Los Angeles, California, dated as of May 1, 1996, by and between HKJ
Gold, Inc. as Landlord and the Registrant as Tenant.(1)
10.22 Grant Deed concerning 8625 Woodman Avenue, Arleta, California, dated May 2, 1996, made by David Gold and
Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(1)
10.23 Grant Deed concerning 6101 Wilshire Boulevard, Los Angeles, California, dated May 2, 1996, made by David
Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited partnership.(1)
10.24 Grant Deed concerning 6124 Pacific Boulevard, Huntington Park, California, dated May 2, 1996, made by
David Gold and Sherry Gold in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.25 Grant Deed concerning 14901 Hawthorne Boulevard, Lawndale, California, dated May 2, 1996, made by Howard
Gold, Karen Schiffer and Jeff Gold in favor of Au Zone Investments #2, L.P., a California limited
partnership.(1)
10.26 Lease for 12125 Carson Boulevard, Hawaiian Gardens, California dated April 1996, by and between Au Zone
Investments #2, L.P., a California limited partnership.**
21.1 Subsidiaries of the Registrant.(1)
23.1 Consent of Troop Meisinger Steuber & Pasich, LLP (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.*
23.3 Consent of Arthur Andersen LLP.*
24.1 Power of Attorney (included on page II-5).*
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
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99 CENTS ONLY STORES
(a California corporation)
2,800,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: , 1998
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<PAGE>
99 CENTS ONLY STORES
(a California corporation)
2,800,000 Shares of Common Stock
(No Par Value Per Share)
U.S. PURCHASE AGREEMENT
, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
99 Cents Only Stores, a California corporation (the "Company") and the
persons listed in Schedule B hereto (the "Selling Shareholders"), confirm
their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S.
Underwriters named in Schedule A hereto (collectively, the "U.S.
Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Goldman,
Sachs & Co., Smith Barney Inc., EVEREN Securities, Inc. and Piper Jaffray
Inc. are acting as representatives (in such capacity, the "U.S.
Representatives"), with respect to the sale by the Company and the Selling
Shareholders, acting severally and not jointly, and the purchase by the U.S.
Underwriters, acting severally and not jointly,
<PAGE>
of the respective numbers of shares of Common Stock, no par value per share,
of the Company ("Common Stock") set forth in said Schedule A, and with
respect to the grant by the Company and the Selling Shareholders to the U.S.
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 420,000 additional shares
of Common Stock to cover over-allotments, if any. The aforesaid 2,800,000
shares of Common Stock (the "Initial U.S. Securities") to be purchased by the
U.S. Underwriters and all or any part of the 420,000 shares of Common Stock
subject to the option described in Section 2(b) hereof (the "U.S. Option
Securities") are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Company
and the Selling Shareholders of an aggregate of 700,000 shares of Common
Stock (the "Initial International Securities") through arrangements with
certain underwriters outside the United States and Canada (the "International
Managers") for which Merrill Lynch International, Goldman Sachs
International, Smith Barney Inc., EVEREN Securities, Inc. and Piper Jaffray
Inc. are acting as lead managers (the "Lead Managers") and the grant by the
Company and the Selling Shareholders to the International Managers, acting
severally and not jointly, of an option to purchase all or any part of the
International Managers' pro rata portion of up to 105,000 additional shares
of Common Stock solely to cover overallotments, if any (the "International
Option Securities" and, together with the U.S. Option Securities, the "Option
Securities"). The Initial International Securities and the International
Option Securities are hereinafter called the "International Securities". It
is understood that the Company is not obligated to sell and the U.S.
Underwriters are not obligated to purchase, any Initial U.S. Securities
unless all of the Initial International Securities are contemporaneously
purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities, and the International
Securities are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing
for the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon
as the U.S. Representatives deem advisable after this Agreement has been
executed and delivered.
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The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-___________)
covering the registration of the Securities under the Securities Act of 1933,
as amended (the "1933 Act"), including the related preliminary prospectus or
prospectuses. Promptly after execution and delivery of this Agreement, the
Company will either (i) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the
Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are
to be used in connection with the offering and sale of the Securities: one
relating to the U.S. Securities (the "Form of U.S. Prospectus") and one
relating to the International Securities (the "Form of International
Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting" and the inclusion in the Form of
International Prospectus of a section under the caption "Certain United
States Tax Considerations for Non-United States Holders." The information
included in any such prospectus or in any such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of
Rule 434 is referred to as "Rule 434 Information." Each Form of U.S.
Prospectus and Form of International Prospectus used before such registration
statement became effective, and any prospectus that omitted, as applicable,
the Rule 430A Information or the Rule 434 Information, that was used after
such effectiveness and prior to the execution and delivery of this Agreement,
is herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto, schedules thereto, if any, and the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 under the
1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
Form of U.S. Prospectus and the final Form of International Prospectus,
including the documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the 1933 Act, in the forms first furnished to the
Underwriters for use in connection with the offering of the Securities are
herein called the "U.S. Prospectus" and the "International Prospectus,"
respectively, and collectively, the "Prospectuses." If Rule 434 is relied
on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to
the preliminary U.S. Prospectus dated _________, 1998 and preliminary
International Prospectus dated _______, 1998, respectively, each together
with the applicable Term Sheet and all references in this Agreement to the
date of such Prospectuses shall mean the date of the applicable Term Sheet.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the U.S. Prospectus, the International Prospectus
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or any Term Sheet or any amendment or supplement to any of the foregoing
shall be deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus (including the Form of
U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is
incorporated by reference in the Registration Statement, any preliminary
prospectus (including the Form of U.S. Prospectus and Form of International
Prospectus) or the Prospectuses, as the case may be; and all references in
this Agreement to amendments or supplements to the Registration Statement,
any preliminary prospectus or the Prospectuses shall be deemed to mean and
include the filing of any document under the Securities Exchange Act of 1934
(the "1934 Act") which is incorporated by reference in the Registration
Statement, such preliminary prospectus or the Prospectuses, as the case may
be.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each
U.S. Underwriter, as follows:
(1) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company meets the
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither of the Prospectuses nor
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<PAGE>
any amendments or supplements thereto, at the time the Prospectuses or
any amendments or supplements thereto were issued and at the Closing
Time (and, if any U.S. Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the U.S. Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement or the
U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(2) INCORPORATED DOCUMENTS. The documents incorporated or deemed to
be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read together
with the other information in the Prospectuses, at the time the
Registration Statement became effective, at the time the Prospectuses were
issued and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(3) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(4) FINANCIAL STATEMENTS. The consolidated financial statements of
the Company, together with related notes and schedules of the Company
included in the Registration Statement and the Prospectuses, are accurate
and present fairly the financial position, results of operations and cash
flows of the Company at the indicated dates and for the indicated periods;
such financial statements have been prepared in accordance with
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<PAGE>
generally accepted accounting principles ("GAAP") consistently applied
throughout the periods involved, and all adjustments necessary for a
fair presentation of results for such periods have been made and any
unaudited financial statements have been prepared on a basis
substantially consistent with that of the audited operating financial
statements included in the Registration Statement and the Prospectuses;
and the summary and selected financial and operating data included in
the Registration Statement and the Prospectuses presents fairly the
information shown therein and have been compiled on a basis consistent
with the audited and any unaudited financial statements, as the case may
be, included therein; and the pro forma information included in the
Prospectuses present fairly the information shown therein, have been
prepared in accordance with GAAP and the Commission's rules and
guidelines with respect to pro forma financial statements and other pro
forma basis described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate under the circumstances.
(5) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material
with respect to the Company and (C) except for the stock dividend on the
Common Stock paid on December 1, 1997 described in the Prospectuses, there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(6) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of California and has corporate power and authority
to own and lease its properties and assets and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect. The Company has no subsidiaries and has
never had a subsidiary.
(7) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, the International Purchase
Agreement or pursuant to employee benefit plans referred to in
6
<PAGE>
the Prospectuses). The shares of issued and outstanding capital stock
of the Company, including the securities to be purchased by the U.S.
Underwriters from the Selling Shareholders, have been duly authorized
and validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company, including the
securities to be purchased by the U.S. Underwriters from the Selling
Shareholders, was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(8) AUTHORIZATION OF AGREEMENT. This Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by the
Company.
(9) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the issuance of
the Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(10) ABSENCE OF DEFAULTS AND CONFLICTS. The Company is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company is a
party or by which it may be bound, or to which any of the property or
assets of the Company is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the International Purchase Agreement and the consummation of
the transactions contemplated in this Agreement, the International Purchase
Agreement and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use of
Proceeds") and compliance by the Company with its obligations under this
Agreement and the International Purchase Agreement have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or
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default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the charter or by-laws of the Company or any
subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.
(11) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees of
the Company exists, or to the best knowledge of the Company after due
inquiry, is imminent, that could result in a Material Adverse Effect; and
the Company has not received notice of any existing or imminent labor
disturbance by the employees of any of its principle suppliers, customers,
manufacturers or contractors that could result in any Material Adverse
Effect.
(12) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected
to materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement and the
International Purchase Agreement or the performance by the Company of its
obligations hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary is a party
or of which any of their respective property or assets is the subject which
are not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(13) ACCURACY OF EXHIBITS. There are no contracts or documents which
are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required.
(14) POSSESSION OF INTELLECTUAL PROPERTY. The Company owns or
possess, or can acquire on reasonable terms, the patents, patent rights,
licenses, inventions,
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copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (collectively,
"Patents and Proprietary Rights") currently employed by it in connection
with the business it now operates except where the failure to so own,
possess or acquire such Patents and Proprietary Rights would not have a
Material Adverse Effect; and the Company has not received any notice and
is not otherwise aware of any infringement of or conflict with asserted
rights of others with respect to any Patent or Proprietary Rights that,
if the subject of any unfavorable decision, ruling or finding, singly or
in the aggregate, could result in a Material Adverse Effect; "99CENTS
Only Stores" and its related logo is a trademark and service mark used
by the Company to identify its retail stores; "Bargain Wholesale" is a
service mark used by the Company to identify its wholesale business; and
such trademarks and service marks are protected by registration in the
name of the Company on the principal register in the United States
Patent and Trademark Office and are registered with the State of
California.
(15) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement and the International Purchase Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws.
(16) POSSESSION OF LICENSES AND PERMITS. The Company possesses such
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by it; the Company is in compliance with the
terms and conditions of all such Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and the Company has not received
any notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
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(17) TITLE TO PROPERTY. The Company has good and marketable title to
all real property owned by the Company and good title to all other
properties owned by it, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances of
any kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company; and all of the leases and subleases material
to the business of the Company, and under which the Company holds
properties described in the Prospectuses, are in full force and effect, and
the Company has not received any notice of any material claim of any sort
that has been asserted by anyone adverse to the rights of the Company under
any of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company to the continued possession of the leased or
subleased premises under any such lease or sublease.
(18) COMPLIANCE WITH CUBA ACT. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(19) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(20) ENVIRONMENTAL LAWS. The Company has not violated any foreign,
federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances
or wastes, pollutants or
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contaminants ("Environmental Laws"), that, in each case or in the
aggregate, might result in a Material Adverse Effect; none of the
property leased by the Company is contaminated with any waste or
hazardous substances (except that certain leased locations may contain
asbestos or certain cleaning materials, the presence of which will not
result in a Material Adverse Effect), nor may the Company be deemed an
"owner or operator" of a "facility" or "vessel" that owns, possesses,
transports, generates, discharges or disposes of a "hazardous substance"
as those terms are defined in Section 9601 et seq. (except that the
Company disposes in the ordinary course of its business ordinary
household products that may be classified as or contain "hazardous
substances"; the disposal of such products (A) is in
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material compliance with all applicable laws as of the date hereof and (B)
has not and will not result in a Material Adverse Effect); the Company has
all permits, authorizations and approvals required under any applicable
Environmental Laws and is in compliance with their requirements.
(21) INSURANCE. The Company maintains reasonably adequate insurance
for the conduct of its business in accordance with prudent business
practices (and the insurances maintained by retailers generally) with
reputable third-party insurers; PROVIDED, that the Company does not
maintain coverage for losses associated with earthquakes.
(22) NO REGISTRATION RIGHTS. No holder of any security of the Company
has any right to require inclusion of any such security in the Registration
Statement.
(23) TAXES. The Company has filed or caused to be filed, or has
properly filed extensions for, all foreign, federal, state and local
income, value added and franchise tax returns and has paid all taxes and
assessments shown thereon as due, except for such taxes and assessments as
are disclosed or adequately reserved against and that are being contested
in good faith by appropriate proceedings, promptly instituted and
diligently conducted; all material tax liabilities are adequately provided
for on the books of the Company, and there is no material tax deficiency
that has been or might be asserted against the Company that is not so
provided for; during the time the Company has elected to be treated as an
"S" Corporation under the Internal Revenue Code, as amended from time to
time (the "Code"), and any applicable state law, the Company's election of
such status was validly made, and at all times from August 31, 1965 through
April 30, 1996 the Company qualified continuously for treatment as an S
Corporation under the Code; from August 31, 1995 through April 30, 1996,
the Company never (A) was an ineligible corporation as defined in Section
1361(b)(2) of the Code (I.E., the Company never was (1) a member of an
affiliated group (determined under Code Section 1504 without regard to the
exceptions contained in subsection (b) thereof; (2) a financial institution
to which Code Section 585
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applies (or would apply but for subsection (c) thereof) or to which
Code Section 593 applies; (3) an insurance company subject to tax under
subchapter L of the Code; (4) a corporation to which an election under
Code Section 936 applies; or (5) a DISC or former DISC); (B) had more
than 35 shareholders; (C) had as a shareholder (other than an estate and
other than domestic trusts described in Code Section 1361(c)(2),
including a domestic qualified Subchapter 5 trust) a person who is not
an individual; (D) had a nonresident alien as a shareholder; or (E) had
more than one class of stock outstanding or authorized or issued debt
convertible into capital stock or debt on which the payment of interest
is contingent on profits of the Company or on the Company's discretion;
from August 31, 1965 through April 30, 1996, there was no agreement to
redeem or purchase stock of the Company at the time of shareholder's
death, divorce, disability or termination of employment (such as
buy-sell agreements among the shareholders or similar option
arrangements) that establishes a purchase price that, at the time the
agreement was entered into, was significantly in excess of or below the
fair market value of the stock of the Company; Form 2553 was properly
completed and filed with the Internal Revenue Service within the 15th
day of the 3rd month of the Company's first taxable year; and such Form
2553 was signed by a duly-authorized signatory of the Company's Form
11205 and all shareholders of the Company (including all spouses of the
shareholders) consented to the Company's S corporation election by duly
executing the Form 2553 filed with the Internal Revenue Service.
(24) NO UNLAWFUL PAYMENTS. Neither the Company nor, to the best
knowledge of the Company and the Existing Shareholders, any employee or
agent of the Company has made any payment of funds of the Company or
received or retained any funds in violation of any law, Rule or regulation
(including, without limitation, the Foreign Corrupt Practices Act) or of a
character required to be disclosed in the Prospectuses; the Company has
not, at any time during the past five years, (1) made any unlawful
contributions to any candidate for any political office, or failed fully to
disclose any contribution in violation of law, or (2) made any unlawful
payment to state, federal or foreign government officer or officers, or
other person charged with similar public or quasi-public duty.
(25) INTERNAL CONTROLS. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv)
the recorded accountability for inventory is compared with the existing
inventory at reasonable intervals and appropriate action is taken with
respect to any differences.
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(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS. Each
Selling Shareholder severally represents and warrants to each U.S. Underwriter
as of the date hereof, as of the Closing Time referred to in Section 2(c)
hereof, and as of each Date of Delivery (if any) referred to in Section 2(b)
hereof, and agrees with each U.S. Underwriter, as follows:
(i) ACCURATE DISCLOSURE. To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company contained
in Section 1(a) hereof are true and correct; such Selling Shareholder
has reviewed and is familiar with the Registration Statement and the
Prospectuses and neither the Prospectuses nor any amendments or
supplements thereto includes any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; such Selling Shareholder is not prompted to sell the
Securities to be sold by such Selling Shareholder hereunder by any
information concerning the Company which is not set forth in the
Prospectuses.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement, the
International Purchase Agreement and a Power of Attorney and Custody
Agreement (the "Power of Attorney and Custody Agreement") and to sell,
transfer and deliver the Securities to be sold by such Selling
Shareholder hereunder. The execution and delivery of this Agreement,
the International Purchase Agreement and the Power of Attorney and
Custody Agreement and the sale and delivery of the Securities to be sold
by such Selling Shareholder and the consummation of the transactions
contemplated in this Agreement and the International Purchase Agreement
and compliance by such Selling Shareholder with its obligations
hereunder have been duly authorized by such Selling Shareholder and do
not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax, lien,
charge or encumbrance upon the Securities to be sold by such Selling
Shareholder or any property or assets of such Selling Shareholder
pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, license, lease or other agreement or instrument
to which such Selling Shareholder is a party or by which such Selling
Shareholder may be bound, or to which any of the property or assets of
such Selling Shareholder is subject, nor will such action result in any
violation of the provisions of the charter or by-laws or other
organizational instrument of such Selling Shareholder, if applicable, or
any applicable treaty, law, statute, rule, regulation, judgment, order,
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over such Selling Shareholder
or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has and
will at the Closing Time have good and marketable title to the Securities
to be sold by such Selling
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Shareholder hereunder, free and clear of any security interest,
mortgage, pledge, lien, charge, claim, equity or encumbrance of any
kind, other than pursuant to this Agreement and the International
Purchase Agreement; and upon delivery of such Securities and payment of
the purchase price therefor as herein contemplated, assuming each such
U.S. Underwriter has no notice of any adverse claim, each of the U.S.
Underwriters will receive good and marketable title to the Securities
purchased by it from such Selling Shareholder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.
Such Selling Shareholder has duly executed and delivered, in the form
heretofore furnished to the U.S. Representatives, the Power of Attorney
and Custody Agreement with ________________, as attorney-in-fact (the
"Attorney-in-Fact") and __________________, as custodian (the
"Custodian"); the Custodian is authorized to deliver the Securities to
be sold by such Selling Shareholder hereunder and to accept payment
therefor; and the Attorney-in-Fact is authorized to execute and deliver
this Agreement, the International Purchase Agreement and the certificate
referred to in Section 5(f) or that may be required pursuant to Section
5(m) on behalf of such Selling Shareholder, to sell, assign and transfer
to the U.S. Underwriters the Securities to be sold by such Selling
Shareholder hereunder, to determine the purchase price to be paid by the
U.S. Underwriters to such Selling Shareholder, as provided in Section
2(a) hereof, to authorize the delivery of the Securities to be sold by
such Selling Shareholder hereunder, to accept payment therefor, and
otherwise to act on behalf of such Selling Shareholder in connection
with this Agreement and the International Purchase Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which
is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent,
approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by each Selling
Shareholder of its obligations under this Agreement, the International
Purchase Agreement or the Power of Attorney and Custody Agreement, or
in connection with the sale and delivery of the Securities hereunder or
the consummation of the transactions contemplated by this Agreement and
the International Purchase Agreement, except such as may have previously
been made or obtained or as may be required under the 1933 Act or the
1933 Act Regulations or state securities laws.
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(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days
from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of Merrill Lynch, (i) 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, directly or indirectly, any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to the Securities to be sold hereunder or under the International Purchase
Agreement.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all
of the Securities to be sold by such Selling Shareholder pursuant
to this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in
blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such
Securities to the U.S. Underwriters pursuant to this Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling Stockholder
nor any of its affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common
control with, or has any other association with (within the meaning of
Article I, Section 1(m) of the By-laws of the National Association of
Securities Dealers, Inc.), any member firm of the National Association
of Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby; and any certificate signed by or on behalf of the
Selling Shareholders as such and delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters pursuant to the terms of
this Agreement shall be deemed a representation and warranty by such Selling
Shareholder to each U.S. Underwriter as to the matters covered hereby.
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SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company and each Selling Shareholder, severally and not
jointly, agrees to sell to each U.S. Underwriter, severally and not jointly,
and each U.S. Underwriter, severally and not jointly, agrees to purchase from
the Company and each Selling Shareholder, at the price per share set forth in
Schedule C, that portion of the number of Initial U.S. Securities set forth
in Schedule B opposite the name of the Company or such Selling Shareholder,
as the case may be, which the number of Initial U.S. Securities set forth in
Schedule A opposite the name of such U.S. Underwriter, plus any additional
number of Initial U.S. Securities which such U.S. Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof bears
to the total number of Initial U.S. Securities, subject, in each case, to
such adjustments among the U.S. Underwriters as the Global Coordinator in its
discretion shall make to eliminate any sales or purchases of fractional
securities.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company and the Selling Shareholders, acting
severally and not jointly, hereby grant an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional 420,000 shares of
Common Stock at the price per share set forth in Schedule C, less an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date
hereof and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Initial U.S. Securities upon notice by
the Global Coordinator to the Company and the Selling Shareholders setting
forth the number of U.S. Option Securities as to which the several U.S.
Underwriters are then exercising the option and the time and date of payment
and delivery for such U.S. Option Securities. Any such time and date of
delivery for the U.S. Option Securities (a "Date of Delivery") shall be
determined by the Global Coordinator, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to
all or any portion of the U.S. Option Securities, each of the U.S.
Underwriters, acting severally and not jointly, will purchase that proportion
of the total number of U.S. Option Securities then being purchased which the
number of Initial U.S. Securities set forth in Schedule A opposite the name
of such U.S. Underwriter bears to the total number of Initial U.S.
Securities, subject in each case to such adjustments as the Global
Coordinator in its discretion shall make to eliminate any sales or purchases
of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Munger,
Tolles & Olson LLP, 355 South Grand Avenue, 35th Floor, Los Angeles, California
90071-1560, or at such other place as shall be agreed upon by
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the Global Coordinator and the Company and the Selling Shareholders, at 7:00
A.M. (California time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10), or such
other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company and the Selling
Shareholders (such time and date of payment and delivery being herein called
"Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for,
and delivery of certificates for, such U.S. Option Securities shall be made
at the above-mentioned offices, or at such other place as shall be agreed
upon by the Global Coordinator and the Company and the Selling Shareholders,
on each Date of Delivery as specified in the notice from the Global
Coordinator to the Company and the Selling Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to a bank account designated by
the Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is
understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and
make payment of the purchase price for, the Initial U.S. Securities and the
U.S. Option Securities, if any, which it has agreed to purchase. Merrill
Lynch, individually and not as representative of the U.S. Underwriters, may
(but shall not be obligated to) make payment of the purchase price for the
Initial U.S. Securities or the U.S. Option Securities, if any, to be
purchased by any U.S. Underwriter whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such U.S. Underwriter from its obligations
hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates for the
Initial U.S. Securities and the U.S. Option Securities, if any, will be made
available for examination and packaging by the U.S. Representatives in The
City of New York not later than 10:00 A.M. (Eastern time) on the business day
prior to the Closing Time or the relevant Date of Delivery, as the case may
be.
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SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
U.S. Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectuses or for additional
information, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any
of such purposes. The Company will promptly effect the filings necessary
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of prospectus transmitted for filing
under Rule 424(b) was received for filing by the Commission and, in the event
that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and,
if any stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the
Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise,
will furnish the Global Coordinator with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file or use any such document to which the Global
Coordinator or counsel for the U.S. Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated or
deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the U.S. Underwriters. The copies of the Registration
Statement and each amendment thereto furnished to the U.S. Underwriters will
be identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
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(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each U.S. Underwriter, without charge, during the
period when the U.S. Prospectus is required to be delivered under the 1933
Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended
or supplemented) as such U.S. Underwriter may reasonably request. The U.S.
Prospectus and any amendments or supplements thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934
Act Regulations so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the International Purchase
Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the U.S. Underwriters or
for the Company, to amend the Registration Statement or amend or supplement
any Prospectus in order that the Prospectuses will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to
the U.S. Underwriters such number of copies of such amendment or supplement
as the U.S. Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been
so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
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(g) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(i) LISTING. The Company will use its best efforts to effect the
listing of the Securities on the New York Stock Exchange.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) 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 share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold hereunder
or under the International Purchase Agreement, or (B) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectuses.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company and the Selling Shareholders will pay or
cause of be paid all expenses incident to the performance of their
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery
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of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer
of the Securities between the U.S. Underwriters and the International
Managers, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel
for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the
printing and delivery to the Underwriters of copies of each preliminary
prospectus, any Term Sheets and of the Prospectuses and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review
by the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Securities and (x) the fees and expenses incurred in
connection with the listing of the Securities on the New York Stock Exchange.
(b) EXPENSES OF SELLING SHAREHOLDERS. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital
duties and stock transfer taxes, if any, payable upon the sale of the
Securities to the Underwriters, and the transfer of the Securities between
the U.S. Underwriters and the International Managers pursuant to an agreement
between such Underwriters, and (ii) the fees and disbursements of their
respective counsel and accountants.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5, Section
9(a)(i) or Section 11 hereof, the Company and the Selling Shareholders shall
reimburse the U.S. Underwriters for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the U.S.
Underwriters.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholders may make
for the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof or in certificates of any officer
of the Company or any subsidiary of the Company or on behalf of any Selling
Shareholder delivered pursuant to the provisions hereof, to the performance
by the Company of its covenants and other obligations hereunder, and to the
following further conditions:
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(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the U.S.
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if
the Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Troop Meisinger Steuber & Pasich, LLP, counsel for the
Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters to the effect set forth in Exhibit A
hereto and to such further effect as counsel to the U.S. Underwriters may
reasonably request.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated as
of Closing Time, of ________________, counsel for the Selling Shareholders,
in form and substance satisfactory to counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the
other U.S. Underwriters to the effect set forth in Exhibit B hereto and to
such further effect as counsel to the U.S. Underwriters may reasonable
request.
(d) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Munger, Tolles & Olson LLP, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters with respect to the matters set forth in
clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the Company),
(viii) through (x), inclusive, (xiii), and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State
of New York and the federal law of the United States, upon the opinions of
counsel satisfactory to the U.S. Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material
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adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary course
of business, and the U.S. Representatives shall have received a certificate
of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company, dated as of Closing
Time, to the effect that (i) there has been no such material adverse change,
(ii) the representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior
to Closing Time, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or are contemplated by the Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the U.S.
Representatives shall have received a certificate of an Attorney-in-Fact on
behalf of each Selling Shareholder, dated as of Closing Time, to the effect
that (i) the representations and warranties of each Selling Shareholder
contained in Section 1(b) hereof are true and correct in all respects with
the same force and effect as though expressly made at and as of Closing Time
and (ii) each Selling Shareholder has complied in all material respects with
all agreements and all conditions on its part to be performed under this
Agreement at or prior to Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from Arthur Anderson
LLP a letter dated such date, in form and substance satisfactory to the U.S.
Representatives, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectuses.
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives
shall have received from Arthur Anderson LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(i) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(j) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
24
<PAGE>
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit C hereto signed by the persons listed on Schedule D hereto.
(l) PURCHASE OF INITIAL INTERNATIONAL SECURITIES. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement, the International Managers shall have purchased the
Initial International Securities under the International Purchase Agreement.
(m) CONDITIONS TO PURCHASE OF U.S. OPTION SECURITIES. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company and the Selling Shareholders
contained herein and the statements in any certificates furnished by the
Company, any subsidiary of the Company and the Selling Shareholders hereunder
shall be true and correct as of each Date of Delivery and, at the relevant
Date of Delivery, the U.S. Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
(ii ) CERTIFICATE OF SELLING SHAREHOLDERS. A certificate, dated
such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling
Shareholder confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) remains true and correct as of such Date of
Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of
Troop Meisinger Steuber & Pasich, LLP, counsel for the Company, in form
and substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. The
favorable opinion of ____________, counsel for the Selling
Shareholders, in form and substance satisfactory to counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. The favorable
opinion of Munger, Tolles & Olson LLP, counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(d) hereof.
25
<PAGE>
(v) BRING-DOWN COMFORT LETTER. A letter from Arthur Anderson LLP,
in form and substance satisfactory to the U.S. Representatives and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the U.S. Representatives pursuant to Section
5(g) hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days prior
to such Date of Delivery.
(n) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished with
such documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company and the Selling
Shareholders in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the U.S.
Representatives and counsel for the U.S. Underwriters.
(o) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of U.S.
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as
the case may be, and such termination shall be without liability of any
party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF U.S. UNDERWRITERS. The Company and the Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
U.S. Underwriter and each person, if any, who controls any U.S. Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged
26
<PAGE>
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company and the Selling Shareholders; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of
any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information
furnished to the Company by any U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the U.S.
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
SHAREHOLDERS. Each U.S. Underwriter severally agrees to indemnify and
hold harmless the Company, its directors, each of its officers who
signed the Registration Statement, each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act and each Selling Shareholder and each person, if any,
who controls any Selling Shareholder within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act against any and all loss,
liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements
or omissions, made in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary U.S. prospectus or the
U.S. Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with
27
<PAGE>
written information furnished to the Company by such U.S. Underwriter
through the U.S. Representatives expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or
the U.S. Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of
which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any
liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability
which it may have otherwise than on account of this indemnity agreement.
In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of
any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also
be counsel to the indemnified party. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under
this Section 6 or Section 7 hereof (whether or not the indemnified
parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release
of each indemnified party from all liability arising out of such
litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of
the nature contemplated by Section 6(a)(ii) effected without its written
consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into
and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of
such settlement.
28
<PAGE>
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The
provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to
hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the U.S. Underwriters on the other hand
from the offering of the Securities pursuant to this Agreement or (ii)
if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Selling Shareholders on the one hand and of
the U.S. Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the U.S. Underwriters on the other hand
in connection with the offering of the U.S. Securities pursuant to this
Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the U.S. Securities pursuant
to this Agreement (before deducting expenses) received by the Company
and the Selling Shareholders and the total underwriting discount
received by the U.S. Underwriters, in each case as set forth on the
cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding
location on the Term Sheet, bear to the aggregate initial public
offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on
the one hand and the U.S. Underwriters on the other hand shall be
determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders or by the U.S. Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the U.S. Underwriters
agree that it would not be just and equitable if contribution pursuant
to this Section 7 were determined by pro rata allocation (even if the
U.S. Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by
an indemnified party and referred to above in this Section 7 shall be
deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or
29
<PAGE>
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S.
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the U.S. Securities
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as
such U.S. Underwriter, and each director of the Company, each officer of
the Company who signed the Registration Statement, and each person, if
any, who controls the Company or any Selling Shareholder within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
shall have the same rights to contribution as the Company or such
Selling Shareholder. The U.S. Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
number of Initial U.S. Securities set forth opposite their respective
names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among
the Company and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in
this Agreement or in certificates of officers of the Company or any of
its subsidiaries or the Selling Shareholders submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any U.S. Underwriter or
controlling person, or by or on behalf of the Company or the Selling
Shareholders, and shall survive delivery of the Securities to the U.S.
Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The U.S. Representatives may terminate
this Agreement, by notice to the Company and the Selling Shareholders,
at any time at or prior to Closing Time (i) if there has been, since the
time of execution of this Agreement or since the respective dates as of
which information is given in the U.S. Prospectus, any material adverse
change in the condition,
30
<PAGE>
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business,
or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial
markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective
change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in
the judgment of the U.S. Representatives, impracticable to market the
Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the New York Stock Exchange, or
if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either
Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further
that Sections 1, 6, 7 and 8 shall survive such termination and remain in
full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. If
one or more of the U.S. Underwriters shall fail at Closing Time or a
Date of Delivery to purchase the Securities which it or they are
obligated to purchase under this Agreement (the "Defaulted Securities"),
the U.S. Representatives shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
U.S. Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this
Agreement or, with respect to any Date of Delivery which occurs after
the Closing Time, the obligation of the U.S. Underwriters to purchase
and of the Company and
31
<PAGE>
the Selling Shareholders to sell the Option Securities to be purchased
and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery
which is after the Closing Time, which does not result in a termination
of the obligation of the U.S. Underwriters to purchase and the Company
and the Selling Shareholders to sell the relevant U.S. Option
Securities, as the case may be, either (i) the U.S. Representatives or
(ii) the Company and any Selling Shareholder shall have the right to
postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectuses or in any
other documents or arrangements. As used herein, the term "U.S.
Underwriter" includes any person substituted for a U.S. Underwriter
under this Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR
THE COMPANY. (a) If a Selling Shareholder shall fail at Closing Time or
at a Date of Delivery to sell and deliver the number of Securities which
such Selling Shareholder or Selling Shareholders are obligated to sell
hereunder, and the remaining Selling Shareholders do not exercise the
right hereby granted to increase, pro rata or otherwise, the number of
Securities to be sold by them hereunder to the total number to be sold
by all Selling Shareholders as set forth in Section B hereto, then the
U.S. Underwriters may, at option of the U.S. Representatives, by notice
from the U.S. Representatives to the Company and the non-defaulting
Selling Shareholders, either (a) terminate this Agreement without any
liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and
effect or (b) elect to purchase the Securities which the non-defaulting
Selling Shareholders and the Company have agreed to sell hereunder. No
action taken pursuant to this Section 11 shall relieve any Selling
Shareholder so defaulting from liability, if any, in respect of such
default.
In the event of a default by any Selling Shareholder as referred to
in this Section 11, each of the U.S. Representatives, the Company and
the non-defaulting Selling Shareholders shall have the right to postpone
Closing Time or Date of Delivery for a period not exceeding seven days
in order to effect any required change in the Registration Statement or
Prospectuses or in any other documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on
the part of any nondefaulting party; provided, however, that the
provisions of Sections
32
<PAGE>
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken
pursuant to this Section shall relieve the Company from liability, if
any, in respect of such default.
SECTION 12. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly
given if mailed or transmitted by any standard form of _______________
telecommunication. Notices to the U.S. Underwriters shall be directed
to the U.S. Representatives at North Tower, World Financial Center, New
York, New York 10281-1201 and 10900 Wilshire Boulevard, Suite 900, Los
Angeles, California 90024, attention of Robert Woolway; and notices to
the Company shall be directed to it at __________________, attention of
_______________ ; and notices to the Selling Shareholders shall be directed to
________________________, attention of ___________________________.
SECTION 13. PARTIES. This Agreement shall each inure to the
benefit of and be binding upon the U.S. Underwriters, the Company and
the Selling Shareholders and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the U.S.
Underwriters, the Company and the Selling Shareholders and their
respective successors and the controlling persons and officers and
directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be
for the sole and exclusive benefit of the U.S. Underwriters, the Company
and the Selling Shareholders and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any U.S. Underwriter shall
be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY
REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
33
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the
Attorney-in-Fact for the Selling Shareholders a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a
binding agreement between the U.S. Underwriters, the Company and the
Selling Shareholders in accordance with its terms.
Very truly yours,
99 CENTS ONLY STORES
By:
------------------------------------
Title:
By:
------------------------------------
As Attorney-in-Fact acting on behalf
of the Selling Shareholders named in
Schedule B hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
34
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
Goldman, Sachs & Co. ...................................
Smith Barney Inc. ......................................
EVEREN Securities, Inc. ................................
Piper Jaffray Inc. .....................................
------------
Total................................................... 2,800,000
------------
------------
</TABLE>
Sch A - 1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Initial Maximum Number of Option
Securities to be Sold Securities to Be Sold
--------------------- -------------------------
<S> <C> <C>
Total ........................
</TABLE>
Sch B - 1
<PAGE>
SCHEDULE C
99CENTS ONLY STORES
2,800,000 Shares of Common Stock
(No Par Value Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_____________________.
2. The purchase price per share for the U.S. Securities to be paid by
the several U.S. Underwriters shall be $__________________, being an amount
equal to the initial public offering price set forth above less $____________
per share; provided that the purchase price per share for any U.S. Option
Securities purchased upon the exercise of the over-allotment option described
in Section 2(b) shall be reduced by an amount per share equal to any
dividends or distributions declared by the Company and payable on the Initial
U.S. Securities but not payable on the U.S. Option Securities.
Sch C - 1
<PAGE>
SCHEDULE D
List of persons and entities
subject to lock-up
Sch D - 1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the U.S. Purchase Agreement and the International Purchase
Agreement or pursuant to employee benefit plans referred to in the
Prospectuses; the shares of issued and outstanding capital stock of the
Company, including the Securities to be purchased by the U.S. Underwriters
and the International Managers from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; and
none of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any securityholder of
the Company.
(v) The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement
and the International Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth in the U.S. Purchase Agreement and the International
Purchase Agreement, will be validly issued and fully paid and non-assessable
and no holder of the Securities is or will be subject to personal liability
by reason of being such a holder.
A-1
<PAGE>
(vi) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(vii) To the best of our knowledge, the Company does not have any
subsidiaries.
(viii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required
filing of the Prospectuses pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectuses, excluding the documents incorporated by
reference therein, and each amendment or supplement to the Registration
Statement and the Prospectuses, excluding the documents incorporated by
reference therein, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.
(xi) The documents incorporated by reference in the Prospectuses (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion), when they were
filed with the Commission complied as to form in all material respects with
the requirements of the 1933 Act or the 1934 Act and the rules and
regulations of the Commission thereunder.
(xiii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company
and the requirements of the New York Stock Exchange.
(xiv) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company
or any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental agency
or body, domestic or foreign, which might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in the
A-2
<PAGE>
U.S. Purchase Agreement and International Purchase Agreement or the
performance by the Company of its obligations thereunder.
(xv) The information in the Prospectuses under "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Certain Federal Income Tax
Considerations" and in the Registration Statement under Item 15, to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's charter and bylaws or legal proceedings, or legal conclusions, has
been reviewed by us and is correct in all material respects.
(xvi) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are
not described as required.
(xvii) All descriptions in the Prospectuses of contracts and other
documents to which the Company or its subsidiaries are a party are accurate
in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto, and the descriptions thereof or references thereto are
correct in all material respects.
(xviii) To the best of our knowledge, the Company is not in violation
of its charter or by-laws and no default by the Company exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement,
note, lease or other agreement or instrument that is described or referred to
in the Registration Statement or the Prospectuses or filed or incorporated by
reference as an exhibit to the Registration Statement.
(xix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the due
authorization, execution and delivery of the U.S. Purchase Agreement and the
International Purchase Agreement or for the offering, issuance, sale or
delivery of the Securities.
(xx) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of
the transactions contemplated in the U.S. Purchase Agreement, the
International Purchase Agreement and in the Registration Statement (including
the issuance and sale of the Securities, and the use of the proceeds from the
sale of the Securities as described in the Prospectuses under the caption
"Use Of Proceeds") and compliance
A-3
<PAGE>
by the Company with its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement do not and will not, whether with or without
the giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of
the Purchase Agreements) under or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, lease or any other agreement or instrument, known
to us, to which the Company or any subsidiary is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary, or any
applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any subsidiary or any of
their respective properties, assets or operations.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no
statement), at the time such Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included or incorporated by reference
therein or omitted therefrom, as to which we need make no statement), at the
time the Prospectuses were issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Such opinion shall not state that it is to be governed or qualified by, or
that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).
A-4
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, (other than the issuance of the
order of the Commission declaring the Registration Statement effective and
such authorizations, approvals or consents as may be necessary under state
securities laws, as to which we need express no opinion) is necessary or
required to be obtained by the Selling Shareholders for the performance by
each Selling Shareholder of its obligations under the U.S. Purchase
Agreement, the International Purchase Agreement or in the Power of Attorney
and Custody Agreement, or in connection with the offer, sale or delivery of
the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholders named therein
and constitutes the legal, valid and binding agreement of such Selling
Shareholder.
(iii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by or on behalf
of each Selling Shareholder.
(iv) Each Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders
in accordance with the terms of the U.S. Purchase Agreement and the
International Purchase Agreement.
(v) The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the Power of Attorney and
Custody Agreement and the sale and delivery of the Securities and the
consummation of the transactions contemplated in the U.S. Purchase Agreement
and the International Purchase Agreement and in the Registration Statement
and compliance by the Selling Shareholders with their obligations under the
U.S. Purchase Agreement and the International Purchase Agreement have been
duly authorized by all necessary action on the part of the Selling
Shareholders and do
B-1
<PAGE>
not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default under or
result in the creation or imposition of any tax, lien, charge or encumbrance
upon the Securities or any property or assets of the Selling Shareholders
pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other instrument or agreement to which any
Selling Shareholder is a party or by which they may be bound, or to which any
of the property or assets of the Selling Shareholders may be subject nor will
such action result in any violation of the provisions of the charter or
by-laws of the Selling Shareholders, if applicable, or any law,
administrative regulation, judgment or order of any governmental agency or
body or any administrative or court decree having jurisdiction over such
Selling Shareholder or any of its properties.
(vi) To the best of our knowledge, each Selling Shareholder has valid
and marketable title to the Securities to be sold by such Selling Shareholder
pursuant to the U.S. Purchase Agreement and the International Purchase
Agreement, free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind, and has full right, power and
authority to sell, transfer and deliver such Securities pursuant to the U.S.
Purchase Agreement and the International Purchase Agreement. By delivery of
a certificate or certificates therefor such Selling Shareholder will transfer
to the U.S. Underwriters and the International Managers who have purchased
such Securities pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement, respectively, (without notice of any defect in the title
of such Selling Shareholder and who are otherwise bona fide purchasers for
purposes of the Uniform Commercial Code) valid and marketable title to such
Securities, free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated
by reference therein or omitted therefrom, as to which we need make no
statement), at the time such Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included or incorporated by reference
therein or omitted therefrom, as to which we need
B-2
<PAGE>
make no statement), at the time the Prospectuses were issued, at the time any
such amended or supplemented prospectuses were issued or at the Closing Time,
included or include an untrue statement of a material fact or omitted or omit
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
B-3
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(K)]
Exhibit C
_____________________________________ , 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY 99CENTS ONLY STORES
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of 99
Cents Only Stores, a California corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Goldman, Sachs & Co., Smith Barney Inc., EVEREN
Securities, Inc. and Piper Jaffray Inc. propose to enter into a U.S. Purchase
Agreement (the "U.S. Purchase Agreement") with the Company and the Selling
Shareholders providing for the public offering of shares (the "Securities")
of the Company's common stock, no par value per share (the "Common Stock").
In recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder [and an officer and/or director] of the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned agrees with each underwriter
to be named in the U.S. Purchase Agreement that, during a period of 90 days
from the date of the U.S. Purchase Agreement, the undersigned will not,
without the prior written consent of Merrill Lynch, directly or indirectly,
(i)
C-1
<PAGE>
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 for the sale of, or otherwise dispose of or transfer any shares of
the Company's Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, whether now owned or hereafter acquired by
the undersigned or with respect to which the undersigned has or hereafter
acquires the power of disposition, or file any registration statement under
the Securities Act of 1933, as amended, with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities,
in cash or otherwise.
Very truly yours,
Signature: __________________________
Print Name: __________________________
C-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
99 CENTS ONLY STORES
(a California corporation)
700,000 Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
99 CENTS ONLY STORES
(a California corporation)
700,000 Shares of Common Stock
(No Par Value Per Share)
INTERNATIONAL PURCHASE AGREEMENT
, 1998
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y9LY
England
Ladies and Gentlemen:
99 Cents Only Stores, a California corporation (the "Company") and the
persons listed in Schedule B hereto (the "Selling Shareholders"), confirm
their respective agreements with Merrill Lynch International ("Merrill
Lynch") and each of the other international underwriters named in Schedule A
hereto (collectively, the "International Managers", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Goldman Sachs International, Smith Barney
Inc., EVEREN Securities, Inc. and Piper Jaffray Inc. are acting as
representatives (in such capacity, the "Lead Managers"), with respect to the
sale by the Company and the Selling Shareholders, acting severally and not
jointly, and the purchase by the International Managers, acting severally and
not jointly, of the respective numbers of shares of Common Stock, no par
value per share, of the Company ("Common Stock") set forth in said Schedule
A, and with respect to the grant by the Company and the Selling Shareholders
to
<PAGE>
the International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 105,000
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 700,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any
part of the 105,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "International Option Securities") are hereinafter
called, collectively, the "International Securities".
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the "U.S.
Purchase Agreement") providing for the offering by the Company and the
Selling Shareholders of an aggregate of 2,800,000 shares of Common Stock (the
"Initial U.S. Securities") through arrangements with certain underwriters in
the United States and Canada (the "U.S. Underwriters") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co., Smith Barney
Inc., EVEREN Securities, Inc. and Piper Jaffray Inc. are acting as
representatives (the "U.S. Representatives") and the grant by the Company and
the Selling Shareholders to the U.S. Underwriters, acting severally and not
jointly, of an option to purchase all or any part of the U.S. Underwriters'
pro rata portion of up to 420,000 additional shares of Common Stock solely to
cover over-allotments, if any (the "U.S. Option Securities" and, together
with the International Option Securities, the "Option Securities"). The
Initial U.S. Securities and the U.S. Option Securities are hereinafter called
the "U.S. Securities". It is understood that the Company is not obligated to
sell and the International Managers are not obligated to purchase, any
Initial International Securities unless all of the Initial U.S. Securities
are contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities
and the Initial U.S. Securities are hereinafter collectively called the
"Initial Securities", and the International Securities and the U.S.
Securities are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing
for the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch International, Merrill Lynch, Pierce, Fenner &
Smith Incorporated (in such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the
International Managers propose to make a public offering of the International
Securities as soon as the Lead Managers deem advisable after this Agreement
has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333- _________ )
covering the registration of the Securities under the Securities Act of 1933,
as amended (the "1933 Act"), including the related preliminary
2
<PAGE>
prospectus or prospectuses. Promptly after execution and delivery of this
Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the
1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in
accordance with the provisions of Rule 434 and Rule 424(b). Two forms of
prospectus are to be used in connection with the offering and sale of the
Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form
of U.S. Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages
and the information under the caption "Underwriting" and the inclusion in the
Form of International Prospectus of a section under the caption "Certain
United States Tax Considerations for Non-United States Holders." The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement
at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of
Rule 434 is referred to as "Rule 434 Information." Each Form of
International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was
used after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule
430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as
the "Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration
Statement. The final Form of International Prospectus and the final Form of
U.S. Prospectus, including the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the 1933 Act, in the forms first
furnished to the Underwriters for use in connection with the offering of the
Securities are herein called the "International Prospectus" and the "U.S.
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434
is relied on, the terms "International Prospectus" and "U.S. Prospectus"
shall refer to the preliminary International Prospectus dated _________, 1998
and preliminary U.S. Prospectus dated _______, 1998, respectively, each
together with the applicable Term Sheet and all references in this Agreement
to the date of such Prospectuses shall mean the date of the applicable Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the International Prospectus, the U.S.
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR").
3
<PAGE>
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus (including the Form of
U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is
incorporated by reference in the Registration Statement, any preliminary
prospectus (including the Form of U.S. Prospectus and Form of International
Prospectus) or the Prospectuses, as the case may be; and all references in
this Agreement to amendments or supplements to the Registration Statement,
any preliminary prospectus or the Prospectuses shall be deemed to mean and
include the filing of any document under the Securities Exchange Act of 1934
(the "1934 Act") which is incorporated by reference in the Registration
Statement, such preliminary prospectus or the Prospectuses, as the case may
be.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each International Manager as of the date hereof,
as of the Closing Time referred to in Section 2(c) hereof, and as of each
Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with
each International Manager, as follows:
(1) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Company meets
the requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information has
been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. Neither of the
Prospectuses nor any amendments or supplements thereto, at the time the
Prospectuses or any amendments or supplements thereto were issued and at
the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order
4
<PAGE>
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the International
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any International Manager through
the Lead Managers expressly for use in the Registration Statement or the
International Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(2) INCORPORATED DOCUMENTS. The documents incorporated or deemed to
be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read together
with the other information in the Prospectuses, at the time the
Registration Statement became effective, at the time the Prospectuses were
issued and at the Closing Time (and, if any International Option Securities
are purchased, at the Date of Delivery), did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(3) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(4) FINANCIAL STATEMENTS. The consolidated financial statements of
the Company, together with related notes and schedules of the Company
included in the Registration Statement and the Prospectuses, are accurate
and present fairly the financial position, results of operations and cash
flows of the Company at the indicated dates and for the indicated periods;
such financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of
results for such periods have been made and any unaudited financial
statements have been prepared on a basis substantially consistent with that
of the audited operating financial statements included
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in the Registration Statement and the Prospectuses; and the summary and
selected financial and operating data included in the Registration
Statement and the Prospectuses presents fairly the information shown
therein and have been compiled on a basis consistent with the audited
and any unaudited financial statements, as the case may be, included
therein; and the pro forma information included in the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with GAAP and the Commission's rules and guidelines with
respect to pro forma financial statements and other pro forma basis
described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate under
the circumstances.
(5) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material
with respect to the Company and (C) except for the stock dividend on the
Common Stock paid on December 1, 1997 described in the Prospectuses, there
has been no dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock.
(6) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of California and has corporate power and authority
to own and lease its properties and assets and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect. The Company has no subsidiaries and has
never had a subsidiary.
(7) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, the U.S.
Purchase Agreement or pursuant to employee benefit plans referred to in
the Prospectuses). The shares of issued and outstanding capital stock of
the Company, including the securities to be purchased by the
International Managers from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock of the Company,
including the securities to be
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purchased by the International Managers from the Selling Shareholders,
was issued in violation of the preemptive or other similar rights of any
securityholder of the Company.
(8) AUTHORIZATION OF AGREEMENT. This Agreement and the U.S. Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(9) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, against payment of the consideration set forth
herein and the U.S. Purchase Agreement, respectively, will be validly
issued, fully paid and in non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Securities will be subject to personal liability
by reason of being such a holder; and the issuance of the Securities is not
subject to the preemptive or other similar rights of any securityholder of
the Company.
(10) ABSENCE OF DEFAULTS AND CONFLICTS. The Company is not in
violation of its charter or by-laws or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company is a
party or by which it may be bound, or to which any of the property or
assets of the Company is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in this Agreement, the U.S. Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use of Proceeds") and
compliance by the Company with its obligations under this Agreement and the
U.S. Purchase Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of
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any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any
of their assets, properties or operations. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary.
(11) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees of
the Company exists, or to the best knowledge of the Company after due
inquiry, is imminent, that could result in a Material Adverse Effect; and
the Company has not received notice of any existing or imminent labor
disturbance by the employees of any of its principle suppliers, customers,
manufacturers or contractors that could result in any Material Adverse
Effect.
(12) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected
to materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement and the
U.S. Purchase Agreement or the performance by the Company of its
obligations hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary is a party
or of which any of their respective property or assets is the subject which
are not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(13) ACCURACY OF EXHIBITS. There are no contracts or documents which
are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required.
(14) POSSESSION OF INTELLECTUAL PROPERTY. The Company owns or
possess, or can acquire on reasonable terms, the patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names (collectively, "Patents and Proprietary Rights") currently employed
by it in connection with the business it now operates except where the
failure to so own, possess or acquire such Patents and Proprietary Rights
would not have a Material Adverse Effect; and the Company has not received
any notice and is not otherwise aware of any infringement of
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or conflict with asserted rights of others with respect to any Patent or
Proprietary Rights that, if the subject of any unfavorable decision,
ruling or finding, singly or in the aggregate, could result in a
Material Adverse Effect; "99CENTS Only Stores" and its related logo is a
trademark and service mark used by the Company to identify its retail
stores; "Bargain Wholesale" is a service mark used by the Company to
identify its wholesale business; and such trademarks and service marks
are protected by registration in the name of the Company on the
principal register in the United States Patent and Trademark Office and
are registered with the State of California.
(15) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement, except such as have been already obtained or as
may be required under the 1933 Act or the 1933 Act Regulations and foreign
or state securities or blue sky laws.
(16) POSSESSION OF LICENSES AND PERMITS. The Company possesses such
permits, licenses, approvals, consents and other authorizations
(collectively, "Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by it; the Company is in compliance with the
terms and conditions of all such Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and the Company has not received
any notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(17) TITLE TO PROPERTY. The Company has good and marketable title to
all real property owned by the Company and good title to all other
properties owned by it, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances of
any kind except such as (a) are described in the Prospectuses or (b) do
not,
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singly or in the aggregate, materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company; and all of the leases and subleases material to
the business of the Company, and under which the Company holds
properties described in the Prospectuses, are in full force and effect,
and the Company has not received any notice of any material claim of any
sort that has been asserted by anyone adverse to the rights of the
Company under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(18) COMPLIANCE WITH CUBA ACT. The Company has complied with, and is
and will be in compliance with, the provisions of that certain Florida act
relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(19) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(20) ENVIRONMENTAL LAWS. The Company has not violated any foreign,
federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"),
that, in each case or in the aggregate, might result in a Material
Adverse Effect; none of the
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property leased by the Company is contaminated with any waste or
hazardous substances (except that certain leased locations may contain
asbestos or certain cleaning materials, the presence of which will not
result in a Material Adverse Effect), nor may the Company be deemed an
"owner or operator" of a "facility" or "vessel" that owns, possesses,
transports, generates, discharges or disposes of a "hazardous substance"
as those terms are defined in Section 9601 et seq. (except that the
Company disposes in the ordinary course of its business ordinary
household products that may be classified as or contain "hazardous
substances"; the disposal of such products (A) is in material compliance
with all applicable laws as of the date hereof and (B) has not and will
not result in a Material Adverse Effect); the Company
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has all permits, authorizations and approvals required under any
applicable Environmental Laws and is in compliance with their
requirements.
(21) INSURANCE. The Company maintains reasonably adequate insurance
for the conduct of its business in accordance with prudent business
practices (and the insurances maintained by retailers generally) with
reputable third-party insurers; PROVIDED, that the Company does not
maintain coverage for losses associated with earthquakes.
(22) NO REGISTRATION RIGHTS. No holder of any security of the Company
has any right to require inclusion of any such security in the Registration
Statement.
(23) TAXES. The Company has filed or caused to be filed, or has
properly filed extensions for, all foreign, federal, state and local
income, value added and franchise tax returns and has paid all taxes and
assessments shown thereon as due, except for such taxes and assessments as
are disclosed or adequately reserved against and that are being contested
in good faith by appropriate proceedings, promptly instituted and
diligently conducted; all material tax liabilities are adequately provided
for on the books of the Company, and there is no material tax deficiency
that has been or might be asserted against the Company that is not so
provided for; during the time the Company has elected to be treated as an
"S" Corporation under the Internal Revenue Code, as amended from time to
time (the "Code"), and any applicable state law, the Company's election of
such status was validly made, and at all times from August 31, 1965 through
April 30, 1996 the Company qualified continuously for treatment as an S
Corporation under the Code; from August 31, 1995 through April 30, 1996,
the Company never (A) was an ineligible corporation as defined in Section
1361(b)(2) of the Code (I.E., the Company never was (1) a member of an
affiliated group (determined under Code Section 1504 without regard to the
exceptions contained in subsection (b) thereof; (2) a financial institution
to which Code Section 585 applies (or would apply but for subsection (c)
thereof) or to which Code Section 593 applies; (3) an insurance company
subject to tax under subchapter L of the Code; (4) a corporation to which
an election under Code Section 936 applies; or (5) a DISC or former DISC);
(B) had more than 35 shareholders; (C) had as a shareholder (other than an
estate and other than domestic trusts described in Code Section 1361(c)(2),
including a domestic qualified Subchapter 5 trust) a person who is not an
individual; (D) had a nonresident alien as a shareholder; or (E) had more
than one class of stock outstanding or authorized or issued debt
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convertible into capital stock or debt on which the payment of interest is
contingent on profits of the Company or on the Company's discretion; from
August 31, 1965 through April 30, 1996, there was no agreement to redeem or
purchase stock of the Company at the time of shareholder's death, divorce,
disability or termination of employment (such as buy-sell agreements among
the shareholders or similar option arrangements) that establishes a
purchase price that, at the time the agreement was entered into, was
significantly in excess of or below the fair market value of the stock of
the Company; Form 2553 was properly completed and filed with the Internal
Revenue Service within the 15th day of the 3rd month of the Company's first
taxable year; and such Form 2553 was signed by a duly-authorized signatory
of the Company's Form 11205 and all shareholders of the Company (including
all spouses of the shareholders) consented to the Company's S corporation
election by duly executing the Form 2553 filed with the Internal Revenue
Service.
(24) NO UNLAWFUL PAYMENTS. Neither the Company nor, to the best
knowledge of the Company, any employee or agent of the Company has made any
payment of funds of the Company or received or retained any funds in
violation of any law, Rule or regulation (including, without limitation,
the Foreign Corrupt Practices Act) or of a character required to be
disclosed in the Prospectuses; the Company has not, at any time during the
past five years, (1) made any unlawful contributions to any candidate for
any political office, or failed fully to disclose any contribution in
violation of law, or (2) made any unlawful payment to state, federal or
foreign government officer or officers, or other person charged with
similar public or quasi-public duty.
(25) INTERNAL CONTROLS. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv)
the recorded accountability for inventory is compared with the existing
inventory at reasonable intervals and appropriate action is taken with
respect to any differences.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS. Each
Selling Shareholder severally represents and warrants to each International
Manager as of the date hereof, as of the Closing Time referred to in Section
2(c) hereof, and as of each Date of Delivery (if any) referred to in Section
2(b) hereof, and agrees with each International Manager, as follows:
(i) ACCURATE DISCLOSURE. To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Selling
Shareholder has reviewed and is familiar with the
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Registration Statement and the Prospectuses and neither the
Prospectuses nor any amendments or supplements thereto includes any
untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; such Selling Shareholder is not prompted to sell the
Securities to be sold by such Selling Shareholder hereunder by any
information concerning the Company which is not set forth in the
Prospectuses.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement, the
U.S. Purchase Agreement and a Power of Attorney and Custody Agreement
(the "Power of Attorney and Custody Agreement") and to sell, transfer
and deliver the Securities to be sold by such Selling Shareholder
hereunder. The execution and delivery of this Agreement, the U.S.
Purchase Agreement and the Power of Attorney and Custody Agreement and
the sale and delivery of the Securities to be sold by such Selling
Shareholder and the consummation of the transactions contemplated in
this Agreement and the U.S. Purchase Agreement and compliance by such
Selling Shareholder with its obligations hereunder have been duly
authorized by such Selling Shareholder and do not and will not, whether
with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any tax, lien, charge or encumbrance upon
the Securities to be sold by such Selling Shareholder or any property or
assets of such Selling Shareholder pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, license, lease
or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder may be bound, or to which any
of the property or assets of such Selling Shareholder is subject, nor
will such action result in any violation of the provisions of the
charter or by-laws or other organizational instrument of such Selling
Shareholder, if applicable, or any applicable treaty, law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over such Selling Shareholder or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has and
will at the Closing Time have good and marketable title to the Securities
to be sold by such Selling Shareholder hereunder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind, other than pursuant to this Agreement and the U.S.
Purchase Agreement; and upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, assuming each such
International Manager has no notice of any adverse claim, each of the
International Managers will receive good and marketable title to the
Securities purchased by it from such Selling Shareholder, free and clear of
any security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
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(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT. Such
Selling Shareholder has duly executed and delivered, in the form heretofore
furnished to the Lead Managers, the Power of Attorney and Custody Agreement
with ________________, as attorney-in-fact (the "Attorney-in-Fact") and
__________________, as custodian (the "Custodian"); the Custodian is
authorized to deliver the Securities to be sold by such Selling Shareholder
hereunder and to accept payment therefor; and the Attorney-in-Fact is
authorized to execute and deliver this Agreement, the U.S. Purchase
Agreement and the certificate referred to in Section 5(f) or that may be
required pursuant to Section 5(m) on behalf of such Selling Shareholder, to
sell, assign and transfer to the International Managers the Securities to
be sold by such Selling Shareholder hereunder, to determine the purchase
price to be paid by the International Managers to such Selling Shareholder,
as provided in Section 2(a) hereof, to authorize the delivery of the
Securities to be sold by such Selling Shareholder hereunder, to accept
payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement and the U.S. Purchase
Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent,
approval, authorization, order, registration, qualification or decree
of, any court or governmental authority or agency, domestic or foreign,
is necessary or required for the performance by each Selling Shareholder
of its obligations under this Agreement, the U.S. Purchase Agreement or
the Power of Attorney and Custody Agreement, or in connection with the
sale and delivery of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement and the U.S. Purchase
Agreement, except such as may have previously been made or obtained or
as may be required under the 1933 Act or the 1933 Act Regulations or
state securities laws.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days
from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of Merrill Lynch, (i) 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, directly or indirectly, any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock,
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whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold hereunder or under the U.S. Purchase
Agreement.
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all
of the Securities to be sold by such Selling Shareholder pursuant to
this Agreement, in suitable form for transfer by delivery or accompanied
by duly executed instruments of transfer or assignment in blank with
signatures guaranteed, have been placed in custody with the Custodian
with irrevocable conditional instructions to deliver such Securities to
the International Managers pursuant to this Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling Stockholder
nor any of its affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common
control with, or has any other association with (within the meaning of
Article I, Section 1(m) of the By-laws of the National Association of
Securities Dealers, Inc.), any member firm of the National Association
of Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company to each International Manager as to
the matters covered thereby; and any certificate signed by or on behalf of the
Selling Shareholders as such and delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers pursuant to the terms of
this Agreement shall be deemed a representation and warranty by such Selling
Shareholder to each International Manager as to the matters covered hereby.
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SECTION 2. SALE AND DELIVERY TO INTERNATIONAL MANAGERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company and each Selling Shareholder, severally and not
jointly, agrees to sell to each International Manager, severally and not
jointly, and each International Manager, severally and not jointly, agrees to
purchase from the Company and each Selling Shareholder, at the price per
share set forth in Schedule C, that portion of the number of Initial
International Securities set forth in Schedule B opposite the name of the
Company or such Selling Shareholder, as the case may be, which the number of
Initial International Securities set forth in Schedule A opposite the name of
such International Manager, plus any additional number of Initial
International Securities which such International Manager may become
obligated to purchase pursuant to the provisions of Section 10 hereof bears
to the total number of Initial International Securities, subject, in each
case, to such adjustments among the International Managers as the Global
Coordinator in its discretion shall make to eliminate any sales or purchases
of fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company and the Selling Shareholders, acting
severally and not jointly, hereby grant an option to the International
Managers, severally and not jointly, to purchase up to an additional 105,000
shares of Common Stock at the price per share set forth in Schedule C, less
an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial International Securities but not payable
on the International Option Securities. The option hereby granted will expire
30 days after the date hereof and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Initial
International Securities upon notice by the Global Coordinator to the Company
and the Selling Shareholders setting forth the number of International Option
Securities as to which the several International Managers are then exercising
the option and the time and date of payment and delivery for such
International Option Securities. Any such time and date of delivery for the
International Option Securities (a "Date of Delivery") shall be determined by
the Global Coordinator, but shall not be later than seven full business days
after the exercise of said option, nor in any event prior to the Closing
Time, as hereinafter defined. If the option is exercised as to all or any
portion of the International Option Securities, each of the International
Managers, acting severally and not jointly, will purchase that proportion of
the total number of International Option Securities then being purchased
which the number of Initial International Securities set forth in Schedule A
opposite the name of such International Manager bears to the total number of
Initial International Securities, subject in each case to such adjustments as
the Global Coordinator in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Munger, Tolles & Olson LLP, 355 South Grand Avenue,
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35th Floor, Los Angeles, California 90071-1560, or at such other place as
shall be agreed upon by the Global Coordinator and the Company and the
Selling Shareholders, at 7:00 A.M. (California time) on the third (fourth, if
the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business
day after the date hereof (unless postponed in accordance with the provisions
of Section 10), or such other time not later than ten business days after
such date as shall be agreed upon by the Global Coordinator and the Company
and the Selling Shareholders (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the
purchase price for, and delivery of certificates for, such International
Option Securities shall be made at the above-mentioned offices, or at such
other place as shall be agreed upon by the Global Coordinator and the Company
and the Selling Shareholders, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company and the Selling
Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to a bank account designated by
the Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers,
for its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the
International Option Securities, if any, which it has agreed to purchase.
Merrill Lynch, individually and not as representative of the International
Managers, may (but shall not be obligated to) make payment of the purchase
price for the Initial International Securities or the International Option
Securities, if any, to be purchased by any International Manager whose funds
have not been received by the Closing Time or the relevant Date of Delivery,
as the case may be, but such payment shall not relieve such International
Manager from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
International Securities and the International Option Securities, if any,
shall be in such denominations and registered in such names as the Lead
Managers may request in writing at least one full business day before the
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial International Securities and the International
Option Securities, if any, will be made available for examination and
packaging by the Lead Managers in The City of New York not later than 10:00
A.M. (Eastern time) on the business day prior to the Closing Time or the
relevant Date of Delivery, as the case may be.
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SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
International Manager as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Global Coordinator immediately,
and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectuses,
whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the
Global Coordinator with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Global Coordinator or counsel for the
International Managers shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the Lead Managers and counsel for the International Managers,
without charge, signed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated or deemed to be
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Lead Managers, without
charge, a conformed copy of the Registration Statement as originally filed
and of each amendment thereto (without exhibits) for each of the
International Managers. The copies of the Registration Statement and each
amendment thereto furnished to the International Managers will be identical
to the electronically transmitted copies
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thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by
the 1933 Act. The Company will furnish to each International Manager,
without charge, during the period when the International Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the International Prospectus (as amended or supplemented) as such
International Manager may reasonably request. The International Prospectus
and any amendments or supplements thereto furnished to the International
Managers will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934
Act Regulations so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the U.S. Purchase Agreement and
in the Prospectuses. If at any time when a prospectus is required by the
1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the International Managers or for
the Company, to amend the Registration Statement or amend or supplement any
Prospectus in order that the Prospectuses will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to
the International Managers such number of copies of such amendment or
supplement as the International Managers may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the International Managers, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any
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jurisdiction in which it is not otherwise so subject. In each jurisdiction
in which the Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such jurisdiction to
continue such qualification in effect for a period of not less than one year
from the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(i) LISTING. The Company will use its best efforts to effect the
listing of the Securities on the New York Stock Exchange.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 90 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) 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 share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold hereunder
or under the U.S. Purchase Agreement, or (B) any shares of Common Stock
issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectuses.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.
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SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company and the Selling Shareholders will pay or
cause of be paid all expenses incident to the performance of their
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the
Securities, (iii) the preparation, issuance and delivery of the certificates
for the Securities to the Underwriters, including any stock or other transfer
taxes and any stamp or other duties payable upon the sale, issuance or
delivery of the Securities to the Underwriters and the transfer of the
Securities between the International Managers and the U.S. Underwriters, (iv)
the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees
and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters
in connection with, the review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x)
the fees and expenses incurred in connection with the listing of the
Securities on the New York Stock Exchange.
(b) EXPENSES OF SELLING SHAREHOLDERS. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital
duties and stock transfer taxes, if any, payable upon the sale of the
Securities to the Underwriters, and the transfer of the Securities between
the International Managers and the U.S. Underwriters pursuant to an agreement
between such Underwriters, and (ii) the fees and disbursements of their
respective counsel and accountants.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and the Selling Shareholders shall
reimburse the International Managers for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the
International Managers.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect any agreement that the Company and the Selling Shareholders may make
for the sharing of such costs and expenses.
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SECTION 5. CONDITIONS OF INTERNATIONAL MANAGERS' OBLIGATIONS. The
obligations of the several International Managers hereunder are subject to
the accuracy of the representations and warranties of the Company and the
Selling Shareholders contained in Section 1 hereof or in certificates of any
officer of the Company or any subsidiary of the Company or on behalf of any
Selling Shareholder delivered pursuant to the provisions hereof, to the
performance by the Company of its covenants and other obligations hereunder,
and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b) (or
a post-effective amendment providing such information shall have been filed
and declared effective in accordance with the requirements of Rule 430A) or,
if the Company has elected to rely upon Rule 434, a Term Sheet shall have
been filed with the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the Lead Managers
shall have received the favorable opinion, dated as of Closing Time, of Troop
Meisinger Steuber & Pasich, LLP, counsel for the Company, in form and
substance satisfactory to counsel for the International Managers, together
with signed or reproduced copies of such letter for each of the other
International Managers to the effect set forth in Exhibit A hereto and to
such further effect as counsel to the International Managers may reasonably
request.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At Closing Time,
the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of ________________, counsel for the Selling Shareholders, in
form and substance satisfactory to counsel for the International Managers,
together with signed or reproduced copies of such letter for each of the
other International Managers to the effect set forth in Exhibit B hereto and
to such further effect as counsel to the International Managers may
reasonable request.
(d) OPINION OF COUNSEL FOR INTERNATIONAL MANAGERS. At Closing Time,
the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of Munger, Tolles & Olson LLP, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers with respect to the matters set forth in
clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the Company),
(viii) through (x), inclusive, (xiii), and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters
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governed by the laws of jurisdictions other than the law of the State of New
York and the federal law of the United States, upon the opinions of counsel
satisfactory to the Lead Managers. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent
they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information
is given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the Lead
Managers shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that (i)
there has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force
and effect as though expressly made at and as of Closing Time, (iii) the
Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or are contemplated by the Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the Lead
Managers shall have received a certificate of an Attorney-in-Fact on behalf
of each Selling Shareholder, dated as of Closing Time, to the effect that (i)
the representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same force
and effect as though expressly made at and as of Closing Time and (ii) each
Selling Shareholder has complied in all material respects with all agreements
and all conditions on its part to be performed under this Agreement at or
prior to Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Lead Managers shall have received from Arthur Anderson LLP a
letter dated such date, in form and substance satisfactory to the Lead
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectuses.
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives
shall have received from Arthur Anderson LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
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(i) APPROVAL OF LISTING. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(j) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of
Exhibit C hereto signed by the persons listed on Schedule D hereto.
(l) PURCHASE OF INITIAL U.S. SECURITIES. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.
(m) CONDITIONS TO PURCHASE OF INTERNATIONAL OPTION SECURITIES. In the
event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company and the
Selling Shareholders contained herein and the statements in any certificates
furnished by the Company, any subsidiary of the Company and the Selling
Shareholders hereunder shall be true and correct as of each Date of Delivery
and, at the relevant Date of Delivery, the Lead Managers shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(e)
hereof remains true and correct as of such Date of Delivery.
(ii) CERTIFICATE OF SELLING SHAREHOLDERS. A certificate, dated
such Date of Delivery, of the Attorney-in-Fact on behalf of each Selling
Shareholder confirming that the certificate delivered at Closing Time
pursuant to Section 5(f) remains true and correct as of such Date of
Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of
Troop Meisinger Steuber & Pasich, LLP, counsel for the Company, in form
and substance satisfactory to counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. The
favorable opinion of
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____________, counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the International Managers, dated such Date of
Delivery, relating to the International Option Securities to be purchased
on such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(iv) OPINION OF COUNSEL FOR INTERNATIONAL MANAGERS. The favorable
opinion of Munger, Tolles & Olson LLP, counsel for the International
Managers, dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(d) hereof.
(v) BRING-DOWN COMFORT LETTER. A letter from Arthur Anderson LLP,
in form and substance satisfactory to the Lead Managers and dated such
Date of Delivery, substantially in the same form and substance as the
letter furnished to the Lead Managers pursuant to Section 5(g) hereof,
except that the "specified date" in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such
Date of Delivery.
(n) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery,
counsel for the International Managers shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Lead Managers and counsel for the International
Managers.
(o) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several International Managers to purchase the relevant
Option Securities, may be terminated by the Lead Managers by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
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SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF INTERNATIONAL MANAGERS. The Company and the
Selling Shareholders, jointly and severally, agree to indemnify and hold
harmless each International Manager and each person, if any, who controls any
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company and the Selling Shareholders; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
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(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
SHAREHOLDERS. Each International Manager severally agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and
each Selling Shareholder and each person, if any, who controls any Selling
Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary international prospectus or
the International Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such International Manager through the Lead Managers expressly for
use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the International Prospectus (or any amendment or
supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section
6(b) above, counsel to the indemnified parties shall be selected by the
Company. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent
to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof
(whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising
out of such litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
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(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party
shall have received notice of the terms of such settlement at least 30 days
prior to such settlement being entered into and (iii) such indemnifying party
shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions
of this Section shall not affect any agreement among the Company and the
Selling Shareholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Shareholders on the one hand and the
International Managers on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Shareholders on the
one hand and of the International Managers on the other hand in connection
with the statements or omissions which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the International Managers on the other hand
in connection with the offering of the International Securities pursuant to
this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the International Securities
pursuant to this Agreement (before deducting expenses) received by the
Company and the Selling Shareholders and the total underwriting discount
received by the International Managers, in each case as set forth on the
cover of the International Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the International Securities as set forth on such
cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the International Managers on the other hand shall be determined
by reference to, among other things, whether any such untrue or alleged
untrue statement of a material fact or omission or alleged
29
<PAGE>
omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company, the Selling Shareholders and the International Managers
agree that it would not be just and equitable if contribution pursuant to
this Section 7 were determined by pro rata allocation (even if the
International Managers were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 7. The aggregate amount of
losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged
untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by
it and distributed to the public were offered to the public exceeds the
amount of any damages which such International Manager has otherwise been
required to pay by reason of any such untrue or alleged untrue statement or
omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights
to contribution as the Company or such Selling Shareholder. The
International Managers' respective obligations to contribute pursuant to this
Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers
30
<PAGE>
of the Company or any of its subsidiaries or the Selling Shareholders
submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of any
International Manager or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the International Managers.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Lead Managers may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time
at or prior to Closing Time (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the International Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered
as one enterprise, whether or not arising in the ordinary course of business,
or (ii) if there has occurred any material adverse change in the financial
markets in the United States or the international financial markets, any
outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Lead Managers,
impracticable to market the Securities or to enforce contracts for the sale
of the Securities, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New
York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or
by such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York
authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE INTERNATIONAL MANAGERS. If
one or more of the International Managers shall fail at Closing Time or a
Date of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Lead Managers
shall have the right, within 24 hours thereafter, to make arrangements for
one or more of the non-defaulting International Managers, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein
set forth; if, however, the Lead Managers shall not have completed such
arrangements within such 24-hour period, then:
31
<PAGE>
(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of the
non-defaulting International Managers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the International Managers to purchase and of the Company and
the Selling Shareholders to sell the Option Securities to be purchased and
sold on such Date of Delivery shall terminate without liability on the part
of any non-defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company and the Selling
Shareholders to sell the relevant International Option Securities, as the
case may be, either (i) the Lead Managers or (ii) the Company and any Selling
Shareholder shall have the right to postpone Closing Time or the relevant
Date of Delivery, as the case may be, for a period not exceeding seven days
in order to effect any required changes in the Registration Statement or the
Prospectuses or in any other documents or arrangements. As used herein, the
term "International Manager" includes any person substituted for an
International Manager under this Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR THE
COMPANY. (a) If a Selling Shareholder shall fail at Closing Time or at a
Date of Delivery to sell and deliver the number of Securities which such
Selling Shareholder or Selling Shareholders are obligated to sell hereunder,
and the remaining Selling Shareholders do not exercise the right hereby
granted to increase, pro rata or otherwise, the number of Securities to be
sold by them hereunder to the total number to be sold by all Selling
Shareholders as set forth in Schedule B hereto, then the International
Managers may, at option of the Lead Managers, by notice from the Lead
Managers to the Company and the non-defaulting Selling Shareholders, either
(a) terminate this Agreement without any liability on the fault of any
non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8
shall remain in full force and effect or (b) elect to purchase the Securities
which the non-defaulting Selling Shareholders and the Company have agreed to
sell hereunder. No action taken pursuant to this Section 11 shall relieve
any Selling Shareholder so defaulting from liability, if any, in respect of
such default.
32
<PAGE>
In the event of a default by any Selling Shareholder as referred to in
this Section 11, each of the Lead Managers, the Company and the
non-defaulting Selling Shareholders shall have the right to postpone Closing
Time or Date of Delivery for a period not exceeding seven days in order to
effect any required change in the Registration Statement or Prospectuses or
in any other documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of Delivery
to sell the number of Securities that it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any
nondefaulting party; provided, however, that the provisions of Sections 1, 4,
6, 7 and 8 shall remain in full force and effect. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect
of such default.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201 and 10900 Wilshire
Boulevard, Suite 900, Los Angeles, California 90024, attention of Robert
Woolway; and notices to the Company shall be directed to it at ,
attention of ; and notices to the Selling Shareholders shall be
directed to , attention of .
SECTION 13. PARTIES. This Agreement shall each inure to the benefit
of and be binding upon the International Managers, the Company and the
Selling Shareholders and their respective successors. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the International Managers, the
Company and the Selling Shareholders and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and
7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the International
Managers, the Company and the Selling Shareholders and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm
or corporation. No purchaser of Securities from any International Manager
shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW
YORK CITY TIME.
33
<PAGE>
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
34
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Shareholders a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a binding agreement between the
International Managers, the Company and the Selling Shareholders in
accordance with its terms.
Very truly yours,
99 CENTS ONLY STORES
By:
------------------------------------------
Title:
By:
------------------------------------------
As Attorney-in-Fact acting on behalf
of the Selling Shareholders named in
Schedule B hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
By: MERRILL LYNCH INTERNATIONAL
By
------------------------------------------
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.
35
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial International
Name of International Manager Securities
----------------------------- -----------
<S> <C>
Merrill Lynch International..............
Goldman Sachs International..............
Smith Barney Inc. .......................
EVEREN Securities, Inc...................
Piper Jaffray Inc........................
-----------
Total..................................... 700,000
-----------
-----------
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Initial Maximum Number of Option
Securities to be Sold Securities to Be Sold
--------------------- ------------------------
<S> <C> <C>
Total....................
</TABLE>
Sch B-1
<PAGE>
SCHEDULE C
99 CENTS ONLY STORES
700,000 Shares of Common Stock
(No Par Value Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $ .
2. The purchase price per share for the International Securities to be
paid by the several International Managers shall be $ , being
an amount equal to the initial public offering price set forth above less $
per share; provided that the purchase price per share for any International
Option Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial International Securities but not payable on the International Option
Securities.
Sch C-1
<PAGE>
SCHEDULE D
List of persons and entities
subject to lock-up
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the
International Purchase Agreement and the U.S. Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the International Purchase Agreement and the U.S. Purchase
Agreement or pursuant to employee benefit plans referred to in the
Prospectuses; the shares of issued and outstanding capital stock of the
Company, including the Securities to be purchased by the International
Managers and the U.S. Underwriters from the Selling Shareholders, have been
duly authorized and validly issued and are fully paid and non-assessable;
and none of the outstanding shares of capital stock of the Company was issued
in violation of the preemptive or other similar rights of any securityholder
of the Company.
(v) The Securities to be purchased by the International Managers and
the U.S. Underwriters from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the International Purchase Agreement
and the U.S. Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to the International Purchase Agreement and the U.S.
Purchase Agreement, respectively, against payment of the consideration set
forth in the International Purchase Agreement and the U.S. Purchase
Agreement, will be validly issued and fully paid and non-assessable and no
holder of the Securities is or will be subject to personal liability by
reason of being such a holder.
A-1
<PAGE>
(vi) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(vii) To the best of our knowledge, the Company does not have any
subsidiaries.
(viii) The International Purchase Agreement and the U.S. .Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required
filing of the Prospectuses pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectuses, excluding the documents incorporated by
reference therein, and each amendment or supplement to the Registration
Statement and the Prospectuses, excluding the documents incorporated by
reference therein, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to
form in all material respects with the requirements of the 1933 Act and the
1933 Act Regulations.
(xi) The documents incorporated by reference in the Prospectuses (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion), when they were
filed with the Commission complied as to form in all material respects with
the requirements of the 1933 Act or the 1934 Act and the rules and
regulations of the Commission thereunder.
(xiii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company
and the requirements of the New York Stock Exchange.
(xiv) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company
or any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental agency
or body, domestic or foreign, which might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in the
A-2
<PAGE>
International Purchase Agreement and U.S. Purchase Agreement or the
performance by the Company of its obligations thereunder.
(xv) The information in the Prospectuses under "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Certain Federal Income Tax
Considerations" and in the Registration Statement under Item 15, to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's charter and bylaws or legal proceedings, or legal conclusions, has
been reviewed by us and is correct in all material respects.
(xvi) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are
not described as required.
(xvii) All descriptions in the Prospectuses of contracts and other
documents to which the Company or its subsidiaries are a party are accurate
in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto, and the descriptions thereof or references thereto are
correct in all material respects.
(xviii) To the best of our knowledge, the Company is not in violation
of its charter or by-laws and no default by the Company exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement,
note, lease or other agreement or instrument that is described or referred to
in the Registration Statement or the Prospectuses or filed or incorporated by
reference as an exhibit to the Registration Statement.
(xix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the due
authorization, execution and delivery of the International Purchase Agreement
and the U.S. Purchase Agreement or for the offering, issuance, sale or
delivery of the Securities.
(xx) The execution, delivery and performance of the International Purchase
Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in the International Purchase Agreement, the U.S.
Purchase Agreement and in the Registration Statement (including the issuance and
sale of the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of Proceeds")
and compliance
A-3
<PAGE>
by the Company with its obligations under the International Purchase
Agreement and the U.S. Purchase Agreement do not and will not, whether with
or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(xi) of the Purchase Agreements) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any subsidiary pursuant to any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or any other agreement
or instrument, known to us, to which the Company or any subsidiary is a party
or by which it or any of them may be bound, or to which any of the property
or assets of the Company or any subsidiary is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would
not have a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary, or any applicable law, statute, rule, regulation, judgment,
order, writ or decree, known to us, of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their respective properties, assets or
operations.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated by
reference therein or omitted therefrom, as to which we need make no
statement), at the time such Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included or incorporated by reference
therein or omitted therefrom, as to which we need make no statement), at the
time the Prospectuses were issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Such opinion shall not state that it is to be governed or qualified by, or
that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).
A-4
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, (other than the issuance of the
order of the Commission declaring the Registration Statement effective and
such authorizations, approvals or consents as may be necessary under state
securities laws, as to which we need express no opinion) is necessary or
required to be obtained by the Selling Shareholders for the performance by
each Selling Shareholder of its obligations under the International Purchase
Agreement, the U.S. Purchase Agreement or in the Power of Attorney and
Custody Agreement, or in connection with the offer, sale or delivery of the
Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholders named therein
and constitutes the legal, valid and binding agreement of such Selling
Shareholder.
(iii) The International Purchase Agreement and the U.S. Purchase
Agreement have been duly authorized, executed and delivered by or on behalf
of each Selling Shareholder.
(iv) Each Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders
in accordance with the terms of the International Purchase Agreement and the
U.S. Purchase Agreement.
(v) The execution, delivery and performance of the International
Purchase Agreement, the U.S. Purchase Agreement and the Power of Attorney and
Custody Agreement and the sale and delivery of the Securities and the
consummation of the transactions contemplated in the International Purchase
Agreement and the U.S. Purchase Agreement and in the Registration Statement
and compliance by the Selling Shareholders with their obligations under the
International Purchase Agreement and the U.S. Purchase Agreement have been
duly authorized by all necessary action on the part of the Selling
Shareholders and do not and will not,
B-1
<PAGE>
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default under or result in the
creation or imposition of any tax, lien, charge or encumbrance upon the
Securities or any property or assets of the Selling Shareholders pursuant to,
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, license, lease or other instrument or agreement to which any Selling
Shareholder is a party or by which they may be bound, or to which any of the
property or assets of the Selling Shareholders may be subject nor will such
action result in any violation of the provisions of the charter or by-laws of
the Selling Shareholders, if applicable, or any law, administrative
regulation, judgment or order of any governmental agency or body or any
administrative or court decree having jurisdiction over such Selling
Shareholder or any of its properties.
(vi) To the best of our knowledge, each Selling Shareholder has valid
and marketable title to the Securities to be sold by such Selling Shareholder
pursuant to the International Purchase Agreement and the U.S. Purchase
Agreement, free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind, and has full right, power and
authority to sell, transfer and deliver such Securities pursuant to the
International Purchase Agreement and the U.S, Purchase Agreement. By
delivery of a certificate or certificates therefor such Selling Shareholder
will transfer to the International Managers and the U.S. Underwriters who
have purchased such Securities pursuant to the International Purchase
Agreement and the U.S. Purchase Agreement, respectively, (without notice of
any defect in the title of such Selling Shareholder and who are otherwise
bona fide purchasers for purposes of the Uniform Commercial Code) valid and
marketable title to such Securities, free and clear of any pledge, lien,
security interest, charge, claim, equity or encumbrance of any kind.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included or incorporated
by reference therein or omitted therefrom, as to which we need make no
statement), at the time such Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included or incorporated by reference
therein or omitted therefrom, as to which we need
B-2
<PAGE>
make no statement), at the time the Prospectuses were issued, at the time any
such amended or supplemented prospectuses were issued or at the Closing Time,
included or include an untrue statement of a material fact or omitted or omit
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
Such opinion shall not state that it is to be governed or qualified by, or
that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).
B-3
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(k)]
Exhibit C
, 1998
MERRILL LYNCH INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
PIPER JAFFRAY INC.
as Lead Managers of the several International Managers
Ropemaker Place
25 Ropemaker Street
London EC2Y 9L4
England
Re: Proposed Public Offering By 99 Cents Only Stores
-----------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of 99
Cents Only Stores, a California corporation (the "Company"), understands that
Merrill Lynch International ("Merrill Lynch"), Goldman Sachs International,
Smith Barney Inc., EVEREN Securities, Inc. and Piper Jaffray Inc. propose to
enter into a International Purchase Agreement (the "International Purchase
Agreement") with the Company and the Selling Shareholders providing for the
public offering of shares (the "Securities") of the Company's common stock,
no par value per share (the "Common Stock"). In recognition of the benefit
that such an offering will confer upon the undersigned as a stockholder
[and an officer and/or director] of the Company, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
International Purchase Agreement that, during a period of 90 days from the
date of the International Purchase Agreement, the undersigned will not,
without the prior written consent of Merrill Lynch, directly or indirectly,
(i) 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 for the sale of, or otherwise dispose of or transfer any shares of
the Company's Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, whether now owned or hereafter acquired by
the undersigned or with respect to which the undersigned has or hereafter
acquires the power of disposition, or file any registration statement under
the Securities Act of 1933, as amended, with respect to any of the foregoing
or (ii)
C-1
<PAGE>
enter into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
--------------------------
Print Name:
--------------------------
C-2
<PAGE>
- -------------------------------------------------------------------------------
BANK OF AMERICA BUSINESS LOAN AGREEMENT
NATIONAL TRUST AND SAVINGS ASSOCIATION
- -------------------------------------------------------------------------------
This Agreement dated as of JANUARY 15, 1997, is between BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and 99 CENTS ONLY STORES
(the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Seven Million Dollars ($7,000,000).
(b) This is a revolving line of credit under which the Borrower may obtain
advances, letters of credit, and shipside bonds. During the availability
period, the Borrower may repay principal amounts and reborrow them. The
Borrower agrees not to permit the outstanding principal balance of all
advances under the revolving line of credit to exceed Two Million Five
Hundred Thousand Dollars ($2,500,000) at any time; letters of credit and
shipside bonds are also subject to dollar limits, described below.
(c) The Borrower agrees not to permit the outstanding principal balance of all
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not yet
reimbursed ("L/C outstandings") and shipside bonds to exceed the
Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and June 30, 1997 (the "Expiration Date") unless the Borrower is
in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on January 31, 1997, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower. Each
interest rate is a rate per year. Interest will be paid on the last day of each
interest period, and on the last day each month during the interest period. At
the end of any interest period, the interest rate will revert to the rate based
on the Reference Rate, unless the Borrower has designated another optional
interest rate for the portion.
<PAGE>
1.6 OFFSHORE RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate plus
1.50 percentage points.
Designation of an Offshore Rate portion is subject to the following
requirements:
(a) The interest period during which the Offshore Rate will be in effect will
be one year or less. The last day of the interest period will be
determined by the Bank using the practices of the offshore dollar
inter-bank market.
(b) Each Offshore Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000) for interest periods of 30 days or longer. For
shorter maturities, each Offshore Rate portion will be for an amount which,
when multiplied by the number of days in the applicable interest period, is
not less than fifteen million (15,000,000) dollar-days.
(c) The "Offshore Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
Offshore Rate = Grand Cayman Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded upward to the
nearest 1/16th of one percent) at which the Bank's Grand Cayman
Branch, Grand Cayman, British West Indies, would offer U.S. dollar
deposits for the applicable interest period to other major banks in
the offshore dollar inter-bank markets.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in the Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will be expressed as
a decimal, and will include, but not be limited to, marginal,
emergency, supplemental, special, and other reserve percentages.
(d) The Borrower may not elect an Offshore Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already bearing
interest at the Offshore Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount
(if any) by which
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest
period, exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the offshore dollar market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an Offshore Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of an Offshore Rate portion are not available in the
offshore dollar inter-bank markets; or
(ii) the Offshore Rate does not accurately reflect the cost of an Offshore
Rate portion.
<PAGE>
1.7 LETTERS OF CREDIT. This line of credit may be used for financing:
(i) commercial letters of credit with a maximum maturity of 180 days but
not to extend more than 180 days beyond the Expiration Date. Each
commercial letter of credit will require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 365 days but not
to extend beyond the Expiration Date except for standby letters of
credit issued in connection with worker's compensation which may not
extend more than 365 days beyond the Expiration Date.
(iii) L/C outstandings at any time may not exceed Five Million Dollars
($5,000,000) for commercial letters of credit or Two Million Dollars
($2,000,000) for standby letters of credit.
The following letters of credit are outstanding from the Bank for the
account of the Borrower:
<TABLE>
<CAPTION>
Letter of Credit Number Amount
----------------------- ------
<S> <C>
218027 $1,636,000.00
1008879 $ 44,064.00
1009811 $ 48,336.00
1013866 $ 106,600.00
1014963 $ 40,076.40
1015118 $ 36,800.00
1015514 $ 50,954.40
1015515 $ 23,184.00
1015516 $ 14,889.00
</TABLE>
As of the date of this Agreement, these letters of credit shall be
deemed to be L/C outstandings under this Agreement, and shall be
subject to all the terms and conditions stated in this Agreement.
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank, be
added to the principal amount outstanding under this Agreement. The amount
will bear interest and be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary acceptable
to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial Letter of
Credit or Application and Agreement for Standby Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the Borrower
will be charged for issuing and processing letters of credit for the
Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to 1.00% per annum of the
outstanding undrawn amount of each standby letter of credit, payable
annually in advance, calculated on the basis of the face amount outstanding
on the day the fee is calculated.
<PAGE>
(h) if the line of credit under this Agreement is terminated for any reason,
including, without limitation, termination at the Borrower's request, as a
result of the Bank's failure to renew the line of credit, or as otherwise
permitted under this Agreement, to immediately deliver to the Bank, cash
collateral in an aggregate amount equal to the L/C outstandings at such
time. The Borrower agrees to maintain at all times unencumbered liquid
assets equal to at least Three Million Dollars ($3,000,000) plus the amount
of the L/C outstandings at such time.
1.8 SHIPSIDE BONDS. This line of credit may be used for financing shipside
bonds in a face amount not exceeding Fifty Thousand Dollars ($50,000). The
Borrower agrees:
(a) any sum owed to the Bank under a shipside bond may, at the option of the
Bank, be added to the principal amount outstanding under this Agreement.
The amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding shipside bonds.
(c) the issuance of any shipside bond is subject to the Bank's express approval
and must be in form and content satisfactory to the Bank.
(d) to sign the Bank's application, security agreement and other standard forms
for shipside bonds, and to pay any issuance and/or other fees that the Bank
notifies the Borrower will be charged for issuing and processing shipside
bonds for the Borrower.
(e) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. EXPENSES. The Borrower agrees to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
3. DISBURSEMENTS, PAYMENTS AND COSTS
3.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
3.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
3.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments or for
the designation of optional interest rates given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14617-01999, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
<PAGE>
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonably believes
are made by any individual authorized by the Borrower to give such
instructions. This indemnity and excuse will survive this Agreement.
3.4 DIRECT DEBIT.
(a) The Borrower agrees that interest and any fees will be deducted
automatically on the due date from checking account number 14617-01999, or
such other of the Borrower's accounts with the Bank as designated in
writing by the Borrower.
(b) The Bank will debit the account on the dates the payments become due. If a
due date does not fall on a banking day, the Bank will debit the account on
the first banking day following the due date.
(c) The Borrower will maintain sufficient funds in the account on the dates the
Bank enters debits authorized by this Agreement. If there are insufficient
funds in the account on the date the Bank enters any debit authorized by
this Agreement, the debit will be reversed.
3.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an offshore rate (if
any), a banking day is a day other than a Saturday or a Sunday on which the Bank
is open for business in California and dealing in offshore dollars. All
payments and disbursements which would be due on a day which is not a banking
day will be due on the next banking day. All payments received on a day which
is not a banking day will be applied to the credit on the next banking day.
3.6 TAXES. The Borrower will not deduct any taxes from any payments it makes
to the Bank. If any government authority imposes any taxes on any payments made
by the Borrower, the Borrower will pay the taxes and will also pay to the Bank,
at the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
3.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
3.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used.
3.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus 2.00 percentage
points. This may result in compounding of interest.
3.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 2.00 percentage point(s)
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
4. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
<PAGE>
4.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
4.2 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
4.3 OTHER ITEMS. Any other items that the Bank reasonably requires.<PAGE>
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
5.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
5.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
5.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
5.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
5.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
5.6 FINANCIAL INFORMATION. All financial and other information that has been
or will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
(and any guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
5.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
5.8 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
5.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
5.10 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
5.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
5.12 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
6. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
<PAGE>
6.1 USE OF PROCEEDS. To use the proceeds of the credit only for working
capital and issuance of letters of credit.
6.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the Bank.
(b) Within 60 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared.
6.3 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain a ratio of
total liabilities to tangible net worth not exceeding 1.00:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities plus long term liabilities.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
6.4 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Additional purchase money security interests in personal property acquired
after the date of this Agreement.
6.5 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(b) any failure to comply with this Agreement.
(c) any material adverse change in the Borrower's (or any guarantor's)
financial condition or operations.
(d) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
(e) any outstanding direct or contingent debts in excess of One Million Dollars
($1,000,000) excluding those debts incurred with respect to (i) acquiring
goods, supplies, or merchandise on normal trade credit, (ii) endorsing
negotiable instruments received in the usual course of business, and (iii)
obtaining surety bonds in the usual course of business.
6.6 BOOKS AND RECORDS. To maintain adequate books and records.
6.7 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
6.8 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
<PAGE>
6.9 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
6.10 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
6.11 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
6.12 INSURANCE. To maintain insurance satisfactory to the Bank as to amount,
nature and carrier covering property damage (including loss of use and
occupancy) to any of the Borrower's properties, public liability insurance
including coverage for contractual liability, product liability and workers'
compensation, and any other insurance which is usual for the Borrower's
business.
6.13 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any merger.
(d) lease, or dispose of all or a substantial part of the Borrower's business
or the Borrower's assets.
(e) sell or otherwise dispose of any assets for less than fair market value.
7. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
7.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
7.2 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
7.3 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition,
a bankruptcy petition is filed against the Borrower (or any guarantor) , or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
7.4 RECEIVERS. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
7.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of Five Hundred Dollars
($500,000) or more in excess of any insurance coverage.
7.6 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Five Hundred Thousand Dollars ($500,000) or more in excess
of any insurance coverage.
7.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
<PAGE>
7.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's (or any guarantor's) financial condition, properties or prospects, or
ability to repay the loan.
7.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) has obtained from anyone else or
which the Borrower (or any guarantor) has guaranteed.
7.10 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
7.11 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
8. ENFORCING THIS AGREEMENT; MISCELLANEOUS
8.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
8.2 CALIFORNIA LAW. This Agreement is governed by California law.
8.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat all
financial information exchanged as confidential. If a participation is sold or
the loan is assigned, the purchaser will have the right of set-off against the
Borrower.
8.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications of
this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing
of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated
under this paragraph is subject to any applicable statute of limitations.
The arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
<PAGE>
(f) The decision that results from an arbitration proceeding may be submitted
to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim,
at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do
not consent to arbitration, the controversy or claim will be settled as
follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed by
a court as provided in California Code of Civil Procedure Section 638
and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the panel)
will be entered as a judgment in the court that appointed the referee,
in accordance with the provisions of California Code of Civil
Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including the
suing party, to submit the controversy or claim to arbitration if the other
party contests the lawsuit. However, if the controversy or claim arises
from or relates to an obligation to the Bank which is secured by real
property located in California at the time of the proposed submission to
arbitration, this right is limited according to the provision above
requiring the consent of both the Borrower and the Bank to seek resolution
through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
8.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
8.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
8.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with
the enforcement or preservation of any rights or remedies under this
Agreement and any other documents executed in connection with this Agreement,
and including any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the
prevailing party is entitled to recover costs and reasonable attorneys' fees
incurred in
<PAGE>
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. As used in this paragraph, "attorneys' fees" includes
the allocated costs of in-house counsel.
8.8 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
8.9 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
8.10 HEADINGS. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
8.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
8.12 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business
Agreement entered into as of December 2, 1994, between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION 99 CENTS ONLY STORES
X /s/ Richard A. Rowley X /s/ David Gold
-------------------------------- -----------------------------
BY: RICHARD A. ROWLEY BY: DAVID GOLD
TITLE: VICE PRESIDENT TITLE: PRESIDENT
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE
ARE TO BE SENT: BORROWER ARE TO BE SENT:
San Gabriel Valley RCBO #1463
15625 E. Stafford St. 4000 E. Union Pacific Ave.
City of Industry, CA 91744 City of Commerce, CA 90023
<PAGE>
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BANK OF AMERICA AMENDMENT TO DOCUMENTS
- -------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of May 20, 1997, is
between Bank of America National Trust and Savings Association (the "Bank")
and 99 CENTS ONLY STORES (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of January 15, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.2 of the Agreement, the date "December 31, 1997" is
substituted for the date "June 30, 1997."
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION 99 CENTS ONLY STORES
X /s/ Richard A. Rowley X /s/ David Gold
----------------------------------- ---------------------------------
BY: RICHARD A. ROWLEY BY: DAVID GOLD
TITLE: VICE PRESIDENT TITLE: PRESIDENT
<PAGE>
- -------------------------------------------------------------------------------
BANK OF AMERICA AMENDMENT TO DOCUMENTS
- -------------------------------------------------------------------------------
AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of December 11, 1997, is
between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank")
and 99 CENTS ONLY STORES (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of January 15, 1997, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.2 of the Agreement, the date "June 30, 1998" is
substituted for the date "December 31, 1997."
2.2 Subparagraph 1.7(ii) of the Agreement is amended to read in its
entirety as follows:
"(ii) standby letters of credit with a maximum maturity 365 days
but not to extend beyond the Expiration Date EXCEPT for
standby letters of credit issued in connection with
workers' compensation may include a provision providing
that the maturity date will be automatically extended
each year for an additional year unless the Bank gives
written notice to the contrary; provided, however, that
each such letter of credit must include a final maturity
date which may not extend more than 365 days beyond the
Expiration Date."
2.3 Paragraph 8.7 of the Agreement is amended to read in its entirety as
follows:
"8.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in
connection with the enforcement or preservation of any rights or
remedies under this Agreement and any other documents executed in
connection with this Agreement, and in connection with any amendment,
waiver, 'workout' or restructuring under this Agreement. In the event
of a lawsuit or arbitration proceeding, the prevailing party is
entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined
by the court or arbitrator. In the event that any case is commenced
by or against the Borrower under the Bankruptcy Code (Title 11, United
States Code) or any similar or successor statute, the Bank is entitled
to recover costs and reasonable attorneys' fees incurred by the Bank
related to the preservation, protection, or enforcement of any rights
of the Bank in such a case. As used in this paragraph, 'attorneys'
fees' includes the allocated costs of the Bank's in-house counsel."
<PAGE>
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all
of the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning
of this Amendment.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION 99 CENTS ONLY STORES
X /s/ Richard A. Rowley X /s/ David Gold
----------------------------------- -----------------------------------
BY: RICHARD A. ROWLEY BY: DAVID GOLD
TITLE: VICE PRESIDENT TITLE: PRESIDENT
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 27, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated March 1, 1998
included in 99 CENTS Only Stores Form 10-K for the year ended December 31, 1997
and to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 27, 1998
