-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jmc3fECG5M5AAZX5xjD6jhQ7mewfIc38DlTRIwox/DOxNNGBOsM31n/5VnwwJbk2 Vu7zK8XMXKx8z6ouU40PXw== 0001011290-98-000005.txt : 19980727 0001011290-98-000005.hdr.sgml : 19980727 ACCESSION NUMBER: 0001011290-98-000005 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980724 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 99 CENTS ONLY STORE CENTRAL INDEX KEY: 0001011290 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 952411605 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-11735 FILM NUMBER: 98671139 BUSINESS ADDRESS: STREET 1: 4000 EAST UNION PACIFIC AVE CITY: CITY OF COMMERCE STATE: CA ZIP: 90023 BUSINESS PHONE: 2139808145 MAIL ADDRESS: STREET 1: 4000 EAST UNION PACIFIC AVENUE CITY: CITY OF COMMERCE STATE: CA ZIP: 90023 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-QA [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-11735 99 CENTS ONLY STORES (Exact name of registrant as specified in its charter) CALIFORNIA 95-2411605 (State or other jurisdiction (I.R.S. Employer Identification No.) or organization) 4000 UNION PACIFIC AVENUE CITY OF COMMERCE, CALIFORNIA 90023 (Address of Principal executive offices) Registrant's telephone number, including area code: (213) 980-8145 NONE Former name, address and fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common Stock, No Par Value, 18,587,841 Shares as of MARCH 31, 1998 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 99 Cents Only Stores Balance Sheets (Amounts In Thousands) March 31, December 31, 1998 1997 (Unaudited) ---------- ---------- Assets Current assets: Cash................................ $2,338 $882 Short-term investments.............. 25,579 26,191 Accounts receivable, net of allowance for doubtful accounts of $152 and $178 as of March 31, 1998 and December 31, 1997, respectively...................... 2,718 1,510 Inventories......................... 43,598 43,114 Other............................... 2,155 673 -------- -------- Total current assets................ 76,388 72,370 Property and equipment, at cost: Land................................ 8,072 8,072 Building and improvements........... 10,804 10,804 Leasehold improvements.............. 13,008 10,986 Fixtures and equipment.............. 8,712 8,473 Transportation equipment............ 711 558 Construction in progress............ 623 776 -------- -------- 41,930 39,669 Less - accumulated depreciation and amortization............. (11,195) (10,228) -------- -------- Total property and equipment, net... 30,735 29,441 Other assets: Deferred income taxes............... 5,947 5,947 Long term investments in marketable Securities........................ 7,505 6,393 Investment in Universal............. 2,594 3,708 Deposits............................ 234 234 Other............................... 2,167 1,120 Receivable from affiliated entity... 780 230 -------- -------- 19,227 17,632 -------- -------- Total assets........................ $126,350 $119,443 ======== ======== The accompanying notes are an integral part of these balance sheets.
99 Cents Only Stores Balance Sheets (Amounts In Thousands) March 31, December 31, 1998 1997 (Unaudited) ---------- ---------- Liabilities and Shareholders' Equity Current liabilities: Current portion of capital lease obligation....................... $716 $704 Accounts payable......................... 6,639 5,534 Accrued expenses: Payroll and payroll related............ 457 1,352 Sales tax.............................. 1,131 1,467 Liability for claims................... 343 396 Other.................................. 54 824 Workers' compensation.................. 1,115 1,091 Income taxes payable................... 3,447 211 -------- -------- Total current liabilities................ 13,902 11,579 Long-term liabilities: Deferred rent............................ 1,494 1,476 Accrued interest on capitalized lease Obligation............................. 2,224 2,075 Capital lease obligation, net of current portion........................ 7,821 8,005 -------- -------- 11,539 11,556 Commitments and contingencies............ - - Shareholders' equity: Preferred stock, no par value Authorized - 1,000,000 shares Issued and outstanding - none.......... - - Common Stock, no par value Authorized - 40,000,000 shares Issued and outstanding - 18,587,841 shares at March 31, 1998 and 18,578,759 shares at December 31, 1997. 66,267 66,207 Retained earnings...................... 34,642 30,101 -------- -------- Total shareholders' equity............... 100,909 96,308 -------- -------- Total liabilities and shareholders' equity $126,350 $119,443 ======== ========
The accompanying notes are an integral part of these balance sheets. 99 Cents Only Stores Statements of Income (Unaudited) (Amounts In Thousands Except Earnings Per Share Data) Three Months Ended March 31, 1998 1997 -------- -------- Net sales: 99 Cents Only Stores................ $51,482 $39,168 Bargain Wholesale................... 11,400 11,576 -------- -------- Net sales........................... 62,882 50,744 Cost of sales....................... 39,839 33,328 -------- -------- Gross profit........................ 23,043 17,416 Selling, general and administrative expenses........... 14,424 11,331 -------- -------- Operating income.................... 8,619 6,085 Interest income (expense), net...... 215 151 -------- -------- Income before (loss) from minority Interest.......................... 8,834 6,236 (Loss) from minority interest....... (742) - -------- -------- Income before provision for Income taxes...................... 8,092 6,236 Provision for income taxes.......... 3,551 2,560 -------- -------- Net income.......................... $4,541 $3,676 ======== ======== Earnings per common share: Basic $0.24 $0.20 Diluted $0.24 $0.20 Weighted average number of common shares outstanding: Basic 18,582 18,521 Diluted 18,964 18,731 The accompanying notes are an integral part of these statements. 99 Cents Only Stores Statements of Cash Flows (Unaudited) (Amounts In Thousands) Three Months Ended March 31, 1998 1997 -------- -------- Cash flows from operating activities: Net income ........................................ $4,541 $3,676 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 999 624 Changes in asset and liabilities Associated with operating activities: Accounts receivable................................ (1,208) (509) Inventories........................................ (484) (332) Other current assets............................... (1,482) (212) Other assets....................................... (1,629) - Accounts payable................................... 1,105 (888) Accrued expenses................................... (2,054) (152) Workers' compensation.............................. 24 (45) Income taxes payable............................... 3,236 2,423 Deferred rent...................................... 18 10 Accrued interest................................... 149 140 -------- -------- Net cash provided by operating activities 3,215 4,735 Cash flows from investing activities: Investment in marketable securities................ (500) (329) Purchase of property and equipment................. (2,261) (1,817) Investment in Universal ........................... 1,114 - -------- -------- Net cash used in investing activities.............. (1,647) (2,146) Cash flows from financing activities: Payments of capital lease obligation............... (172) (160) Net proceeds from exercise of stock options........ 60 - -------- -------- Net cash used in financing activities.............. (112) (160) Net increase in cash............................... 1,456 2,429 Cash, beginning of period.......................... 882 3,375 -------- -------- Cash, end of period................................ $2,338 $5,804 ======== ======== The accompanying notes are an integral part of these statements. 99 CENTS ONLY STORES NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles. However, certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These statements should be read in conjunction with the Company's December 31, 1997 audited and pro forma financial statements and notes thereto included in the Company's Form 10-K dated March 26, 1998, including all amendments thereto. In the opinion of management, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for each of the periods presented. The results of operations and cash flows for such periods are not necessarily indicative of results to be expected for the full year. Concentration of Operations in Southern California All of the Company's retail stores are located in Southern California. In addition, the Company's current retail expansion plans anticipate that all planned new stores will be located in this geographic region. Consequently, the Company's results of operations and financial condition are dependent upon general economic trends and various environmental factors in Southern California. 2. Earnings Per Common Share Earnings per share calculations are in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the year. "Diluted" earnings per share is computed by dividing net income by the total of the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options (applying the treasury stock method). Earnings per share amounts for 1997 have been restated to reflect the adoption of SFAS No. 128. A reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding for each of the three month periods ended March 31, follows (amounts in thousands): 1998 1997 ----- ----- Weighted average number of common shares 18,582 18,521 outstanding-Basic....................... Dilutive effect of outstanding stock 382 210 options................................. ------ ------ Weighted average number of common shares 18,964 18,731 outstanding-Diluted..................... ====== ====== 3. Investment in Universal International, Inc. In November 1997, the Company acquired approximately 48% of the outstanding common stock of Universal International, Inc. ("Universal") for $4 million in cash and inventory. The investment in Universal is accounted for using the equity method of accounting. The investment is increased (reduced) by a credit (charge) to income for 48% of the Universal income (loss). Summary information relating to the results of operations and the financial condition of Universal for fiscal 1997 and for the first three months of 1998 and 1997 are as follows (amounts in thousands): March 31 March 31 December 31, 1998 1997 1997 ----- ----- ----- Sales................. $15,501 $13,579 $68,705 Net loss.............. (1,553) (2,440) (11,887) Total assets.......... 32,812 41,427 31,388 Shareholders' equity.. 6,828 14,048 8,601 During the period from the purchase of 48% of the Universal common stock to March 31, 1998, the Company had made $1.3 million in advances to Universal. In February 1998, the Company announced a proposal to acquire all of the issued and to-be-issued shares of the common stock of Universal and Odd's-N-End's Inc. ("Odd's-N-End's")(approximately 41% of Odd's-N-End's is owned by Universal). If the acquisitions are consummated as proposed, the Company will issue to the shareholders of Universal approximately 305,800 shares of the Company's common stock and will pay to the holders of Odd's-N-End's common stock approximately $830,000 in cash. As of March 31, 1998, Universal had a note receivable due from Odd's-N-End's of approximately $10.4 million. The transaction is expected to close by approximately July 1998. Included in the 99 Cents Only Stores results of operations for the three months ended March 31, 1998 is a $742 thousand charge representing the Company's 48% share of the Universal loss for the first quarter of 1998. 4. Short-Term Investments Investments in debt and equity securities are recorded as required by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments are comprised primarily of investment grade federal and municipal bonds and commercial paper, primarily with short- term maturities. The Company generally holds investments until maturity and has not experienced any significant gain or loss from sales of its investments. Any premium or discount recognized in connection with the purchase of an investment is amortized over the term of the investment. Certain long-term investments in marketable securities at December 31, 1997 have been reclassified to conform to the presentation at March 31, 1998. As of March 31, 1998 and December 31, 1997, the fair value of investments approximated the carrying values and were invested as follows (amounts in thousands): Maturity Maturity -------- -------- March 31, Within 1 to 2 December 31, Within 1 to 2 1998 1 year years 1997 1 year years --------- ------ ----- --------- ------ ----- Federal Bonds $ 1,500 $ - $ 1,500 $ 1,500 $ - $1,500 Municipal Bonds 18,784 12,779 6,005 18,583 13,690 4,893 Commercial Paper 12,800 12,800 0 12,501 12,501 0 ------- ------- ------- ------- ------- ------- $33,084 $25,579 $7,505 $32,584 $26,191 $6,393 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company has been engaged since 1976 in the purchase and sale of name-brand, close-out and regularly available general merchandise. Since that time, the Company has sold its merchandise on a wholesale basis through its Bargain Wholesale division. On August 13, 1982, the Company opened its first 99 Cents Only Stores location and as of March 31, 1998, operates a chain of 54 deep-discount 99 Cents Only Stores. The Company's growth during the last three years has come primarily from new store openings and growth in its Bargain Wholesale division. The Company opened ten stores in 1997. The Company opened two stores (including one relocation) in the first three months of 1998, one each in San Bernardino, California and North Hollywood, California and plans to open an additional 11 stores (including one relocation) during the remainder of the year. Of the additional stores planned for 1998, the Company has secured sites for five additional store locations. Bargain Wholesale's growth has been primarily attributable to an increased focus on large domestic and international accounts and expansion into new geographic markets. The Company generally realizes a lower gross profit margin on Bargain Wholesale's net sales compared to 99 Cents Only Stores net sales. However, Bargain Wholesale complements the Company's retail operations by allowing the Company to purchase in larger volumes at more favorable pricing and to generate additional net sales with relatively small incremental increases in operating expenses. Comparable stores net sales increased 1.5% during the year in 1997 and for the first quarter of 1998. In the past, as part of its strategy to expand retail operations, the Company has at times opened larger new stores in close proximity to existing stores where the Company determined that the trade area could support a larger facility. In some of these situations, the Company retained its existing store as 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 past year, average net sales per estimated saleable square foot was $354 per square foot. As the Company targets larger locations for new store development it is expected that the sales per square foot will be negatively impacted. Existing stores average approximately 15,000 gross square feet. Since January 1, 1995, the Company has opened 24 new stores (including two relocations in 1995 and one in 1996) that average over 19,000 gross square feet. The Company currently targets new store locations between 15,000 and 25,000 gross feet. Although it is the Company's experience that larger stores generally have lower average net sales per square foot than smaller stores, larger stores generally achieve higher average annual store revenues and operating income. 99 Cents Only Stores increased its net sales, operating income and net income in the first quarter of 1998. For the first quarter of 1998 it had net sales of $62.9 million, operating income of $8.6 million and net income of $4.5 million, representing a 23.9%, 41.6% and 23.5% increase over 1997, respectively. Recent Developments In November 1997, the Company acquired approximately 48% of the outstanding Common Stock of Universal. In February 1998, the Company announced a proposal to acquire all of the issued and to-be-issued shares of the Common Stock of Universal and Odd's-N-End's. Together, these two companies operate 44 retail stores in Minnesota and the surrounding upper Midwest region, eight retail stores in Texas and 22 retail stores in upper New York State. If the acquisitions are consummated as proposed, the Company will issue to the shareholders of Universal approximately 305,800 shares of the Company's Common Stock and will pay to the holders of Odd's-N-End's common stock approximately $830,000 in cash. Universal has a note receivable due from Odd's-N-End's of approximately $10.4 million. Currently the Company's ownership interest in Universal is accounted for using the equity method. The impact of the inclusion of Universal in the Company's financial statements for first quarter ended March 31, 1998 was ($742) thousand. Upon consummation of the acquisition of Universal, the Company will consolidate the results of operations of Universal with those of the Company, and will preliminarily record approximately $7.4 million in goodwill on its balance sheet, which will be amortized over 30 years and will result in increased amortization expense in future periods. Universal's business is seasonal. Historically, all of its earnings have been generated in the fourth quarter, and it has incurred losses during the first three quarters of the calendar year. As a result, shareholders equity is likely to be lower and the amount of goodwill related to the acquisition of Universal is likely to be of a greater magnitude at the closing date compared to the current estimate of $7.4 million. The Company expects to continue to provide financial support to Universal through the date of closing through trade credit and other advances. Such amounts will be provided from the Company's ongoing cash flows from operations and its existing working capital. On March 31, 1998, the Company announced that it had filed a registration statement with the Securities and Exchange Commission covering a public offering of an aggregate of 3,500,000 shares of Common Stock (4,025,000 shares if the underwriters' over-allotment option is exercised in full). Of the shares offered, the Company offered 750,000 newly issued shares (862,500 shares if the underwriters' over-allotment option is exercised in full). The offering was consummated as proposed on April 30, 1998. The net proceeds of the offering to the Company were $27.3 million. The Company did not receive any of the net proceeds from the sale of shares by the selling shareholders The Company has made in this Form 10-Q forward-looking statements within the meaning of Section 27A of the Securities Act concerning the Company's operations, expansion plans, economic performance, financial condition, the pending acquisitions of Universal and Odd's-N-End's and their effect on the Company's results of operations and the results of operations of Universal, store openings, purchasing abilities, sales per square foot and comparable store net sales trends and capital requirements. Such forward-looking statements may be identified by the use of words such as "believe", "anticipate," "intend" and "expect". Such forward-looking statements are subject to various risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from those currently anticipated due to a number of factors, including certain risk factors. Some of those factors include (i) the Company's ability to open new stores on a timely basis and operate them profitably, (ii) the Company's ability to integrate Universal and Odd's-N-End's achieve anticipated operating synergies and to operate their stores at multiple price points and in different geographic locations, (iii) the orderly operation of the Company's receiving and distribution process, (iv) inflation, consumer confidence and other general economic factors, (v) the availability of adequate inventory and capital resources, (vi) the risk of a disruption in sales volume in the fourth quarter and other seasonal factors (vii) dependence on key personnel and control for the Company by existing shareholders and (viii) increased competition from new entrants into the deep-discount retail industry. The Company does not ordinarily make projections of its future operating results and undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 NET SALES: Net sales increased $12.1 million, or 23.9%, to $62.9 million in the 1998 period from $50.7 million in the 1997 period. 99 Cents Only Stores net sales increased approximately $12.3 million, or 31.4%, to $51.5 million in the 1998 period from $39.2 million in the 1997 period, and Bargain Wholesale net sales decreased $0.2 million, to $11.4 million in the 1998 period from $11.6 million in the 1997 period. The increase in 99 Cents Only Stores net sales was attributable to the net effect of four new larger stores opened and the closure of two smaller stores, the full quarter effect of 10 new stores opened in 1997, and a 1.5% increase in comparable same store sales in 1998. Comparable store sales were impacted by new store openings within a 3 mile radius of existing stores. The Bargain Wholesale net sales were affected negatively by currency exchange factors. GROSS PROFIT: Gross profit increased approximately $5.6 million, or 32.3%, to $23.0 million in the 1998 period from $17.4 million in the 1997 period. The increase in gross profit was due to higher net sales and an increase in the gross profit margin to 36.6% in the 1998 period from 34.3% in the 1997 period. The 2.3% point increase in the gross profit margin is due to a higher proportion of retail net sales, which typically have a higher gross margin than wholesale sales and merchandise cost factors. SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $3.1 million, or 27.3%, to 14.4 million in 1998 period from $11.3 million in 1997 period. This was primarily due to increased costs associated with new store growth. As a percentage of net sales, SG&A increased slightly to 22.9% from 22.3%. The increase as a percentage of net sales was primarily due to increased payroll costs primarily resulting from state and federally mandated increases in the minimum wage. In addition, the minimum wage in California increased to $5.75 per hour in March 1998. Legislation has been introduced in California to further increase the minimum wage from $5.75 to $6.75 per hour effective January 1999. OPERATING INCOME: As a result of the items discussed above, operating income increased $2.5 million, or 41.6%, to $8.6 million in 1998 from $6.1 million in 1997. The operating margin increased to 13.7% in 1998 from 12.0% in 1997. INTEREST INCOME (EXPENSE): Interest income (expense) relates to interest on the Company's capitalized warehouse lease, net of interest earned on the Company's cash balances and short-term investments. The change in interest expense between 1998 and 1997 was due to interest earned on short-term marketable securities. The Company's investments are comprised primarily of investment grade federal and municipal bonds and commercial paper, primarily with short-term maturities. The Company generally holds investments until maturity and has not experienced any significant gain or loss from sales of its investments. Any premium or discount recognized in connection with the purchase of an investment is amortized over the term of the investment. During 1998 and 1997, the Company had no bank debt. (LOSS FROM MINORITY INTEREST): The Company's owns a 48% interest in Universal International, Inc. Its share of the Universal loss from operations for the period ended March 31, 1998 was ($742) thousand. No tax benefit is applied to this loss. Universal has tax loss carryforewards of approximately $15 million as of March 31, 1997. PROVISION FOR INCOME TAXES: The provision for income taxes for the three months ended March 31, 1998, was $3.6 million in 1998 compared to $2.6 million in 1997. The effective rates of the historical provision for income taxes was approximately 40.2% in 1998 and 41.1% in 1997. The change in the effective rate in 1998 from 1997 results from the benefit of available tax credits. NET INCOME: As a result of the items discussed above, net income increased $0.9 million, or 23.5% to $4.5 million in 1998 from $3.7 million in the 1997 period. Net income as a percentage of sales is 7.2% in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations principally from cash provided by operations, and has not generally relied upon external sources of financing. The Company's capital requirements result primarily from purchases of inventory, expenditures related to store openings and the working capital requirements for new and existing stores. The Company takes advantage of close-out and other special situation opportunities which frequently results in large volume purchases, and as a consequence, its cash requirements are not constant or predictable during the year and can be affected by the timing and size of its purchases. The Company maintains cash and short-term investments with highly qualified financial institutions. The Company's investments are comprised primarily of investment grade federal and municipal bonds and commercial paper, primarily with short-term maturities. The Company generally holds investments until maturity and has not experienced any significant gain or loss from sales of its investments. At various times such amounts may be in excess of insured limits. As of March 31, 1998 the Company had purchased the land and buildings for three of its retail store locations. The Company may purchase other locations in the future. Available cash not immediately needed for such purposes has been invested in short-term investments grade securities. During the three months period ended March 31, 1998 and 1997, net cash provided by operations was $2.7 million and $4.4 million respectively. Inventories increased $0.5 million in 1998 and increased $0.3 million in 1997. Receivables increased $1.2 million, in 1998 and $0.5 in 1997 respectively. Accounts payable increased $1.1 million in 1998 and decreased $0.9 million in 1997. Current income taxes payable increased $3.2 million in 1998 and increased $2.4 million in 1997. The increase in 1998 is a result of the increased in taxable income and the inability to give tax effect for the Company's share of the Universal loss as mentioned above. In the first quarter of 1998, the Company also reinvested $0.5 million of interest earned on marketable securities. Net cash used in investing activities was $1.1 million in 1998, consisting of expenditures for property and equipment of $2.3 million and the decrease in the Universal investment of $1.1 million. In 1997, cash flow from investing activities consisted of $1.8 million used for capital expenditures. In 1998, net cash used in financing activities of $0.1 million included $0.2 for payments on the capitalized warehouse lease, this was offset by $0.1 of proceeds from the exercise of stock options. In 1997, net cash provided by financing activities was $0.2 million. These funds represented payments on the capitalized warehouse lease. The Company has a $7.0 million bank line of credit facility bearing interest at the bank's prime rate. Under terms of the facility, the Company must comply with one financial covenant, the ratio of total liabilities to tangible net worth. As of March 31, 1998, the Company was in compliance with this covenant and there were no amounts outstanding on the line of credit. The credit agreement expires in June 1998, at which time the Company expects that it will be renewed. As of March 31, 1998, there were no borrowings outstanding under the line of credit and outstanding letters of credit were approximately $1.6 million ($1.1 million of which related to a standby letter of credit required by the State of California to be self-insured for worker's compensation). The Company leases its 880,000 square foot single level warehouse and distribution facility under a lease accounted for as a capital lease. The lease requires monthly payments of $70,000 and accrues interest at an annual rate of 7.0%. At the lease expiration in December 2000, the Company has the option to purchase the facility for $10.5 million. The Company currently intends to exercise the option at the end of the lease. If the Company does not exercise the purchase option, the Company will be subject to a $7.6 million penalty. The Company plans to open new stores at a targeted annual rate of 20%. The average investment per new store opened in 1996, including leasehold improvements, furniture, fixtures and equipment, inventory and pre-opening expenses, was approximately $650,000. Inventory and pre-opening expenses are not capitalized by the Company. The Company's cash needs for new store openings are expected to total approximately $8.5 million in each of 1998 and 1999. The Company's total planned expenditures in each of 1998 and 1999 for additions to fixtures and leasehold improvements of existing stores are approximately $600,000. The Company believes that its total capital expenditure requirements (including new store openings) will increase to approximately $11.4 million and $11.6 million in 1998 and 1999, respectively. Capital expenditures in 1998 and 1999 are currently expected to be incurred primarily for new store openings, improvements to existing stores and system and general corporate infrastructure. The Company believes that cash flow from operations, availability under its credit agreement and the net proceeds from its planned offering will be sufficient to meet operating needs, capital spending requirements and the retirement of Universal debt and payment of overdue accounts payable of Universal for at least the next twelve months. Year 2000 The Company has completed an assessment of its existing software systems and after reviewing various factors, one of which being the year 2000 issue, has determined that certain modifications or upgrades to or replacements of certain software is required. The Company anticipates that the required changes to its existing computer systems will be substantially completed no later than mid-1999. The year 2000 project cost is not anticipated to have a material effect on the results of operations. The costs of the project and the date on which the Company believes it will complete the changes to its computer systems are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. The project is scheduled to be completed no later than mid-1999. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBIT 27.01 Financial Data Schedule (B) Item 5. 8-K filed on April 21, 1998 (C) Item 5. 8-K filed on May 1, 1998 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. 99 CENTS ONLY STORES Date: July 24, 1998 /s/ Andrew A. Farina Andrew A. Farina Vice President Finance EXHIBIT 27.1 99 Cents Only Stores Financial Data Schedule 3-mos Dec 31 1998 Jan 01 1998 March 31 1998 [CASH] 2,338 [SECURITIES] 25,579 [RECEIVABLES] 2,718 [ALLOWANCES] (152) [INVENTORY] 43,598 76,388 [PP&E] 41,930 [DEPRECIATION] (11,195) 126,350 13,902 [BONDS] 0 0 [PREFERRED] 0 [COMMON] 66,267 34,642 126,350 [SALES] 62,882 62,882 [CGS] 39,839 14,424 338 0 189 8,092 3,551 4,541 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 4,541 0.24 0.24 Retained Earnings -----END PRIVACY-ENHANCED MESSAGE-----