Item 1. Business
99 Cents Only Stores (the "Company") is a leading deep-discount retailer of name-brand, consumable general merchandise. The Company's stores offer a wide assortment of regularly available consumer goods as well as a broad variety of first-quality, close-out merchandise. In 1999, a majority of the Company's product offerings were comprised of recognizable name-brand merchandise. 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 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 85 existing 99 Cents Only Stores at March 28, 2000 are all located in Southern California except for one store located in Las Vegas Nevada, have an average size of approximately 17,900 square feet. The Company's 99 Cents Only Stores generated average net sales per estimated saleable square foot of $332, which the Company believes is among the highest in the deep-discount store industry, and average net sales per store of $4.4 million for stores open the full year in 1999.
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 78 stores and 1,102,369 estimated saleable square feet at December 31, 1999, representing a compound annual growth rate ("CAGR") of 22% and 35%, respectively. The Company believes that its attractive store-level economics facilitates its expansion. Historically, all of the Company's 99 Cents Only Stores have been profitable within their first year of operation. Including the scheduled opening of the second store in Las Vegas Nevada on March 30, 2000, the Company will have opened eight stores in the first three months of 2000 and plans to open at least an additional 12 net new stores 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 25% per year. The Company estimates that the Southern California market has the potential for about 200, 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 represented 13.2% of the Company's net sales in 1999.
Industry
The Company participates primarily in the deep-discount retail industry, with its 99 Cents Only Stores. Deep discount retail 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-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 1999, 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, Nestle, The Pillsbury Company, The Procter & Gamble Company, Revlon Inc. and SmithKline Beecham Corporation. Broad Selection of Regularly Available Merchandise. The Company's retail 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 99 Cents Only Stores in 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 the 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 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, re-orderable 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 $47.7 million in 1999, primarily due to an increased focus on large domestic 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.
Focus on Larger Stores in Convenient Locations. The Company's 99 Cents Only 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. The Company's 85 existing 99 Cents Only Stores average approximately 17,900 gross square feet. Since January 1, 1996, the Company has opened 49 new stores that average over 20,000 gross square feet and currently targets new store locations between 15,000 and 30,000 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, Howard Gold, Senior Vice President of Distribution, Jeff Gold, Senior Vice President of Real Estate and Information Systems, Eric Schiffer, President and Karen Schiffer Senior Buyer) and all full-time with tenure of more than six months with the Company receive an annual grant of stock options. As of December 31, 1999, the Company's employees (other than executive officers) held options to purchase an aggregate of 3,075,066 shares, or over 9.0% 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 now operates eight 99 Cents Only Stores in San Diego County and one in Las Vegas Nevada. The Company has plans to open at least 20 net new 99 Cents Only Stores in 2000 (a net increase of 25%), all in the Southern California and Las Vegas, Nevada area. Including the scheduled opening of the second store in Las Vegas Nevada on March 30, 2000, the Company will have opened eight stores in the first three months of 2000. The company plans to open at east an additional 12 new stores during the remainder of the year. As of March 28, 2000, the Company has secured sites for eight additional store locations and has signed 12 letters of intent to lease prospective store sites. Generally, the Company expects that at least 50% of the letters of intent will materialize. The Company intends to continue its planned store expansion over the next several years at a targeted rate of approximately 25% per year. The Company estimates that the Southern California market has the potential for about 200, 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. In November 1999 the Company opened its first 99 Cents Only Stores outside the state of California in Las Vegas Nevada. Subsequently, the store has performed above Company expectations and has been one of the Company's top performing stores.
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.
Recent Developments
Universal International. The Company has determined it would be in its best interest, and that of its shareholders, to focus its efforts on increasing the growth rate of 99 Cents Only Stores, which over the past five years has yielded operating margins averaging 13.4%. In conjunction with this revised growth strategy, the Company also has decided to sell its Universal subsidiary. Universal operates a multi-price point variety chain, with 65 stores located in the Midwest, Texas and Upstate New York, under the trade names Only Deals and Odd's-N-End's. There were several other factors which were considered in making this decision. The Company had a successful opening of its first 99 Cents Only Stores outside the state of California in Las Vegas, Nevada. The Company believes the success of the Las Vegas store helps to prove that the 99 Cents Only Stores concept is portable to areas outside the State of California. As a result, the Company will focus greater management resources to expand more rapidly in Nevada and into Arizona.
Universal incurred an operating loss of $2.7 million in the fourth quarter of 1999 versus a marginal profit of $0.2 million in 1998 and its results were below the Company's expectations. Universal's business is seasonal and historically the fourth quarter was relied upon to achieve all of its income goals. In the fourth quarter Universal was unable to achieve historical gross margin goals and sustained inventory markdowns in efforts to generate sales volume. In addition, Universal incurred additional advertising and distribution costs compared to plan, for the stores located in Texas, New York and areas outside the local distribution point of Minneapolis, Minnesota.
The Company has adopted a definitive plan to sell Universal. The Company plans to engage an investment-banking firm to evaluate and identify potential buyers for the Universal business. The Company expects to sell Universal to a strategic buyer within one year. The Company has $26.9 million of net assets of discontinued business at December 31, 1999. The value of Universal's net assets at December 31, 1999 includes $30.0 million in inventory, net fixed assets of $8.0 million and $2.1 million of other assets offset by $4.2 million of accounts payable and accrued liabilities.
The Company's estimated net loss on the disposition of Universal of $9.0 million, includes the estimated net realizable value of the business, net of estimated disposal costs and the estimated loss of $1.2 million from the results of operation for Universal to the disposal date reduced by a tax benefit of $2.6 million. This $9.0 million estimated net loss on the disposition of Universal has also been offset against the net assets of the discontinued business.
Retail Operations
The Company's retail 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 sold in the Company's 99 Cents Only Stores retail stores sells 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 Stores operations (dollar amounts in thousands, except sales per square foot):
Year Ended December 31, 1995 1996 1997 1998 1999
99 Cents Only Stores net retail sales $121,9 $143,1 $186,0 $238,8 $312,30 98 63 24 68 6 99 Cents Only Stores annual net sales growth rate 10.2% 17.3% 29.9% 28.4% 30.7% 99 Cents Only Stores store count at beginning of year 34 36 43 53 64 New stores 4 8 10 13 18 Stores closed 2(a) 1(a) - 2(a) 4(a) Total store count at year end 36 43 53 64 78 Average 99 Cents Only Stores net sales per store open the full year(b) $3,467 $3,667 $3,750 $4,147 $4,433 Estimated saleable square footage at year end for 99 Cents 332,10 455,20 631,50 822,90 1,102,3 Only Stores 0 0 0 0 69 Average net sales per estimated saleable square foot(b) $397 $389 $354 $335 $332 Change in comparable 99 Cents Only Stores net sales(c) (0.2)% 2.8% 1.5% 4.3% 6.1%
(a) Stores closed due to relocation to a larger nearby site.
(b) For stores open for the entire fiscal year for 99 Cents Only Stores.
(c) 99 Cents Only Stores for the years 1995 and 1996 change in comparable stores net sales, compares net sales for stores open for the entire two years. Commencing in 1997, change in comparable stores net sales compares net sales for all stores open at least 15 months.
Merchandising. All of 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 $1.20 to $10.00, for only 99 cents per item or group of items. Each store typically carries over five thousand different stock keeping units (SKU). 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 1997, the Company added a deli and frozen foods section to substantially all 99 Cents Only Stores.
While each of the Company's 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 re-orderable 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 (except Christmas 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. As of March 28, 2000 the Company's 85 existing 99 Cents Only Stores are all located in Southern California except for one store located in Las Vegas, Nevada, and average over 17,900 gross square feet. Since January 1, 1996, the Company has opened 49 new stores (including one in 1996, two in 1998 and four in 1999) that average over 20,000 gross square feet and currently targets new store locations between 15,000 and 30,000 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. The stores are located primarily in more densely populated, demographically diverse neighborhoods. The Company's 85 existing 99 Cents Only Stores are located in California and Nevada: 84 in six counties in Southern California and one in Las Vegas, Nevada.
The Company's stores are attractively merchandised, brightly lit, well-maintained, "destination" locations. The layout of each of the Company's 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, 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 77 of its 85 99 Cents Only Stores retail locations. The Company typically seeks leases with an initial five to ten year term with one or more five year options. See "Item 2.
Item 2. Properties
As of March 28, 2000, the Company leased 77 of its 85 store locations. The Company currently leases 12 store locations and a parking lot associated with one of these stores from David Gold, the Company's Chief Executive Officer and certain members of his Family.
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 retail stores leases assuming the exercise of all options to extend:
Expiri Expirin Expirin Expiring ng g g 2006 2000 2001-20 2003-20 and Beyond 02 05
1(a) - 4 72
(a) An older smaller store leased on a month to month basis.
The Company has purchased eight locations, one opened in 1996, two in 1997, one in 1998, three in 1999 and one already existing store (Pico #13). The Company may also purchase other locations in the future.
The Company leases its warehouse and distribution facilities. The Company's executive offices are also located in the City of Commerce, California 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 in the fourth quarter of 2000. If the Company does not exercise the purchase option, the Company will be subject to a $7.6 million penalty.
Item 3.
Item 3. Legal Proceedings
The Company is periodically subject to legal actions, which arise in the ordinary course of its business. The Company does not believe that any pending action is materially adverse to its results of operations or financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
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 four-for-three stock split effected in the form of stock dividend paid on February 9, 2000.
Price Range High Low
1998: First Quarter $23.7 $16.2 1 0 Second Quarter 26.00 20.37 Third Quarter 28.09 21.08 Fourth Quarter 36.86 22.06 1999: First Quarter $36.8 $29.8 8 1 Second Quarter 37.63 30.75 Third Quarter 38.19 25.81 Fourth Quarter 28.69 18.88 2000: First Quarter through March 28, 2000 37.00 23.25
The closing price as reported on March 28, 2000 on the New York Stock Exchange is set forth on the cover page of this Form 10K. As of March 28, 2000, the Company had approximately 10,924 holders of the Common Stock including 489 shareholders of record.
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.
Item 6.
Item 6. Selected Financial 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, 1997, 1998, and 1999, and the balance sheet data as of December 31, 1998 and 1999 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 year ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995, 1996 and 1997 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 report.
Year Ended December 31, 1995 1996 1997 1998 1999 (Amounts in thousands, except per share and operating data) Statement of Operations Data: Net sales: 99 Cents Only Stores $121,998 $143,163 $186,024 $238,868 $312,306 Other retail sales(a) 492 - - - - Bargain Wholesale(h) 30,337 40,480 44,831 53,202 47,652
Total 152,827 183,643 230,855 292,070 359,958 Cost of sales 102,160 120,922 146,797 183,044 218,496
Gross profit 50,667 62,721 84,058 109,026 141,462 Selling, general and administrative expenses: Operating expenses 32,169 37,683 49,850 62,424 80,089 Depreciation and 1,640 2,009 2,989 4,506 5,927 amortization
Total operating expenses 33,809 39,692 52,839 66,930 86,016
Operating income 16,858 23,029 31,219 42,096 55,446 Interest (income) expense, 755 (126) (855) (1,428) (1,059) net
Income from continuing operations before provision for income taxes 16,103 23,155 32,074 43,524 56,505 Provision for income taxes(b): Pro forma 6,509 9,453 - - -
Historical 156 2,418 13,124 17,032 22,367
Income from continuing Operations(b): Pro forma 9,594 13,702 - - -
Historical 15,947 20,737 18,950 26,492 34,138
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Year Ended December 31, 1995 1996 1997 1998 1999 (Amounts in thousands, except per share and operating data) Income(loss) from discontinued operation net of income tax provision of $910 and income tax benefit - - - 201 (3,167) of $2,111......... Loss from disposal of discontinued operation including a provision of $1,200 for operating losses during the phase-out period, net of income tax - - - - (9,000) benefit of $2,613.........
Net income $15,947 $20,737 $18,950 $26,693 $21,971
Earnings per common share from continuing operations (b)(g): Pro forma-Basic $0.46 $0.51 - - - Pro forma-Diluted $0.46 $0.47 - - - Historical-Basic $0.77 $0.77 $0.61 $0.82 $1.03 Historical-Diluted $0.77 $0.71 $0.61 $0.81 $1.00 Earnings (loss) per common share from discontinued operations(b)(g): Historical-Basic - - - $0.01 ($0.10) Historical-Diluted - - - $0.01 ($0.09) Earnings (loss) per common share from disposal of discontinued operations(b)(g): Historical-Basic - - - - ($0.27) Historical-Diluted - - - - ($0.26) Earnings per common share (b)(g): Pro forma-Basic $0.46 $0.51 - - - Pro forma-Diluted $0.46 $0.47 - - - Historical-Basic $0.77 $0.77 $0.61 $0.83 $0.66 Historical-Diluted $0.77 $0.71 $0.61 $0.82 $0.65 Weighted average number of common shares outstanding: Pro forma-Basic 20,685 26,839 - - - Pro forma-Diluted (c) 20,685 29,332 - - - Historical-Basic 20,685 26,839 30,904 32,045 33,252 Historical-Diluted 20,685 29,332 31,260 32,751 33,985
Company Operating Data: Sales Growth 99 Cents Only Stores 10.2% 17.3% 29.9% 28.4% 30.7% Bargain Wholesale(h) 60.4 33.4 10.8 18.7 (10.0) Total Company sales 16.0 20.2 25.7 26.5 23.2 Gross margin 33.2 34.2 36.4 37.3 39.3 Operating margin 11.0 12.6 13.5 14.4 15.4 Income from continuing operations: Pro forma 6.3 7.5 - - - Historical 10.4 11.3 8.2 9.1 9.5
(Continued from previous page)
As of December 31, 1995 1996 1997 1998 1999
Retail Operating Data(d): 99 Cents Only Stores at end of period 36 43 53 64 78 Change in comparable stores net sales 99 Cents Only (0.2)% 2.8% 1.5% 4.3% 6.1% Stores(e) Average net sales per store open the full year - 99 Cents Only Stores $3,467 $3,667 $3,750 $4,147 $4,433 Average net sales per estimated saleable square foot - 99 Cents Only Stores $397 $389 $354 $335 $332 (f) Estimated saleable square footage at year end - 99 Cents Only Stores 332,100 455,200 631,500 822,900 1,102,36
Balance Sheet Data: Working capital $28,690 $58,822 $60,791 $81,439 $105,637 Total assets 57,598 98,997 119,443 194,167 224,015 Long-term debt - - - - - Capital lease obligation, including current portion 9,977 9,366 8,709 8,005 7,251 Total shareholders' equity $35,558 $76,505 $96,308 $164,365 $195,540
(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) Prior to May 1, 1996 the Company was treated as an S corporation for federal and state income tax purposes. The presentation for 1995-1996 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.
(c) 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.
(d) Includes retail operating data solely for the Company's 99 Cents Only Stores.
(e) For the years 1995-1996, 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.
(f) Computed based upon estimated total saleable square footage of stores open for the entire period.
(g) All earnings per share amounts have been restated to reflect the adoption of SFAS No. 128, "Earnings per Share," effective December 15, 1997.
(h) In 1998, Bargain Wholesale sales includes $12.0 million of inter- company sales to Universal billed at cost. Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in connection with "Item 6. Selected Financial Data," and "Item 8. Financial Statements."
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 28, 2000, operates a chain of 85 deep-discount 99 Cents Only Stores. The Company's growth during the last three years has come primarily from new store openings. The Company opened ten, thirteen and eighteen stores in 1997, 1998 and 1999, respectively (ten, eleven and fourteen respectively, net of relocated stores). Including the scheduled opening of the Company's second store in Las Vegas, Nevada on March 30, 2000, the Company will have opened eight stores in the first three months of the year 2000, seven in Southern California and one in Las Vegas, Nevada. The Company plans to open at least 12 additional net new stores during the remainder of the year. The Company has secured sites for eight additional store locations.
Bargain Wholesale's growth over the three years ended December 31, 1999 was primarily attributable to an increased focus on large domestic 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.
Comparable stores net sales have improved since the Company's initial public offering in May 1996. 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 store. 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, 1997 to December 31, 1999, 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 $332 per square foot. This trend reflects the Company's determination to target larger locations for new store development. Existing stores average approximately 17,900 gross square feet. Since January 1, 1996, the Company has opened 49 new stores (including one relocation in 1996, two in 1998 and four in 1999) that average over 20,000 gross square feet. The Company currently targets new store locations between 15,000 and 30,000 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 1999 it had net sales of $360.0 million, operating income of $55.4 million and income from continuing operations of $34.1 million before a charge of $12.2 million from the discontinued operation, representing a 23.2%, 31.7% and 28.9% increase over 1998, respectively. From 1995 through 1999, the Company had a compounded annual growth rate in net sales, operating income and net income of 23.9%, 34.7% and 21.0%, respectively.
Recent Developments
Universal International. The Company has determined it would be in its best interest, and that of its shareholders, to focus its efforts on increasing the growth rate of 99 Cents Only Stores, which over the past five years has yielded operating margins averaging 13.4%. In conjunction with this revised growth strategy, the Company has decided to sell its Universal subsidiary. Universal operates a multi-price point variety chain, with 65 stores located in the Midwest, Texas and Upstate New York, under the trade names Only Deals and Odd's-N-End's. Among other factors which were considered in making this decision was the Company's successful opening of its first 99 Cents Only Stores outside the state of California in Las Vegas Nevada. The success of the Las Vegas, Nevada store helps to prove that the 99 Cents Only Stores concept is portable to areas outside the State of California. As a result, the Company will focus greater management resources to expand more rapidly in Nevada and into Arizona.
Universal incurred an operating loss of $2.7 million the fourth quarter of 1999 versus a marginal profit of $0.2 million in 1998. Universal's business is seasonal and historically the fourth quarter was relied upon to achieve all of its income goals. In the fourth quarter Universal was unable to achieve historical gross margin goals and sustained inventory markdowns in efforts to generate sales volume. Universal also incurred additional advertising and distribution costs as compared to the Company's plan for the stores located in Texas, New York and areas outside the local distribution point of Minneapolis, Minnesota.
The Company has adopted a definitive plan to sell Universal. It plans to engage an investment-banking firm to evaluate and identify potential buyers for the Universal business. The Company expects to sell Universal to a strategic buyer within one year. The Company has $26.9 million of net assets of discontinued business at December 31, 1999. The value of Universal's net assets at December 31, 1999 includes $30.0 million in inventory, net fixed assets of $8.0 million, $2.1 million of other assets offset by $4.2 million of accounts payable and accrued liabilities.
The Company's estimated net loss on the disposal of Universal of $9.0 million, includes the estimated net realizable value of the business, a $1.2 million loss from operations to the disposal date, and the estimated selling costs offset by a $2.6 million tax benefit.
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:
Years Ended December 31, 1997 1998 1999 (Amounts in thousands) Net sales: 99 Cents Only Stores $186,0 80.6 $238,8 81.8 $312,3 86.8 24 % 68 % 06 % Bargain Wholesale 44,831 19.4 53,202 18.2 47,652 13.2
Total 230,85 100. 292,07 100. 359,95 100. 5 0 0 0 8 0 Cost of sales 146,79 63.6 183,04 62.7 218,49 60.7 7 4 6
Gross profit 84,058 36.4 109,02 37.3 141,46 39.3 6 2 Selling, general and administrative expenses: Operating expenses 49,850 21.6 62,424 21.4 80,089 22.3 Depreciation and amortization 2,989 1.3 4,506 1.5 5,927 1.6
Total 52,839 22.9 66,930 22.9 86,016 23.9
Operating income 31,219 13.5 42,096 14.4 55,446 15.4 Interest (income) expense, net (855) (0.4 (1,428 (0.5 (1,059 (0.3 ) ) ) ) )
Income from continuing operations 32,074 13.9 before provision for income taxes 43,524 14.9 56,505 15.7 Provision for income taxes 13,124 5.7 17,032 5.8 22,367 6.2
Income from continuing operations 18,950 8.2 26,492 9.1 34,138 9.5
Income (loss) from discontinued - operation net of income tax provision of $910 and income tax - 201 0.0 (3,167 (0.9 benefit of $2,111........... ) ) Loss from disposal of discontinued - operation including a provision of $1,200 for operating losses during the phase-out period, net of income tax benefit of - - (9,000 (2.5 $2,613.................. ) ) Net Income $18,95 8.2% $26,69 9.1% $21,97 6.1% 0 3 1
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Total net sales increased $67.9 million, or 23.2%, from $292.1 million in 1998 to $360.0 million in 1999. 99 Cents Only Stores net sales increased approximately $73.4 million, or 30.7%, from $238.9 million in 1998 to $312.3 million in 1999. Bargain Wholesale net sales increased approximately $6.5 million, or 15.7%, from $41.2 million in 1998 (excluding the $12.0 million sales to Universal billed at cost in 1998) to $47.7 million in 1999. There were no other retail operations in 1999. The increase in 99 Cents Only Stores net sales was attributed to the net effect of 14 net new stores opened in 1999 and the full year effect of 11 stores opened in 1998. Comparable stores net sales increased 6.1% from 1998 to 1999. Excluding the $12.0 million shipment to Universal billed at cost, the increase in Bargain Wholesale net sales was primarily attributed to an increased focus on large domestic accounts and expansion into new geographic markets.
Gross profit. Gross profit, which consists of total net sales, less cost of sales, increased approximately $32.5 million, or 29.8%, from $109.0 million in 1998 to $141.5 million in 1999. The increase in gross profit dollars was primarily due to higher sales volume. As a percentage of net sales, gross profit improved from 37.3% in 1998 to 39.3% in 1999 reflecting the effect of a 7 to 1 ratio in 1999 of retail sales versus wholesale sales. The ratio in 1998 was 6 to 1, retail versus wholesale, excluding the $12.0 million sales to Universal billed at cost. Selling, general and administrative. Selling, general and administrative expenses ("SG&A"), which include operating expenses and depreciation and amortization, increased $19.1 million, or 28.5%, from $66.9 million in 1998 to $86.0 million in 1999. The increase over 1998 is associated with 1999 new store growth and the full year effect of 1998 new stores. SG&A increased as a percentage of net sales from 22.9% in 1998 to 23.9% in 1999. The increase in SG&A expenses is directly attributed to 14 net new store openings.
Operating income. Operating income increased $13.4 million, or 31.7%, from $42.1 million in 1998 to $55.4 million in 1999. Operating income increased as a percentage of net sales from 14.4% in 1998 to 15.4% in 1999 primarily due to the increase in gross margin as 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 1999. Interest income earned on the Company's marketable securities was $1.8 million in 1999. At December 31, 1999, the Company held $51.0 million in short-term investments and $8.6 million in long-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 1999 was $22.4 million, or 6.2% of net sales, compared to $17.0 million, or 5.8% of net sales, in 1998. The effective combined federal and state rates of the provision for income taxes were 39.6% and 39.1% in 1999 and 1998, respectively. The effective combined federal and state rates are less than the statutory rates in each period due to the benefit of certain tax-exempt interest and other credits. See Note 4 of "Notes to Financial Statements."
Income from continuing operations. As a result of the items discussed above, net income increased $7.6 million, or 28.9%, from $26.5 million in 1998 to $34.1 million in 1999 before a charge of $12.2 million from the discontinued operations. Net income from continuing operations as a percentage of net sales was 9.5% in 1999 and 9.1% in 1998.
Discontinued operations. On March 4, 2000 the Board of Directors approved the disposition of the entire operations of Universal, which comprises the Odd's-N-End's and Only Deals retail stores. The net losses of these operations for all periods are included in the consolidated statements of income under "discontinued operations". Revenues from such operations were $31.1 million in 1998 and $83.3 million in 1999. The carrying value of the assets at December 31, 1999 was $26.9 million, which is net of approximately $9.0 million in provision for loss on discontinued operations. The provision for loss on discontinued operations reflected in the consolidated statements of income includes the write-down of the assets of Universal to estimated net realizable values and the estimated costs of disposing of these operations along with the estimated loss from operations of $1.2 million through the estimated date of disposal, less expected tax benefits of approximately $2.6 million applicable thereto.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Total net sales increased $61.2 million, or 26.5%, from $230.9 million in 1997 to $292.1 million in 1998. 99 Cents Only Stores net sales increased approximately $52.8 million, or 28.4%, from $186.0 million in 1997 to $238.9 million in 1998. Bargain Wholesale net sales increased approximately $8.4 million, or 18.7%, from $44.8 million in 1997 to $53.2 million in 1998, including $12.0 million sales to Universal billed at cost. There were no other retail operations in 1998. The increase in 99 Cents Only Stores net sales was attributed to the net effect of 11 stores opened in 1998 and the full effect of 10 stores opened in 1997. Comparable stores net sales increased 4.3%, or $7.1 million, from 1997 to 1998.
Gross profit. Gross profit, which consists of total net sales, less cost of sales, increased approximately $25.0 million, or 29.7%, from $84.1 million in 1997 to $109.0 million in 1998. The increase in gross profit dollars was primarily due to higher net sales. As a percentage of net sales, gross profit improved from 36.4% in 1997 to 37.3% in 1998 reflecting the effect of a 6 to 1 ratio in 1998 of retail sales versus wholesales sales excluding the $12.0 million sales to Universal billed at cost. The ratio in 1997 was 4 to 1, retail versus wholesale.
Selling, general and administrative. Selling, general and administrative expenses ("SG&A"), which include operating expenses and depreciation and amortization, increased $14.1 million, or 26.7%, from $52.8 million in 1997 to $67.0 million in 1998. The increase over 1997 is associated with 1998 new store growth and the full year effect of 1997 new stores. SG&A as a percentage of net sales was 22.9% in 1997 and 1998.
Operating income. Operating income increased $10.9 million, or 34.9%, from $31.2 million in 1997 to $42.1 million in 1998. Operating income increased as a percentage of net sales from 13.5% in 1997 to 14.4% in 1998 primarily due to the increase in gross margin as 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 1998. Interest income earned on the Company's marketable securities was $2.2 million in 1998. At December 31, 1998, the Company held $43.9 million in short-term investments and $2.7 million in long-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 1998 was $17.0 million, or 5.8% of net sales, compared to $13.1 million, or 5.7% of net sales, in 1997. The effective combined federal and state rates of the provision for income taxes were 39.1% and 40.9% in 1998 and 1997, respectively. The effective combined federal and state rates are less than the statutory rates in each period due to the benefit of certain tax-exempt interest and other credits. See Note 4 of "Notes to Financial Statements."
Income from continuing operations. As a result of the items discussed above, net income increased $7.7 million, or 40.5%, from $19.0 million in 1997 to $26.5 million in 1998. Net income as a percentage of net sales was 9.1% in 1998 and 8.2% in 1997.
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 requirement results 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 1997, 1998 and 1999, net cash provided by operations was $13.7 million, $31.0 million and $26.0 million, respectively. Net cash provided by operations reflects increases in inventories in the amount of $6.2 million, $6.5 million and $4.3 million during 1997, 1998 and 1999, respectively. During 1997, 1998 and 1999, net cash used in investing activities for purchases of property and equipment was $9.4 million, $12.5 million and $18.0 million, respectively. Cash used in investing activities for the purchase of short-term investments was $5.0 million, $14.0 million and $13.0 million in 1997, 1998 and 1999, respectively. 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. In 1998, net cash provided by financing activities was $29.0 million; these funds represented payment for capital lease obligations, in addition, the Company received proceeds of $27.2 million from the Company's secondary public offering and from the exercise of employee stock options of $2.5 million. In 1999, net cash provided by financing activities was $4.2 million; these funds represented payment for capital lease obligations and proceeds from exercise of stock options.
The Company does not maintain any credit facilities with any bank. However, the Company maintains a surety bond of approximately $1.2 million for self-insured workers 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 99 Cents Only Stores at a targeted annual rate of 25%. The average investment per new store opened in 1999, 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 $12 million in 2000. The Company's total planned expenditures for 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 $17 million in 2000. Capital expenditures in 2000 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.
On January 25, 2000 the Company acquired all of the remaining outstanding minority shares of Universal for $1.4 million. This $1.4 million minority interest acquisition cost for Universal has been considered in the estimated net realizable value of the net assets of the discontinued business as of December 31, 1999. In addition, the Company acquired a distribution facility for Universal for $7.0 million on March 28, 2000. The lease on Universal's current distribution facility will expire in July 2000. The Company believes the acquisition of the distribution facility was a very favorable purchase price relative to current market values. It is currently planned that this facility will be either leased to the prospective buyer of Universal or will be able to be resold for a gain.
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 are even more dependent upon results in the fourth quarter.
The following table sets forth certain unaudited results of operations for each quarter during 1998 and 1999 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 report 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.
1st 2nd 3rd 4th 1st 2nd 3rd 4th Quart Quart Quart Quart Quart Quart Quart er er er er er er er Quarte r Year Ended December 31, Year Ended December 31, 1998 1999 (Amounts in thousands) Net sales: 99 Cents Only $51,4 $56,6 $59,1 $71,5 $64,6 $69,8 $76,5 $101,3 Stores 82 95 46 45 33 27 17 29 Bargain Wholesale 11,40 15,06 16,35 10,38 11,09 11,02 12,20 13,332 0 2 7 3 4 5 1
Total 62,88 71,75 75,50 81,92 75,72 80,85 88,71 114,66 2 7 3 8 7 2 8 1 Gross profit 23,04 25,32 26,95 33,70 29,60 31,24 35,34 45,270 3 1 3 9 7 1 4 Operating income 8,619 9,405 10,20 13,86 10,71 11,44 13,19 20,099 5 7 0 4 3 Incomefrom continuing 5,283 5,880 6,810 8,519 6,671 7,018 8,107 12,342 operation......... .. Income (loss) from discontinued operation......... (742) (495) (98) 1,536 (373) (170) 53 (2,677 . ) (Loss) on disposal of discontinued operation......... - - - - - - - (9,000 . ) Net $4,54 $5,38 $6,71 $10,0 $6,29 $6,84 $8,16 $665 income........... 1 5 2 55 8 8 0
Earnings per common share from continuing operations: Basic $0.17 $0.19 $0.21 $0.26 $0.20 $0.21 $0.24 $0.37 Diluted $0.17 $0.18 $0.20 $0.25 $0.20 $0.20 $0.24 $0.37 Earnings (loss)per common share from discontinued operations: Basic ($0.0 ($0.0 - $0.05 ($0.0 ($0.0 - ($0.08 2) 2) 1) 1) ) Diluted ($0.0 ($0.0 - $0.05 ($0.0 ($0.0 - ($0.08 2) 1) 1) 1) )
(Continued from previous page)
1st 2nd 3rd 4th 1st 2nd 3rd 4th Quart Quart Quart Quart Quart Quart Quart Quart er er er er er er er er Year Ended December 31, Year Ended December 31, 1998 1999 (Amounts in thousands) (Loss)per common share on disposal of discontinued operations: Basic - - - - - - - ($0.2 7) Diluted - - - - - - - ($0.2 7) Net earnings per share: Basic $0.15 $0.17 $0.21 $0.30 $0.19 $0.21 $0.24 $0.02 Diluted $0.14 $0.17 $0.20 $0.30 $0.19 $0.20 $0.24 $0.02 Shares outstanding: Basic 30,96 31,66 32,57 32,97 33,00 33,16 33,39 33,37 9 5 3 4 1 3 6 0 Diluted 31,60 32,38 33,25 33,79 33,94 34,04 34,00 33,77 7 5 3 5 9 4 5 4 Percent of Net sales Net sales: 99 Cents Only 81.9% 79.0% 78.3% 87.3% 85.4% 86.4% 86.2% 88.4% Stores Bargain Wholesale 18.1 21.0 21.7 12.7 14.6 13.6 13.8 11.6
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Gross profit 36.6 35.3 35.7 41.1 39.1 38.6 39.8 39.5 Operating income 13.7 13.1 13.5 16.9 14.1 14.2 14.9 17.5 Income from continuing operations 8.4% 8.2% 9.0% 10.4% 8.8% 8.7% 9.1% 10.8%
New Authoritative Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement was amended by SFAS No. 137 which defers the effective date to all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 is effective for the Company's first quarter in the year 2001 and is not expected to have a material effect on the Company's financial position.
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 "We are vulnerable to uncertain economic factor and Changes 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 1997, 1998 and 1999, we opened ten, thirteen and eighteen of our 99 Cents Only Stores, respectively (ten, eleven and fourteen stores, respectively, net of relocated stores). From January 1, 2000 through March 28, 2000, we opened seven 99 Cents Only Stores and we expect to open at least thirteen 99 Cents Only Stores in Southern California and Nevada during the remainder of the year. We plan to open new stores over the next several years at a rate of approximately 25% 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.
Our operations are mainly concentrated in Southern California
All but one of our 99 Cents Only Stores are currently located in Southern California. The Company currently has one store in Las Vegas, Nevada and plans to open an additional store in Las Vegas on March 30, 2000. In addition, our year 2000 retail expansion plans includes new stores in these regions and thereafter also in Arizona. 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 1999. 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.
We could experience disruptions in receiving and distribution
Our success depends upon whether our receiving and shipment schedules are organized and well managed. As we continue to grow, we may face unexpected demands on our warehouse operations 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 operations, 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, 1997, 1998 and 1999, we recorded net inventory of $43.1 million, $49.6 million and $53.9 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. 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 12 of our 85, 99 Cents Only Stores and a parking lot for one of these stores from certain members of the Gold family and their affiliates. Our annual rental expense for these facilities totaled approximately $2.0 million, $2.2 million and $1.9 million in 1997, 1998 and 1999, 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 1998 and 1999, we generated approximately 28.1% and 31.8%, respectively, of our net sales and approximately 32.9% and 36.2%, respectively, of our operating income during the fourth quarter. 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 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 eight 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 15,126,538 shares of 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
The Company had no interruption of its business process as a result of Year 2000 computer issues or Y2K related equipment malfunctions. The Company successfully implemented its Y2K systems plan and spent approximately $0.1 million to upgrade certain equipment and cash registers at the Universal retail stores to replace non compliant Y2K equipment.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risk for its investments in marketable securities. At December 31, 1999, the Company had $59,571,000 in marketable securities maturing at various dates through October 2001. 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 the purchase of an investment is amortized over the term of the investment. Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pag e
99 Cents Only Stores Report of Independent Public Accountants 32 Consolidated Balance Sheets as of December 31, 1998 and 1999 33 Consolidated Statements of Income for the years ended December 31, 1997, 1998 and 1999 35 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999 36 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 37 Notes to the Consolidated Financial Statements 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited the accompanying consolidated balance sheets of 99 Cents Only Stores (a California Corporation) and it's subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 in the United States. 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 and it's subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California March 7, 2000
99 CENTS ONLY STORES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999 (Amounts In Thousands, Except Share Data)
ASSETS
1998 1999
CURRENT ASSETS: Cash $2,699 $7,984 Short-term investments 43,850 50,971 Accounts receivable, net of allowance for doubtful accounts of $169 and $140 as of December 31, 1998 and 1999, 2,455 3,356 respectively Income tax receivable 27 4,674 Inventories 49,634 53,932 Other 885 1,451
Total current assets 99,550 122,36
PROPERTY AND EQUIPMENT, at cost: Land 9,590 11,060 Building and improvement 11,896 12,876 Leasehold improvements 15,963 23,786 Fixtures and equipment 11,584 14,718 Transportation equipment 1,014 1,635 Construction in progress 1,680 5,466
51,727 69,541 Less-Accumulated depreciation and amortization (14,331 (20,11 ) 9)
37,396 49,422
OTHER ASSETS: Deferred income taxes 6,342 11,318 Long term investments in marketable securities 2,710 8,600 Deposits 183 214 Net assets of discontinued operation. 45,143 26,928 Other 2,843 5,165
57,221 52,225
$194,16 $224,0 7 15
The accompanying notes are an integral part of these consolidated balance sheets.
99 CENTS ONLY STORES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999 (Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1999
CURRENT LIABILITIES: Current portion of capital lease obligation $754 $809 Accounts payable 12,326 9,010 Accrued expenses: Payroll and payroll-related 1,575 1,967 Sales tax 1,766 2,429 Other 318 421 Workers compensation 1,372 2,095
Total current liabilities 18,111 16,731
LONG-TERM LIABILITIES: Deferred rent 1,750 1,952 Accrued interest 2,690 3,350 Capital lease obligation, net of current portion 7,251 6,442
11,691 11,744
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 32,987,769 at December 31, 1998 and 33,425,232 at December 31, 1999 107,571 116,775 Retained earnings 56,794 78,765
164,365 195,540
$194,16 $224,01 7 5
The accompanying notes are an integral part of these consolidated balance sheets.
99 CENTS ONLY STORES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts In Thousands, Except Per Share Data)
1997 1998 1999
NET SALES: 99 Cents Only Stores $186,02 $238,86 $312,30 4 8 6 Bargain Wholesale 44,831 53,202 47,652
230,855 292,070 359,958 COST OF SALES 146,797 183,044 218,496
Gross profit 84,058 109,026 141,462
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating expenses 49,850 62,424 80,089 Depreciation and amortization 2,989 4,506 5,927
52,839 66,930 86,016
Operating income 31,219 42,096 55,446
OTHER (INCOME) EXPENSE: Interest income (1,613) (2,180) (1,805) Interest expense 758 752 746 (855) (1,428) (1,059)
Income from continuing operations before provisions for income taxes 32,074 43,524 56,505 PROVISION FOR INCOME TAXES 13,124 17,032 22,367
Income from continuing operations 18,950 26,492 34,138 Income(loss) from discontinued operation net of income tax provision of $910 and income tax benefit of - 201 (3,167) $2,111..................................... Loss from disposal of discontinued operation including a provision of $1,200 for operating losses during the phase-out period, net of income tax benefit of - - (9,000) $2,613.....................................
NET INCOME $18,950 $26,693 $21,971
EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS: Basic $0.61 $0.82 $1.03 Diluted $0.61 $0.81 $1.00 EARNINGS (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATION: Basic - $0.01 ($0.10) Diluted - $0.01 ($0.09)
(LOSS) PER COMMON SHARE FROM DISPOSAL OF DISCONTINUED OPERATION: Basic - - ($0.27) Diluted - - - ($0.26)
NET EARNINGS PER COMMON SHARE: Basic $0.61 $0.83 $0.66 Diluted $0.61 $0.82 $0.65 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 30,904 32,045 33,252 Diluted 31,260 32,751 33,985
The accompanying notes are an integral part of these consolidated financial statements. 99 CENTS ONLY STORES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Amounts In Thousands)
Common Stock Retain ed Share Amount Earnin s gs
BALANCE, December 31, 1996 30,86 $65,354 $11,15 8 1 Net income - - 18,950 Tax benefit from exercise of stock options - 350 - Proceeds from exercise of stock options 96 503 -
BALANCE, December 31, 1997 30,96 66,207 30,101 Net income - - 26,693 Tax benefit from exercise of stock options - 2,195 - Proceeds from exercise of stock options 324 2,477 - Net proceeds from secondary public offering 1,251 27,188 - Shares issued in connection with acquisition of 449 9,504 - Universal
BALANCE, December 31, 1998 32,98 107,571 56,794 Net income - - 21,971 Tax benefit from exercise of stock options - 4,229 - Proceeds from exercise of stock options 437 4,975 -
BALANCE, December 31, 1999 33,42 $116,77 $78,76 5 5 5
The accompanying notes are an integral part of these consolidated financial statements.
99 CENTS ONLY STORES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (Amounts in Thousands) 1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $18,950 $26,693 $21,971 Adjustment to reconcile net income to net cash provided by operating activities: (Income)loss from discontinued operation - (201) 3,167 Provision for loss on disposal of discontinued operation - - 9,000 Provision for doubtful accounts 20 - - Depreciation and amortization 2,989 4,506 5,927 Benefit for deferred income taxes (245) (395) (4,976) Changes in assets and liabilities associated with operating activities: Accounts receivable 31 (945) (901) Inventories (6,181) (6,520) (4,298) Other assets (1,470) (1,935) (2,888) Deposits 12 51 (31) Receivable from affiliated entity (66) 230 - Accounts payable (1,043) 6,792 (3,316) Accrued expenses (842) (380) 1,158 Worker's compensation 320 281 723 Income taxes 458 1,957 (418) Deferred rent 182 274 202 Accrued interest 575 615 660
Net cash provided by operating activities 13,690 31,023 25,980
CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (9,356) (12,461 (17,953 ) ) Purchases of short-term investments (4,966) (13,976 (13,011 ) ) Net asset of discontinued operations. (1,708) (31,730 6,048 )
Net cash used in investing activities (16,030 (58,167 (24,916 ) ) )
CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital lease obligation (656) (704) (754) Net proceeds from secondary public offering - 27,188 - Proceeds from exercise of stock options 503 2,477 4,975
Net cash provided (used in) financing (153) 28,961 4,221 activities
NET INCREASE (DECREASE) IN CASH (2,493) 1,817 5,285 CASH, beginning of period 3,375 882 2,699
CASH, end of period $882 $2,699 $7,984
The accompanying notes are an integral part of these consolidated financial statements.
99 CENTS ONLY STORES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999
1. Line of Business
The Company, 99 Cents Only Stores and its subsidiaries (the Company, including the operations of its 99 Cents Only Stores and Bargain Wholesale) primarily market and sell various consumable products and operated 64 and 78 retail stores at December 31, 1998 and 1999, respectively. The Company is also a wholesale distributor of various consumable products.
2. Concentration of Operations in Southern California
All but one of the Company's retail store are located in Southern California. In addition, the Company's current retail expansion plans anticipate that most new stores will be located in that same 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. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of 99 Cents Only Stores and its subsidiaries. All inter-company transactions have been eliminated and all of its wholly owned subsidiaries.
Use of Estimates
The preparation of consolidated 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 amortized and depreciated on the straight-line basis over the following useful lives of the assets:
Building and improvements 30 - 27.5 years Leasehold improvements Lesser of 5 years or Remaining lease term Fixtures and equipment 5 years Transportation equipment 3 years
The Company follows the policy of capitalizing expenditures that materially increase asset lives and charging ordinary repairs and maintenance to operations as incurred.
Stock Split
All common shares and per share amounts have been adjusted to give retroactive effect to a four-for-three stock split distributed on February 9, 2000 to holders of record on January 31, 2000.
Earnings per share
"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 years in the period ended December 31, 1999 follows:
1997 1998 1999 (Amounts in thousands)
Weighted average number of common shares outstanding-Basic 30,90 32,04 33,25 4 5 2 Dilutive effect of outstanding stock 356 706 733 options
Weighted average number of common shares outstanding-Diluted 31,26 32,75 33,98 0 1 5
In 1999, approximately 1,054 options were excluded from the calculation of fully diluted shares outstanding because the option price was above the average market price during the year.
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.
Deferred Rent
Certain of the Company's operating leases for its retail locations include scheduled increasing monthly payments. In accordance with generally accepted accounting principles, the Company has accounted for the leases to provide straight-line charges to operations over the lives of the leases.
Revenue Recognition
Revenue is recognized at the point of sale for retail sales and at the time of shipment for wholesale sales.
Pre-Opening Costs
The Company expenses, as incurred, all pre-opening costs related to the opening of new retail stores.
Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect method as prescribed by the Statement of Financial Accounting Standards No. 95. The Company considers all investments with original maturities of three months or less to be cash equivalents. Cash payments for income taxes were $12,911,000, $16,727,000 and $21,756,000 in 1997, 1998 and 1999, respectively. Interest payments totaled approximately $184,000, $136,000 and $86,000 for the years December 31, 1997, 1998 and 1999, respectively.
New Authoritative Pronouncements
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2001 and management does not expect adoption of this standard to have a material impact on the Company's financial reporting or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the current year's presentation.
4. Income Tax Provision
The provisions for income taxes from continuing operations for the years ended December 31, 1997, 1998 and 1999 are as follows:
Years Ended December 31, (Amounts in thousands) 1997 1998 1999
Current: Federal $10,678 $15,249 $20,192 State 2,691 2,178 2,885
13,369 17,427 23,077 Deferred (245) (395) (710)
Provisions for income taxes $13,124 $17,032 $22,367
Differences between the provisions for income taxes and income taxes at the statutory federal income tax rate for the years ended December 31, 1997, 1998 and 1999 are as follows:
Year Ended December 31, (Amounts in thousands) 1997 1998 1999 Amoun Perce Amoun Perce Amoun Perce t nt t nt t nt
Income tax at statutory federal $11,2 35.0% $15,2 35.0% $19,7 35.0% rate 26 33 77 State income taxes, net of federal income tax effect 1,924 6.0 2,405 5.5 3,012 5.3% Effect of permanent differences (204) (0.6) (255) (0.6) (64) (0.1) LARZ and targeted job credits (280) (0.9) (393) (0.9) (380) (0.6) Other 458 1.4 42 0.1 22 -
$13,1 40.9% $17,0 39.1% $22,3 39.6% 24 32 67
A detail of the Company's deferred tax asset as of December 31, 1998 and 1999 is as follows:
Years Ended December 31, (Amounts in thousands) 1998 1999
Inventory $1,061 $606 Uniform inventory capitalization 1,298 971 Depreciation 2,356 2,326 Liability for claims 125 112 Workers' compensation 562 845 Deferred rent 635 787 State taxes 727 1,216 Other, net 66 117 Net operating loss carry-forward 10,330 9,140
17,160 16,120
Net deferred tax liabilities (488) (262) 16,672 15,858 Valuation allowance (10,330 (4,540) ) $6,342 $11,318
In connection with the acquisition of Universal and Odd's-N-End's, the Company has federal net operating loss carry-forwards of approximately $27.1 million which it can use to offset income. Future use of this loss carry-forward may be limited and may expire at various dates through 2013. Due to the uncertainty of the future use of such loss carry-forwards, the Company has recorded a valuation allowance equal to the tax effect of the loss carry-forward that is not expected to be realizable. In accordance with SFAS 109, any benefits realized from future use of these loss carry- forwards will be recorded as a reduction of the goodwill generated from the acquisition. During 1999 the Company reduced goodwill by $5,790 related to the expected future tax benefits for the net operating losses.
5. 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. 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, 1998 and 1999, the fair value of investments approximated the carrying values and were invested as follows:
(Amounts in thousands) 1998 Maturity 1999 Maturity Withi 1 Withi 1 n 1 year n 1 year year or year or more more
Federal bonds $1,50 - $1,50 $1,50 $1,50 - 0 0 0 0 Municipal bonds 15,84 $14,6 1,210 16,42 9,981 $6,44 6 36 1 0 Corporate Securities - - - 1,560 - 1,560 Commercial paper 29,21 29,21 - 40,09 39,49 600 4 4 0 0
$46,5 $43,8 $2,71 $59,5 $50,9 $8,60 60 50 0 71 71 0
6. 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 7.0 percent per annum. On or before 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 during the fourth quarter of 2000. In the event the option is not exercised, there is a $7.6 million penalty.
Total minimum payments under the lease are as follows:
(Amounts in thousands )
Year ending December 31: 2000 $11,340
Less: Amount representing interest (4,089)
Present value (principal only) of minimum lease 7,251 payment Less: Current portion (809)
$6,442
7. Related-Party Transactions
The Company leases certain retail facilities from its principal shareholders. Rental expense for these facilities was approximately $2.0 million, $2.2 million and $1.9 million in 1997, 1998 and 1999, respectively. During 1997, 1998 and 1999 the Company incurred legal fees of $61,000, $60,000 and $0, respectively, to the law firm in which a director of the Company is a partner.
8. Commitments and Contingencies
Credit Facility
The Company does not maintain any credit facilities with any bank. However, the Company maintains a surety bond of approximately $1.2 million for self-insured workers' compensation.
Lease Commitments
The Company leases various facilities under operating leases, which expire at various dates through 2010. 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 1997, 1998 and 1999 was approximately $7.3 million, $10.6 million and $11.0 million, respectively.
As of December 31, 1999, the minimum annual rentals payable under all non-cancelable operating leases (includes operating stores only) were as follows:
(Amounts in thousands )
Year ending December 31: 2000 $11,608 2001 10,186 2002 9,462 2003 9,239 2004 8,188 Thereafter 17,365
$66,048
In addition, the Company also leases certain retail facilities on a month-to-month basis. The aggregate monthly rental payment for month-to-month leases at December 31, 1999 was approximately $13 thousand dollars.
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. The Company provides for losses of estimated known and incurred but not reported insurance claims. Known claims are estimated and accrued when reported. At December 31, 1999, the Company had accrued approximately $2.1 million for estimated workers' compensation claims.
In connection with the self-insurance of workers' compensation, the Company is required by the State of California to maintain a $1.2 million surety bond.
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.
Advertising
Advertising expenses were $2.0 million, $2.4 million and $2.4 million for 1997, 1998 and 1999, respectively.
9. Stock Option Plan
The Company's 1996 Stock Option Plan provides for the granting of non-qualified and incentive options to purchase up to 6,167,000 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 (the "Committee"). Options vest over a three year period, one third on the first anniversary date of grant and one third per year thereafter. Options expire ten years from the date of grant.
The following table summarizes stock options available for grant.
Year Year Year ended ended ended December December December 31, 31, 31, 1997 1998 1999
Beginning Balance 1,148,231 22,000 1,059,220 Authorized - 2,083,333 2,000,000 Granted (1,180,94 (1,223,04 (973,016) 0) 5) Cancelled 54,709 176,932 148,136
Available for future grant 22,000 1,059,220 2,234,340
A summary of the status of the Plan for the years ended December 31, 1997, 1998 and 1999 follows:
December 31, December 31, December 31, 1997 1998 1999 Weight Weight Weight ed ed ed Averag Averag Averag Shares e Shares e Shares e Exerci Exerci Exerci se se se Price Price Price
Outstanding at the beginning of the year 935,102 $5.31 1,965,3 $8.38 2,687,5 $10.48 92 66 Granted 1,180,9 10.59 1,223,0 23.47 973,016 35.21 40 45 Exercised (95,941 5.25 (323,93 6.56 (437,38 15.18 ) 9) 0) Cancelled (54,709 8.15 (176,93 10.19 (148,13 27.29 ) 2) 6)
Outstanding at the end of the 1,965,3 8.38 2,687,5 10.48 3,075,0 21.34 year 92 66 66
Exercisable at the end of the 222,525 $5.33 621,469 $8.69 1,141,3 $11.83 year 70
Weighted average fair value of options granted $8.66 $23.47 $22.66
The following table summarizes information about stock options outstanding at December 31, 1999.
Weighted Weight Weight Range of Average ed ed Exercise Options Remaining Averag Options Averag Prices Outstandi Contractual e Exercisab e ng life Exerci le Exerci se se Price Price
$5.28-$6.69 446,758 6.4 $5.35 446,758 $5.35 $8.73- 720,824 7.3 10.57 397,580 10.56 $13.05 $15.90- 856,216 8.3 22.53 243,208 22.34 $22.80 $24.00- 1,051,268 9.3 34.54 53,824 27.57 $35.25
3,075,066 8.1 21.34 1,141,370 11.83
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, 1997, 1998 and 1999 (amounts in thousands, except for per share data):
December 31, 1997 1998 1999
Additional compensation expense $3,11 $8,36 $16,0 2 0 71 Pro forma net income 17,08 21,67 12,32 3 7 8 Pro forma earnings per share: Basic $0.56 $0.57 $0.37 Diluted $0.55 $0.56 $0.36
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:
December 31, 1997 1998 1999
Risk free interest rate 5.4% 4.9% 5.5% Expected life 10 8.8 10 years years Years Expected stock price volatility 77% 67% 44% Expected dividend yield None None None
10. Operating Segments
The Company has two business segments, retail operations and wholesale distribution. The majority of the product offerings include recognized brand-name consumable merchandise, regularly available for reorder. The Company's Bargain Wholesale division 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 above in the summary of significant accounting policies. The Company evaluates segment performance based on net sales and gross profit of each segment. Management does not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor is there any separately identifiable statements of income data (below gross profit) to be disclosed.
The Company accounts for inter-segment transfer at cost through its inventory accounts.
The Company had no customers representing more than 10 percent of net sales. Substantially all of the Company's net sales were to customers located in the United States.
Reportable segment information for the years ended December 31, 1997, 1998 and 1999 follows (in 000's).
Retail Wholesale Total Net sales $186,024 $44,831 $230,855 Gross Margin 75,211 8,847 84,058
Net sales $238,868 $53,202 $292,070 Gross Margin 99,021 10,005 109,026
Net sales $312,306 $47,652 $359,958 Gross Margin 130,317 11,145 141,462
11. 401(k) Plan
In 1998 the Company adopted a 401(k) Plan (the Plan). All full time employees are eligible to participate in the Plan after 3 months of service. The Company has the option to match employee contributions. The Company may elect to make a discretionary contribution to the Plan. For the year ended December 31, 1999, no matching discretionary contributions were made.
12. Discontinued Operations
On March 4, 2000, the Board of Directors approved the disposition of the entire operations of Universal International, Inc., which comprises the retail operations of Odds-n-Ends, Inc. and Only Deals, Inc.
The net losses of these operations for all periods are included in the consolidated statements of income under "discontinued operations". Revenues from such operations were $31,107 in 1998 and $83,264 in 1999. The carrying value of the assets at December 31, 1999 was $26,928, which is net of a $9,000 provision for loss on disposal.
The provision for loss on discontinued operations reflected in the consolidated statement of income, includes the write-down of the assets of Universal operations to estimate net realizable values and the estimated cost of disposing these operations along with the estimated loss of $1,200 million through the estimated date of disposal, less the expected tax benefits of approximately $2,613 applicable thereto.
13. Subsequent Events
In January 2000, the Company paid $1.4 million to acquire the remaining minority interest of Universal. This additional cost for Universal has been considered in the Company's estimate of the net realizable value of the net assets of the discontinued operations as of December 31, 1999.
In January 2000, the Company entered into a commitment to purchase an existing distribution facility for $7.0 million.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors of the registrant required by Item 401 of Regulation S-K and information regarding Directors and Executive Officers of the registrant required by Item 405 of Regulation S-K is presented under the captions "Election of Directors," "Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K is presented under the caption "Executive Compensation" in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 403 of Regulation S-K is presented under the caption "Principal Shareholders" in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by Item 404 of Regulation S-K is presented under the caption "Certain Relationships" in the definitive Proxy Statement for the Company's 2000 Annual Meeting of Shareholders, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. Financial Statements. Reference is made to the Index to the Consolidated Financial Statements set forth on page 32 of this Form 10-K.
2. Financial Statement Schedules. All Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included herein.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report.
4. Reports on Form 8-K.
None. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
99 CENTS ONLY STORES By : /s/ Andy Farina Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report on Form 10K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board and March 28, /S/ David Gold Chief Executive Officer 2000
Senior Vice President of March 28, /S/ Howard Gold Distribution and Director 2000
Senior Vice President of Real March 28, /S/ Jeff Gold Estate and Information Systems 2000 and Director
March 28, /S/ Eric Schiffer President and Director 2000
March 28, /S/ William Christy Director 2000
March 28, /S/ Lawrence Glascott Director 2000
March 28, /S/ Marvin L. Holen Director 2000
March 28, /S/ Ben Schwartz Director 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 99 Cents Only Stores:
We have audited in accordance with generally accepted auditing standards in the United States, the consolidated financial statements of 99 Cents Only Stores in this Form 10-K and have issued our report thereon dated March 7, 2000. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in item 14 and included on page 50 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California March 7, 2000
99 ONLY STORES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For Each of the Three Years in the Period Ended December 31, 1999
Beginni End ng Additio Reducti Other of of Year n on Year (Amounts in Thousands) For the year ended December 31, 1999: Allowance for doubtful accounts $169 $29 $140 Inventory reserves 2,589 1,086 1,503 For the year ended December 31, 1998: Allowance for doubtful accounts 178 - 9 - 169 Inventory reserves 3,762 - 1,173 - 2,589 For the year ended December 31, 1997: Allowance for doubtful accounts 211 - 33 - 178 Inventory reserves $4,052 - $290 - $3,76
Exhibit Index
Exhib Exhibit Description it Numbe r
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) 10.1 Form of Indemnification Agreement and Schedule of Indemnified Parties.(1) 10.2 [Reserved] 10.3 Form of Tax Indemnification Agreement, between and among the Registrant and the Existing Shareholders.(1) 10.4 1996 Stock Option Plan.(1) 10.6 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, Arleta, 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) 11.1 Statements Regarding Computation of Per Share Earnings* 21.1 Subsidiaries of the Registrant. Universal International Inc., Only Deals, Inc., Odd's-N-End's Inc. 23.1 Consent of Arthur Andersen LLP.* 27.1 Financial Data Schedule*
* Filed herewith
(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.
(2) Incorporated by reference from the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on March 31, 1998.
Exhibit 11.1
99 CENTS ONLY STORES STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS (Amounts in Thousands, Except Per Share Data)
December 31, 1997 1998 1999 Income from continuing operations $18,95 $26,49 $34,13 0 2 8 Income (loss) from discontinued operations, net - 201 (3,167 ) Loss from disposal of discontinued operation, net - - (9,000 ) Net Income $18,95 $26,69 $21,97 0 3 1 Common Stock: Shares outstanding from beginning of period 30,868 30,964 32,988 Pro-rata shares-stock issuance 36 1,081 264
Basic weighted average number of common shares 30,904 32,045 33,252 outstanding
Common stock equivalents 356 706 733
Diluted weighted average number of common shares 31,260 32,751 33,985 outstanding
Income from continuing operations: Basic $0.61 $0.82 $1.03 Diluted $0.61 $0.81 $1.00 Income (loss) from discontinued operation: Basic - $0.01 ($0.10 ) Diluted - $0.01 ($0.09 ) Loss from disposal of discontinued operation: Basic - - ($0.27 ) Diluted - - ($0.26 ) Net Income Basic $0.61 $0.83 $0.66 Diluted $0.61 $0.82 $0.65
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 333-26575, 333-80185 and 333-66729.
ARTHUR ANDERSEN LLP
Los Angeles, California March 28, 2000
EXHIBIT 27.1
[PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1999 [PERIOD-START] JAN-01-1999 [PERIOD-END] DEC-31-1999 [CASH] 7,984 [SECURITIES] 59,571 [RECEIVABLES] 3,356 [ALLOWANCES] (140) [INVENTORY] 53,932 [CURRENT-ASSETS] 122,368 [PP&E] 69,541 [DEPRECIATION] (20,119) [TOTAL-ASSETS] 224,015 [CURRENT-LIABILITIES] 16,731 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 116,775 [OTHER-SE] 78,765 [TOTAL-LIABILITY-AND-EQUITY] 224,015 [SALES] 359,958 359,958 [CGS] 218,496 [TOTAL-COSTS] 80,089 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] (746) [INCOME-PRETAX] 56,505 [INCOME-TAX] 22,367 [INCOME-CONTINUING] 34,138 [DISCONTINUED] (3,167) [EXTRAORDINARY] (9,000) [CHANGES] 0 [NET-INCOME] 21,971 [EPS-BASIC] 0.66 [EPS-DILUTED] 0.65 [FN] Retained Earnings