UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA
95-2411605
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
4000 UNION PACIFIC AVENUE
CITY OF COMMERCE, CALIFORNIA 90023
(Address of Principal executive offices)
Registrant's telephone number, including area code: (323) 980-8145
NONE
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days.
YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, No Par Value, 24,804,490 Shares as of MARCH 31, 1999
<TABLE>
<CAPTION>
<S>
<C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cents Only Stores
Consolidated Balance Sheets
(Amounts In Thousands)
March 31, December 31,
1999 1998
(Unaudited)
Assets
Current assets:
Cash $1,971 $4,516
Short-term investments 44,332 43,850
Accounts receivable, net of
allowance for doubtful accounts of
$544 and $535 as of March 31, 1999 3,858 2,605
and December 31, 1998, respectively
Inventories 79,910 78,392
Other 2,997 2,389
Total current assets 133,068 131,752
Property and equipment, at cost:
Land 10,189 9,590
Building and improvements 12,296 11,896
Leasehold improvements 21,546 19,179
Fixtures and equipment 17,908 16,860
Transportation equipment 1,139 1,014
Construction in progress 1,638 1,680
64,716 60,219
Less - accumulated depreciation and (16,435) (14,746)
amortization
Total property and equipment, net 48,281 45,473
Other assets:
Deferred income taxes 6,201 6,422
Long term investments in marketable 2,798 2,710
securities
Deposits 183 183
Goodwill 8,276 8,617
Other 2,960 2,966
20,418 20,898
Total assets $201,767 $198,123
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<TABLE>
<CAPTION>
<S>
<C>
99 Cents Only Stores
Consolidated Balance Sheets
(Amounts In Thousands)
March 31, December 31,
1999 1998
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital lease $893 $923
obligation
Accounts payable 9,158 13,856
Accrued expenses:
Payroll and payroll related 857 1,976
Sales tax 1,653 2,299
Liability for claims 318 306
Other 377 510
Workers' compensation 1,296 1,372
Income taxes payable 3,740 -
Total current liabilities 18,292 21,242
Long-term liabilities:
Deferred rent 2,052 2,091
Accrued interest on capitalized lease 2,851 2,690
obligation
Capital lease obligation, net of 7,152 7,337
current portion
12,055 12,118
Minority Interest 361 398
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 - 24,804,490
shares at March 31, 1999 and
24,740,889 shares at December 31, 107,966 107,571
1998
Retained earnings 63,093 56,794
171,059 164,365
Total liabilities and shareholders' $201,767 $198,123
equity
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<TABLE>
<CAPTION>
<S>
<C>
99 Cents Only Stores
Consolidated Statements of Income
(Unaudited)
(Amounts In Thousands, Except Earnings Per Share Data)
Three
Months Ended
March 31,
1999 1998
Net sales:
99 Cents Only Stores $64,633 $51,482
Universal 17,727 -
Bargain Wholesale 11,377 11,400
Net sales 93,737 62,882
Cost of sales 56,137 39,839
Gross profit 37,600 23,043
Selling, general and administrative 27,474 14,424
expenses
Operating income 10,126 8,619
Interest income (expense), net 318 215
Income before from minority interest 10,444 8,834
Equity loss and minority interest 37 (742)
Income before provision for income 10,481 8,092
taxes
Provision for income taxes 4,183 3,551
Net income $6,298 $4,541
Earnings per common share:
Basic $0.25 $0.19
Diluted $0.25 $0.19
Weighted average number of common
Shares outstanding:
Basic 24,751 23,227
Diluted 25,462 23,705
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
<CAPTION>
<S>
<C>
99 Cents Only Stores
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts In Thousands)
Three
Months Ended
March 31,
1999 1998
Cash flows from operating
activities:
Net income $6,298 $4,541
Adjustment to reconcile net income
to net cash
provided by operating activities:
Depreciation and amortization 1,769 999
Minority interest (37) 742
Changes in asset and liabilities
Associated with operating
activities:
Accounts receivable (1,253) (1,208)
Inventories (1,518) (484)
Other current assets (608) (1,482)
Other assets 5 (1,629)
Accounts payable (4,698) 1,105
Accrued expenses (1,885) (2,054)
Workers' compensation (76) 24
Income taxes payable 4,002 3,236
Deferred rent (39) 18
Accrued interest 161 149
Deferred taxes 221 -
Net cash provided by operating 2,342 3,957
activities
Cash flows from investing
activities:
Purchase of property and equipment (4,497) (2,261)
Investment in Universal - 372
Short-term investments (570) (500)
Net cash used in investing (5,067) (2,389)
activities
Cash flows from financing
activities:
Payments of capital lease obligation (215) (172)
Net proceeds from exercise of stock 395 60
options
Net cash provided by (used in) 180 (112)
financing activities
Net increase in cash (2,545) 1,456
Cash, beginning of period 4,516 882
Cash, end of period $1,971 $2,338
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<TABLE>
<CAPTION>
<S>
<C>
99 CENTS ONLY STORES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles.
However, certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted
accounting principles have been omitted or condensed pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). These
statements should be read in conjunction with the Company's December 31, 1998
audited financial statements and notes thereto included in the Company's Form
10-K filed March 31, 1999. In the opinion of management, these interim
consolidated financial statements reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position and results of operations for each of the
periods presented. The results of operations and cash flows for such periods
are not necessarily indicative of results to be expected for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of 99 Cents
Only Stores and its subsidiaries, Universal International, Inc. and Odd's-N-
End's Inc., from the date of acquisition, September 16, 1998. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Concentration of Operations
All of the Company's 99 Cents Only Stores are located in Southern
California. In addition, the Company's current retail expansion plans for the
99 Cents Only Stores anticipates that planned new stores will be located in
this geographic region. Consequently, the Company's results of operations and
financial condition are substantially dependent upon general economic trends
and various environmental factors in Southern California.
Through its subsidiary, Universal International, Inc. the Company
operates an additional 68 Only Deals and Odd's-N-End's multi price discount
stores located in the upper Midwest, New York and Texas.
2. EARNINGS PER COMMON 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).
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 month periods ended March 31, follows; all options
outstanding are included, no options outstanding were excluded for reasons of
being above market value (amounts in thousands):
1999 1998
Weighted average number of common shares 24,751 23,228
outstanding-Basic.....
Dilutive effect of outstanding stock 711 477
options...............
Weighted average number of common shares 25,462 23,705
outstanding-Diluted....
3. INVESTMENT IN MARKETABLE SECURITIES
Investments in debt and equity securities are recorded as required by
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments are comprised primarily of investment
grade federal and municipal bonds and commercial paper, primarily with short-
term maturities. The Company generally holds investments until maturity and
has not experienced any significant gain or loss from sales of its
investments. Any premium or discount recognized in connection with the
purchase of an investment is amortized over the term of the investment. As of
March 31, 1999 and December 31, 1998, the fair value of investments
approximated the carrying values and were invested as follows (amounts in
thousands):
(Unaudited)
Maturity Maturity
March 31, Within 1 1 to 2 Dec. 31, Within 1 1 to 2
1998 year years 1998 year years
Federal Bonds $ 1,500 $ $ 1,500 $ 1,500 $ $1,500
- -
Municipal Bonds 15,990 14,692 1,298 15,846 14,636 1,210
Commercial Paper 24,857 29,640 - 29,214 29,214 -
$47,130 $44,332 $2,798 $46,560 $43,850 $2,710
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). Adoption of SFAS 130 has
not had a material impact on the Company's financial reporting.
In June 1997, the Financial Accounting Standard Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS 131). The Company adopted SFAS 131 in 1998.
In 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2000
and management does not expect adoption of this standard to have a material
impact on the Company's financial reporting or results of operations.
5. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores retail stores
and Universal's Only Deals and Odd's-N-End's retail stores. The majority of
the product offerings include recognized brand-name consumable merchandise,
regularly available for reorder. Bargain Wholesale sells the same merchandise
at prices generally below normal wholesale levels to local, regional and
national distributors and exporters.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies noted in the Company's Form
10-K. The Company evaluates segment performance based on the net sales and
gross profit of each segment. Management does not track segment data or
evaluate segment performance on additional financial information. As such,
there are no separately identifiable segment assets nor is there any
separately identifiable statements of income data (below gross profit) to be
disclosed.
The company accounts for inter-segment transfer at cost through its
inventory and inter-company accounts. All such transfers have been eliminated
in consolidation.
The Company had no customers representing more than 10 percent of
consolidated net sales. Substantially all of the Company's net sales were to
customers located in the United States.
Reportable segment information for the three months ended March 31,
1998, and 1999 follows (in thousands).
Retail Wholesale Total
1998
Net sales $51,482 $11,400 $62,882
Gross Margin 20,640 2,403 23,043
1999
Net sales $82,360 $11,377 $93,737
Gross Margin 35,007 2,593 37,600
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 April 25, 1999, operates a chain of
68 deep-discount 99 Cents Only Stores and 69 Only Deals and Odd's-N-End's
stores. The Company's growth during the last three years has come primarily
from new store openings, growth in its Bargain Wholesale division and through
the acquisition of Universal. The Company opened eight, ten and thirteen
stores in 1996, 1997 and 1998, respectively (seven, ten and eleven
respectively, net of relocated stores). The Company opened three 99 Cents
Only Stores in the first three months of 1999, one in Los Angeles,
California, one in Van Nuys, California and one in Downey, California and
plans to open an additional 10 net 99 Cents Only Stores during the remainder
of the year. Also, during the period from December 31, 1998 through April 25,
1999, consistent with the Company's on going review and operating strategy,
six Only Deals stores were closed, as the leases matured. One of the closed
stores was in Texas, three were located in Iowa and one each in Nebraska and
Minnesota.
Bargain Wholesale's growth over the three years ended December 31, 1998
and the first quarter of 1999 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 its retail net sales.
However, Bargain Wholesale complements the Company's retail operations by
allowing the Company to purchase in larger volumes at more favorable pricing
and to generate additional net sales with relatively small incremental
increases in operating expenses.
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.
The Company has made in this Form 10-Q forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities and Exchange Act of 1934 concerning the Company's operations,
expansion plans, economic performance, financial condition, 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" and variations thereof. 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. 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 the Only Deals and Odd's-N-End's 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 (vii) dependence on key personnel and control of 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 or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
Readers of this report should carefully read the risk factors included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
NET SALES: Net sales increased $30.8 million, or 49.1%, to $93.7 million in
the 1999 period from $62.9 million in the 1998 period. Retail sales included
both 99 Cents Only Stores retail sales and retail sales of Universal's Only
Deals and Odd's-N-End's. 99 Cents Only Stores retail sales increased $13.2
million to $64.6 million in the 1999 period from $51.5 million in the 1998
period. The increase in 99 Cents Only Stores net sales was attributable to
the net effect of three new stores opened, the full quarter effect of 11 new
stores opened in 1998, and an 8.5% increase in comparable same store sales in
1999 period. Retail sales in the 1999 period also included $17.7 million of
Universal's retail sales. Universal's sales were not included in the 1998
period. Bargain Wholesale net sales were $11.4 million in both the 1999 and
1998 periods.
GROSS PROFIT: Gross profit increased approximately $14.6 million, or 63.2%,
to $37.6 million in the 1999 period from $23.0 million in the 1998 period.
The increase in gross profit was due to higher net sales and an increase in
the gross profit margin to 40.1% in the 1999 period from 36.6% in the 1998
period. The 3.5% point increase in the gross profit margin is due to a higher
proportion of retail net sales, which typically have a higher gross margin
than wholesale sales and favorable merchandise cost factors.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $13.1 million, or
90.5%, to $27.5 million in the 1999 period from $14.4 million in 1998 period.
This increase in expenses is due to the acquisition and resulting
consolidation of Universal's results of operations. Universal's business is
seasonal and has historically incurred losses in the first quarter. As a
percentage of net sales, SG&A increased to 29.3% from 22.9% in 1998. The SG&A
was also affected by 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.
OPERATING INCOME: As a result of the items discussed above, operating income
increased $1.5 million, or 17.5%, to $10.1 million in 1999 from $8.6 million
in 1998. The operating margin was 10.8% in 1999 versus 13.7% in 1998.
INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on
the Company's capitalized leases, net of interest earned on the Company's
cash balances and short-term investments. The change in net interest between
1999 and 1998 was due to interest earned on short-term marketable securities.
During 1999 and 1998, the Company had no bank debt.
(LOSS FROM MINORITY INTEREST): The Company owned a 48% interest in Universal
in the 1998 period. Its share of the Universal loss from operations for the
three month period ended March 31, 1998 was ($741,561). No tax benefit was
applied to this loss, since Universal has tax loss carry-forwards.
PROVISION FOR INCOME TAXES: The provision for income taxes for the three
months ended March 31, 1999, was $4.2 million in 1999 compared to $3.6
million in 1998. The effective rates of the provision for income taxes was
approximately 40.0% in 1999 and 40.2% in 1998. The change in the effective
rate in 1999 from 1998 results from the benefit of available tax credits.
NET INCOME: As a result of the items discussed above, net income increased
$1.8 million, or 38.7% to $6.3 million in 1999 from $4.5 million in the 1998
period. Net income as a percentage of sales is 6.7% in 1999 and 7.2% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations principally from cash provided by
operations, and has not generally relied upon external sources of financing.
The Company's capital requirements result primarily from purchases of
inventory, expenditures related to store openings and the working capital
requirements for new and existing stores. The Company takes advantage of
close-out and other special situation opportunities which frequently results
in large volume purchases, and as a consequence, its cash requirements are
not constant or predictable during the year and can be affected by the timing
and size of its purchases.
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.
As of March 31, 1999 the Company had purchased the land and buildings for six
of its retail store locations. The Company may purchase other locations in
the future. Available cash not immediately needed for such purposes has been
invested in short-term investment grade securities.
During the three months period ended March 31, 1999, net cash provided by
operations was $2.3 million and was $4.0 million for the period ended March
31, 1998. In 1999, inventories increased $1.5 million and receivables
increased $1.3 million. In 1998, inventories increased $0.5 million and
receivables increased $1.2 million. The Company reduced accounts payable by
$4.7 million in 1999. This reduction in accounts payable included payment of
vendor balances carried over with the acquisition of Universal. In 1998
accounts payable increased $1.1 million. Other assets increased $0.6 million
in 1999 and $3.1 million in 1998. Current income taxes payable increased $4.0
million in 1999 and $3.2 million in 1998. These amounts represent the
effective combined federal and state tax rate applied to taxable income for
the first quarter of 1999 and 1998. Net cash used in investing activities was
$5.1 million in 1999, consisting of expenditures for property and equipment
of $4.5 million and the investment of $0.6 million in marketable securities.
In 1998 the Company invested $2.3 million in capital expenditures and $0.5
million in marketable securities. In 1999, net cash proceeds from financing
activities was $0.2 million. This included $0.2 million for payments on the
capitalized warehouse lease offset by $0.4 million of proceeds from the
exercise of stock options. In 1998 payments on capital lease obligations were
$0.2 million and proceeds from the exercise of stock options were $0.1
million.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2000
and management does not expect adoption of this standard to have a material
impact on the Company's financial reporting or results of operations.
The Company plans to open new 99 Cents Only Stores at a targeted annual
rate of 20%. The average investment per new 99 Cents Only Stores opened in
1998, including leasehold improvements, furniture, fixtures and equipment,
inventory and pre-opening expenses, was approximately $660,000. Pre-opening
expenses are not capitalized by the Company. The Company's cash needs for new
store openings are expected to total approximately $9 million in 1999 and $12
million in 2000. The Company's total planned expenditures in each of 1999 and
2000 for additions to fixtures and leasehold improvements of existing stores
as well as for distribution expansion and replacement will be approximately
$5 million. The Company believes that its total capital expenditure
requirements (including new store openings) will increase to approximately
$17 million in 2000. Capital expenditures in 1999 are currently expected to
be incurred primarily for new store openings, improvements to existing stores
and system and general corporate infrastructure. The Company believes that
cash flow from operations will be sufficient to meet operating needs and
capital spending requirements for at least the next twelve months.
Risk Factors
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.
We Depend on New Store Openings for Future Growth
Our operating results depend largely on our ability to open and operate
new stores successfully and to manage a larger business profitably. In 1996,
1997 and 1998, we opened eight, ten and thirteen of our 99 Cents Only Stores,
respectively (seven, ten and eleven stores, respectively, net of relocated
stores). From January 1, 1999 through March 26, 1999, we opened two 99 Cents
Only Stores and we expect to open at least eleven 99 Cents Only Stores in
Southern California during the remainder of the year. We plan to open new
stores over the next several years at a rate of approximately 20% [of the
number of 99 Cents Only Stores we have] per year. Our strategy depends on
many factors, including our ability to identify suitable markets and sites
for our new stores, negotiate leases with acceptable terms, refurbish stores,
appropriately upgrade our financial and management information systems and
controls and manage our operating expenses. In addition, we must be able to
continue to hire, train, motivate and retain competent managers and store
personnel. Many of these factors are beyond our control. As a result, we
cannot assure you that we will be able to achieve our expansion goals. Any
failure by us to achieve our expansion goals on a timely basis, obtain
acceptance in markets in which we currently have limited or no presence,
attract and retain management and other qualified personnel, appropriately
upgrade our financial and management information systems and control or
manage operating expenses could adversely affect our future operating results
and our ability to execute our business strategy.
We also cannot assure you that when we open new stores, we will improve
our results of operations. A variety of factors, including store location,
store size, rental terms, the level of store sales and the level of initial
advertising influence if and when a store becomes profitable. Assuming that
our planned expansion occurs as anticipated, our store base will include a
relatively high proportion of stores with relatively short operating
histories. We cannot assure you that our new stores will achieve the sales
per saleable square foot and store-level operating margins currently achieved
at our existing stores. If our new stores on average fail to achieve these
results, our planned expansion could produce a decrease in our overall sales
per saleable square foot and store-level operating margins. Increases in the
level of advertising and pre-opening expenses associated with the opening of
new stores could also contribute to a decrease in our operating margins.
Finally, the opening of new stores in existing markets has in the past and
may in the future reduce retail sales of existing stores in those markets,
negatively affecting comparable store sales.
Risks Associated with Our Recent Acquisition
In September 1998, we acquired Universal International, Inc. and Odd's-N-
End's, Inc. Acquisitions involve various risks. For example:
- Assimilation of the operations and personnel of an acquired business
into our own business;
- Management information and accounting systems of an acquired business
must be integrated into our current systems;
- Our management must devote its attention to assimilating the acquired
business which diverts their attention from our other business
concerns;
- We might enter markets in which we have limited prior experience; and
- We might lose key employees of an acquired business.
The companies we acquired operate in a market where we had little prior
experience. We have devoted substantial time and resources to integrate
these recently acquired businesses, and we will be required to devote
substantial time and resources to integrate any other business we may acquire
in the future.
We intend to continue to evaluate potential acquisitions of companies
which we believe will complement or enhance our existing business. If we
acquire other companies in the future, it may result in the issuance of
equity securities that could dilute your stock ownership. We may also incur
additional debt and amortize expenses related to goodwill and other tangible
assets if we acquire another company, and this could negatively impact our
results of operations. We currently do not have any arrangements or
understandings to acquire any company or business, and we cannot guarantee
that we will be able to identify or complete any acquisition in the future.
Our operations are mainly concentrated in Southern California
All of our 99 Cents Only Stores are currently located in Southern
California. In addition, our retail expansion plans anticipate that new
stores will be located in this region. As a result, our results of
operations and financial condition depend upon trends in the Southern
California economy. For example, this region experienced an economic
recession in the early 1990s. Although this recession had no material effect
on our business, between 1989 and 1993 most California counties, particularly
Los Angeles, recorded a significant decline in retail spending. Recovery in
these retail markets has continued from 1995 through 1997. However, this
trend may not continue and retail spending could decline in the future. In
addition, Southern California historically has been vulnerable to certain
natural disasters and other risks, such as earthquakes, fires, floods and
civil disturbance. At times, these events have disrupted the local economy.
These events could also pose physical risks to our properties. Although we
maintain standard property and business interruption insurance, we do not
have earthquake insurance on our properties.
With our acquisition of Universal and Odd's-N-End's, we now have stores
in the upper Midwest, upstate New York and Texas. These regions have unique
economic characteristics which we will need to become more familiar with. 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.
We could experience disruptions in receiving and distribution
We pick up substantially all our inventory for our 99 Cents Only Stores
directly from suppliers and deliver the inventory to our only warehouse in
Los Angeles, California. We distribute all inventory for our New York, Texas
and Upper Midwest stores through our only warehouse in Minnesota. Our
success depends upon whether our receiving and shipment schedules are
organized and well managed. As we continue to grow, we may face unexpected
demands on our warehouse operations that could cause delays in delivery of
merchandise to or from our warehouses to our stores. A fire, earthquake or
other disaster at our warehouses could hurt our business, financial condition
and results of operation, particularly because much of our merchandise
consists of close-outs and other irreplaceable products. Although we maintain
standard property and business interruption insurance, we do not have
earthquake insurance on our properties.
Although we try to limit our risk of exposure to potential product
liability claims, we do not know if the limitations in our agreements are
enforceable. We maintain insurance covering damage from use of our products.
If any product liability claim is successful and large enough, our business
could suffer.
We depend upon our relationships with our suppliers and the availability of
close-out and special-situation merchandise
Our success depends in large part on our ability to locate and purchase
quality close-out and special-situation merchandise at attractive prices.
This helps us maintain a mix of name-brand and other merchandise at the 99
Cents price point. We cannot be certain that such merchandise will continue
to be available in the future. Further, we may not be able to find and
purchase merchandise in quantities necessary to accommodate our growth.
Additionally, our suppliers sometimes restrict the advertising, promotion and
method of distribution of their merchandise. These restrictions in turn may
make it more difficult for us to quickly sell these items from our inventory.
Although we believe our relationships with our suppliers are good, we do
not have long term agreements with any supplier. As a result, we must
continuously seek out buying opportunities from our existing suppliers and
from new sources. We compete for these opportunities with other wholesalers
and retailers, discount and deep-discount chains, mass merchandisers, food
markets, drug chains, club stores and various privately-held companies and
individuals. Although we do not depend on any single supplier or group of
suppliers and believe we can successfully compete in seeking out new
suppliers, a disruption in the availability of merchandise at attractive
prices could impair our business.
We purchase in large volumes and our inventory is highly concentrated
To obtain inventory at attractive prices, we take advantage of large
volume purchases, close-outs and other special situations. As a result, our
inventory levels are generally higher than other discount retailers. At
December 31, 1996, 1997 and 1998, we recorded net inventory of $36.9 million,
$43.1 million and $78.4 million, respectively.
We periodically review the net realizable value of our inventory and
make adjustments to its carrying value when appropriate. The current carrying
value of our inventory reflects our belief that we will realize the net
values recorded on our balance sheet. However, we may not be able to do so.
If we sell large portions of our inventory at amounts less than their
carrying value or if we write down a significant part of our inventory, our
cost of sales, gross profits, operating income and net income could suffer
greatly during the period in which such event or events occur.
We face strong competition
We compete in both the acquisition of inventory and sale of merchandise
with other wholesalers, discount and deep-discount stores, single price point
merchandisers, mass merchandisers, food markets, drug chains, club stores and
other retailers. Our industry competitors also include many privately held
companies and individuals. At times, these competitors are also customers of
our Bargain Wholesale division. In the future, new companies may also enter
the deep-discount retail industry. Additionally, we currently face
increasing competition for the purchase of quality close-out and other
special-situation merchandise. Some of our competitors have substantially
greater financial resources and buying power than us. Our capability to
compete will depend on many factors including our ability to successfully
purchase and resell merchandise at lower prices than our competitors. We
cannot assure you that we will be able to compete successfully against our
current and future competitors.
We are vulnerable to uncertain economic factors and changes in the minimum
wage
Our ability to provide quality merchandise at our 99 Cents price point
could be hindered by certain economic factors beyond our control, including
but not limited to:
- increases in inflation;
- increases in operating costs;
- increases in employee health care costs;
- increases in prevailing wage levels; and
- decreases in consumer confidence levels.
As a result, increases in federal and state minimum wage requirements
significantly affect our business. In California, the minimum wage increased
[in March 1997 from $4.75 to $5.00 per hour], in September 1997 from $5.00 to
$5.15 per hour, in March 1998 to $5.75 per hour [and again in January 1999 to
$6.75 per hour.] The federal minimum wage increased in September 1997 to
$5.15 per hour. Congress has proposed a bill to increase the minimum wage to
$6.15 per hour beginning September 1, 1999, and $6.66 per hour beginning
September 1, 2000, with later adjustments to reflect increases in the
Consumer Price Index. Since we provide consumers with merchandise at a 99
Cents price point, we typically cannot pass on to them any incremental costs.
As a result, significant increases in the minimum wage requirements could
impair our business.
We face risks associated with international sales and purchases
Although international sales historically have not been important to our
consolidated net sales, they have contributed to growth in Bargain
Wholesale's net sales. In addition, some of the inventory we purchase is
manufactured outside the United States. There are many risks associated with
doing business internationally. Our international transactions may be
subject to risks such as:
- political instability;
- currency fluctuations;
- exchange rate controls;
- changes in import and export regulations;
- changes in tariff and freight rates.
The United States and other countries have also proposed various forms of
protectionist trade legislation. Any resulting changes in current tariff
structures or other trade policies could lead to fewer purchases of our
products and could adversely affect our international operations.
We could encounter risks related to transactions with our affiliates
We currently lease 13 of our 66, 99 Cents Only Stores and a parking lot
for one of these stores from certain members of the Gold family and their
affiliates. Our annual rental expense for these facilities totaled
approximately $1.8 million, $2.0 million and $2.2 million in 1996, 1997 and
1998, respectively. We believe that our lease terms are just as favorable to
us as they would be for an unrelated party. Under our current policy, we
enter into real estate transactions with our affiliates only for the renewal
or modification of existing leases and on occasions where we determine that
such transactions are in our best interests. Moreover, the independent
members of our Board of Directors must unanimously approve all real estate
transactions between us, and our affiliates. They must also determine that
such transactions are equivalent to a negotiated arm's-length transaction
with a third party. We cannot guarantee that we will reach agreements with
the Gold Family on renewal terms for the properties we currently lease from
them. Also, even if we agree to such terms, we cannot be certain that our
independent directors will approve them. If we fail to renew one of these
leases, we could be forced to relocate or close the leased store. Any
relocations or closures we experience will be costly and could adversely
affect our business.
We rely heavily on our management team
Our success depends substantially on David Gold, our Chief Executive
Officer. We also rely on the continued service of our executive officers and
other key management, particularly Helen Pipkin, our Senior Vice President of
Wholesale Operations. We have not entered into employment agreements with any
of our executive officers and we do not maintain key person life insurance on
them. As we continue to grow, our success will depend on our ability to
identify, attract, hire, train, retain and motivate other highly skilled
management personnel. Competition for such personnel is intense, and we may
not be able to successfully attract, assimilate or retain sufficiently
qualified candidates.
Our operating results may fluctuate and may be affected by seasonal buying
patterns
Historically, our highest net sales and operating income have occurred
during the fourth quarter, which includes the Christmas and Halloween selling
seasons. During 1996, 1997 and 1998, we generated approximately 28.8%, 29.2%
and 34.2%, respectively, of our net sales and approximately 32.6%, 32.3% and
36.7%, respectively, of our operating income during the fourth quarter.
Furthermore, the operations of Universal and Odd's-N-End's heavily depend
upon fourth quarter results. Accordingly, any decrease in net sales during
the fourth quarter could reduce our profitability and impair our results of
operations for the entire year.
In addition to seasonality, many other factors may cause our results of
operations to vary significantly from quarter to quarter. Some of these
factors are beyond our control. The factors include:
- the number and timing of sales contributed to new stores;
- the level of advertising and pre-opening expenses associated with new
stores;
- the integration of new stores into our operations;
- general economic health of the deep-discount retail industry;
- changes in the mix of products sold;
- unexpected increases in shipping costs;
- ability to successfully manage our inventory levels;
- changes in our personnel;
- fluctuations in the amount of consumer spending; and
- the amount and timing of operating costs and capital expenditures
relating to the growth of our business.
We may need to modify our management information systems
Our business is currently supported by a standard accounting and
financial reporting system which uses a PC-based local area network (LAN) and
a separate partially customized inventory control system processed on a
Hewlett-Packard RISC-based computer. We believe that our accounting and
management information system and inventory control system meet our current
needs. We plan to continue updating and enhancing our systems to improve our
capabilities and provide for growth. If we grow faster than we expect, we may
need to install a new management information or inventory control system or
significantly modify our current systems to accommodate the growth in our
business.
We face year 2000 risks
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000.
We use software, computer technology and other services, that may fail
due to the year 2000 phenomenon. We have determined that we must modify or
replace portions of our software so that our computer systems will function
properly with respect to dates in the year 2000 and after. We expect to
complete our year 2000 improvements by mid-1999. Although we do not expect
the year 2000 problem to significantly affect our results of operations, we
could encounter unanticipated delays and other problems in modifying our
systems. Any difficulties we experience in becoming year 2000 compliant
could hurt our ability to communicate with and effectively purchase from our
suppliers, and could adversely impact our business.
Based upon the results of this assessment, we will develop and
implement, if necessary, a remediation plan with respect to any software and
computer technology used by our vendors that may not be year 2000 compliant.
At this time, we cannot determine the expenses associated with this
assessment and potential remediation plan. Our business could suffer
significantly if our suppliers' software and computer systems are not year
2000 compliant.
We are subject to environmental regulations
Under various federal, state and local environmental laws and
regulations, current or previous owners or occupants of property may become
liable for the costs of removing any hazardous substances found on the
property. These laws and regulations often impose liability without regard
to fault. We currently lease all but three of our stores, as well as our
warehouse and distribution facility (where our executive offices are
located). We have the option to purchase our warehouse and distribution
facility in December 2000, which we plan to do. However, in the future we
may be required to incur substantial costs for preventive or remedial
measures associated with the presence of hazardous materials. In addition, we
operate one underground diesel storage tank and one above-ground propane
storage tank at our warehouse. Although we have not been notified of, and are
not aware of, any current environmental liability, claim or non-compliance,
we could incur costs in the future related to our leased properties and our
storage tanks.
In the ordinary course of our business, we sometimes handle or dispose
of commonplace household products that are classified as hazardous materials
under various environmental laws and regulations. We have adopted policies
regarding the handling and disposal of these products, and we train our
employees on how to handle and dispose of them. We cannot assure you that our
policies and training will successfully help us avoid potential violations of
these environmental laws and regulations in the future.
Anti-takeover Effect; We are controlled by our existing shareholders
In addition to some governing provisions in our Articles of
Incorporation and Bylaws, we are also subject to certain California laws and
regulations which could delay, discourage or prevent others from initiating a
potential merger, takeover or other change in our control, even if such
actions would benefit our shareholders and us. In addition, David Gold, our
Chairman and Chief Executive Officer, and members of his immediate family and
certain of their affiliates beneficially own 11,282,113 of the our voting
stock. As a result, they have the ability to control all matters requiring
the vote of our shareholders, including the election of our directors and
most of our corporate actions. They can also control our policies and
prevent a change in our control. This could adversely affect the voting and
other rights of our other shareholders and could depress the market price of
our common stock.
Our stock price could fluctuate widely
The market price of our common stock has risen substantially since our
initial public offering on May 23, 1996. Trading prices for our common stock
could fluctuate significantly due to many factors, including:
- the depth of the market for our common stock;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- variations in our operating results;
- conditions or trends in our industry or in the industries of any of our
significant clients;
- additions or departures of key personnel; and
- future sales of our common stock.
YEAR 2000
General
The Year 2000 issue relates to the problems associated with many
computer systems (including computer chips and software) not being designed
to use dates for the Year 2000 and thereafter. Many of these systems
internally record only the last two digits for the year of dates, and will
not correctly distinguish between different years ending with the same two
digits (the years 2000 and 1900 would be recorded identically). Others of
these systems will not be able to accept, print, perform calculations, or
display dates greater than 12/31/1999. Other systems may cease to function
("crash"), produce miscalculations or produce other undesired results in
connection with such dates. The Year 2000 issues are a concern to the
Company due to potential impacts on the Company's systems and additionally a
concern for the potential impact to the systems of other entities (vendors,
service providers, utility providers, transportation, banks, etc.) that
provide products and services to the Company.
Although the Company believes that the Year 2000 issue will not pose
significant internal operational problems for the Company, if all Year 2000
issues are not properly identified, or assessment, remediation and testing
are not done in a timely manner, with respect to the potential problems that
are identified, there can be no assurance that the Year 2000 issue will not
have a material adverse impact on the Company's results of operations
including, among other things, a temporary inability to process credit sales
transactions, record inventory transactions and engage in similar normal
business activities. Additionally, there is no assurance that the Year 2000
issues of other entities will not have a material adverse impact on the
Company's systems or operations.
Year 2000 Status
General phases of the project include: (1) cataloging Year 2000 issues;
(2) assigning priorities and materiality of the issues to the Company; (3)
implementing and testing the necessary modifications and replacements, and
(4) contingency planning.
The Company's use of computer systems consists of five major areas: (1)
operating systems; (2) purchased standard software applications; (3)
internally developed software applications; (4) third party suppliers and
agents; and (5) embedded chips. Application software concerns include both
the conversion of software that is not Year 2000 compliant and the
replacement of software where applicable.
The Company's primary computer systems consist of standard accounting
and financial reporting packages utilizing a PC-based local area network and
a packaged inventory control system, customized for the Company's needs,
processed by a Hewlett Packard RISC-based system. Based on a review of the
hardware, system software, and application software comprising these primary
systems, the Company believes that, with some corrective measures, these
primary systems will not be materially impacted by Year 2000 issues.
Third party suppliers include merchandise vendors, outside payroll
processing, freight companies, banks, brokerage firms which hold the
company's securities in street names as well as the underlying institutions
issuing the securities, customer credit card and ATM authorization firms,
stock transfer agent, security alarm, fire prevention, phone services,
insurance companies, energy and other utility suppliers and various local,
state and federal governmental regulatory agencies.
99 Cents Only Stores year 2000 Project is proceeding substantially on
schedule. The Company has undertaken its year 2000 project internally and
has developed a plan to make the Company's business computer systems Year
2000 compliant. The Company has completed the assessment as to its critical
systems. The Company believes the risks associated with internal systems are
minimal. The customized internal modifications are being scheduled, and will
be complete in the last quarter of 1999.
The Company is in the process of upgrading its PC-based financial
package to the most current release which has been certified Year 2000
compliant. Additionally testing of the Hewlett Packard RISC based system
will be completed by the end of the second quarter. The test will include
using the Company's backup Hewlett Packard and changing the calendar to the
Year 2000, so all core applications can be tested and confirmed Year 2000
ready.
Many of the Company's third party suppliers have been surveyed and
identified as to those having a direct interface level. Letters and
questionnaires are in the process of being sent to all critical entities with
which the Company does business to assess their Year 2000 readiness. The
Company anticipates that these activities will be on-going for the remainder
of 1999 and will include follow up telephone interviews and on site meetings.
The Company is not currently aware of any single vendor or other third party
that may have a material impact on the Company. The Company can provide no
assurance that Year 2000 compliance will be successfully completed by its
third party suppliers in a timely manner.
Cost
The total cost to date associated with required modifications to become
Year 2000 compliant has not been material to the Company's financial
position. The estimated total cost of the Year 2000 compliance work has not
been established, but is not expected to be material.
Contingency Plan
The Company has not completed a comprehensive analysis for all the
operational problems and costs (including loss of revenue) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with all
of the most likely worst case scenario. The Company believes that any
failures of its internal systems to be Year 2000 compliant will not alone
materially adversely affect the continuity of core retail business or to
receive and ship merchandise to its retail stores.
The Year 2000 compliance project is expected to reduce the level of
uncertainty about the effect of the Year 2000 on the Company and the
preparedness of significant third party agents. The Company believes that
with the implementation and completion of the project, significant
interruptions of normal operations should be reduced. However, if all Year
2000 issues are not properly identified, or assessment, remediation and
testing are not effected in a timely manner with respect to problems that are
identified, there can be no assurance that the Year 2000 issue will not have
a material adverse impact on the Company's results of operations or adversely
affect the Company's relationships with suppliers, customers or other third
parties. Additionally, there can be no assurance that the Year 2000 issues
of other entities will not have a material adverse impact on the Company's
systems or results of operations.
Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Risk Factors" in the Company's Form 10-K for
the year ended December 31, 1998. Readers should understand that the dates
on which the Company believes the Year 2000 project will be completed are
based upon Management's best estimates, which were derived utilizing numerous
assumptions of future events, including the availability of certain
resources, third-party modifications plans and other factors. However, there
can be no guarantee that these estimates will be achieved, or that there will
not be a delay in, or increased costs associated with, the implementation of
the Company's Year 2000 compliance project. A delay in specific factors that
might cause differences between the estimates and actual results include, but
are not limited to, the availability and cost of personnel trained in these
areas, the ability to correct all relevant computer code, timely responses to
and corrections by third parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced, and
similar uncertainties. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third parties and the inter-connection of national and
international businesses, the Company cannot ensure that its ability to
timely and cost effectively resolve problems associated with the Year 2000
issue may not affect its operations and business, or expose it to third party
liability.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk for its investments in
marketable securities. At March 31, 1999, the Company had $47,130,000 in
marketable securities maturing at various dates through June 2000. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity. Any premium or discount recognized with purchase of an
investment is amortized over the term of the investment.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT 27.01 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
99 CENTS ONLY STORES
Date: April 30, 1999 /s/ Andrew A. Farina
Andrew A. Farina
Vice President Finance
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
EXHIBIT 27.1
99 Cents Only Stores
Financial Data Schedule
This Schedule contains summary financial information
extracted from 99 Cents Only Stores' Financial
Statements and is qualified in its entirety by
reference to such financial statements.
(amounts in thousands)
<PERIOD TYPE> 3-mos
<FISCAL YEAR END> Dec. 31 1999
<PERIOD START> Jan. 01 1999
<PERIOD END> March 31,1999
[CASH] 1,971
[SECURITIES] 44,332
[RECEIVABLES] 3,858
[ALLOWANCES] (544)
[INVENTORY] 79,910
<CURRENT ASSETS> 133,068
[PP&E] 64,716
[DEPRECIATION] (16,435)
<TOTAL ASSETS> 201,767
<CURRENT LIABILITIES> 18,292
[BONDS] 0
0
[PREFERRED] 0
[COMMON] 107,966
<OTHER SE> 63,093 <FN1>
<TOTAL LIABILITY AND EQUITY> 201,767
[SALES] 93,737
<TOTAL REVENUE> 93,737
[CGS] 56,137
<TOTAL COSTS> 27,474
<OTHER EXPENSES> 37
<LOSS PROVISION> 0
<INTEREST EXPENSE> 195
<INCOME PRE TAX> 10,481
<INCOME TAX> 4,183
<INCOME CONTINUING> 6,298
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
<NET INCOME> 6,298
<EPS PRIMARY> 0.25
<EPS DILUTED> 0.25
<FN1> Retained Earnings
</TABLE>
