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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-26531
99 CENT STUFF INC.
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(Exact name of registrant as specified in its charter)
Florida 77-0398908
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(State of incorporation) (IRS employer identification number)
1801 Clint Moore Road
Boca Raton, Florida 33487
(561) 999-9815
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(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value, Warrants expiring December 31, 2006
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The approximate aggregate market value of the voting and non-voting
common equity held by non-affiliates of the issuer as of June 30, 2003 was
$1,500,000. The number of shares outstanding of the issuer's common stock as of
March 15, 2004 was 5,832,950.
Documents Incorporated by reference: None.
PART I
Item 1. BUSINESS
Overview
99 Cent Stuff is a Florida-based single-priced value retailer of
primarily name-brand, consumable merchandise. Our stores offer a wide assortment
of regularly available consumer goods as well as a broad variety of
first-quality, closeout merchandise. Every product is sold at 99 cents,
including extra value savings of two or three items for 99 cents. We feature
consumer staples such as produce and bread to encourage our customers to visit
our stores frequently. We believe that our strategy of value cultivates
customers as long-term clients of our stores by virtue of our assortment of
consistently replenishable merchandise, branded goods, 99 cent pricing and
convenient accessible locations. The value concept also increases the frequency
of consumer visits and impulse purchases and reduces our exposure to seasonality
and economic cycles. By offering merchandise in an attractive, convenient and
familiar environment, we believe that our stores appeal to a wide demographic of
customers.
We opened our first store in 1999 and operate 11 retail stores in south
Florida. Our 99 Cent Stuff stores are located in neighborhood shopping centers
where consumers are more likely to do their regular household shopping. These
stores have an average size of approximately 20,000 saleable square feet and in
2003 average net sales per store was $3.8 million for stores open the full year.
In 2003, our average sale per customer was $9.36.
99 Cent Stuff Stores' management team has many years of retail
experience including in the value merchandise sector. Our chairman and chief
executive officer, Raymond Zimmerman was chief executive of Service Merchandise
Company, a multi-billion dollar retail chain. All of our other senior management
have extensive retail experience.
INDUSTRY BACKGROUND
Value retail is generally distinguished from other retail formats by
the purchase of closeout 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. As a result, stores
offer a continually changing selection of brands and products. According to a
2002 research report by Merrill Lynch, over the last five years, this segment
has grown at roughly twice the pace of the remainder of the retail industry and
is one of the fastest growing retail sectors in the United States. The recent
economic downturn and difficult consumer environment has not materially impacted
this segment as demonstrated by the financial results of other companies in this
sector.
The sale of closeout or special-situation merchandise developed in
response to the need of manufacturers, wholesalers and others to distribute
merchandise outside their normal channels. This merchandise becomes available
for a variety of reasons, including
o a manufacturer's over-production for seasonal or other
reasons,
o discontinuance due to a change in style, color, size or
packaging,
o the inability of a manufacturer or wholesaler to move
merchandise effectively through regular channels, and
o the financial needs of the manufacturer.
Many value retailers also sell merchandise that can be purchased from a
manufacturer or wholesaler on a regular basis. Although this merchandise is
usually purchased at less than the original wholesale cost and sold below normal
retail cost, the discount, if any, however, is generally less than with closeout
merchandise. Value retailers sell regularly available merchandise to ensure a
degree of consistency in their product offerings and to establish themselves
with customers as a reliable source of basic goods.
The critical factor that drives success in the deep discount industry
is effective inventory purchasing and management. Purchasing is based on the
ability to make timely payment and to immediately take delivery of merchandise.
2
OUR STRATEGY
Our goal is to operate stores providing continuous value to customers
on a wide variety of merchandise. We strive to exceed our customers'
expectations of the range and quality of name-brand consumables that can be
purchased for 99 cents. Our strategies to achieve this goal include the
following:
Emphasize "Name-Brands". We believe that customers visit our stores in
search of name-brand consumable merchandise that can be purchased for 99 cents.
During 2003, we purchased from more than 500 suppliers, including merchandise
with the brand names Heinz, Conagra, General Mills, Colgate-Palmolive, Eveready
Battery, Gerber Products, Hershey Foods, Johnson & Johnson, Kraft General Foods,
Lever Brothers, Mattel, Nabisco, Nestle, Pillsbury, Procter & Gamble, Revlon and
SmithKline Beecham.
Carry A Wide Selection Of Regularly Available Merchandise. Our retail
stores offer consumer items in many staple product categories, including food,
beverages, health and beauty aids, household products, housewares, hardware,
stationary and party goods, seasonal goods, baby products and toys, giftware,
pet products and clothing. To ensure that our merchandise offering is complete,
we also offer non-name brand items or private label items from other retailers.
By consistently offering a wide selection of consumable items, we encourage
customers to frequently visit our stores for their everyday household needs.
Effective Store Layout. Our stores are designed for visual appeal and
functionality and are attractively merchandised, brightly lit and
well-maintained. The stores are organized in a "supermarket" format with items
in the same category grouped together. Our prototype stores average 20,000
saleable square feet, which is significantly larger than most of our
competitors. This size store allows us to more effectively display a wide
assortment of merchandise, carry deep stock positions and provide customers with
a more inviting and convenient environment that encourages customers to shop
longer and buy more. Our stores feature central checkout lanes, scanning at
point of sale and shopping carts.
Strong Supplier Relationships. Our goal is to develop a reputation as a
reliable purchaser of name-brand, quality merchandise at discount prices. We
strive to achieve this goal using our experienced buying staff to make immediate
buying decisions and take timely possession of merchandise, pay promptly, honor
all issued purchase orders and purchase goods close to a target season or out of
season. We have been able to improve our supplier relationships by quickly
selling name-brand merchandise without advertising.
Careful Purchasing To Increase Margins. We strive to maintain a lean
operating environment focused on increasing operating margins. To reach this
goal, we purchase merchandise at substantially discounted prices as a result of
our buyers' knowledge, experience and negotiating skills and ability to select
desirable merchandise.
EXPANSION STRATEGY
The Florida market is rapidly growing and is the fourth most populous
state, with over 16 million residents or nearly 6% of the nation's population.
All of the current stores are in Miami-Dade, Broward and Palm Beach counties,
which include Miami, Ft. Lauderdale and West Palm Beach. These densely populated
counties have experienced high growth and are expected to continue to grow in
the future. We currently plan to open three to seven stores in 2004. We believe
that we could open up to 25 additional locations in south Florida in the next
few years. By continuing to focus our store openings in south Florida for the
immediate future, we can leverage our brand awareness and take advantage of our
existing warehouse and distribution facility and other management and operating
efficiencies.
We believe that our value concept is easily replicated in most other
populated areas of Florida and the southeastern U.S. Other areas of Florida are
also experiencing explosive growth and we are developing plans to open up in
other major metropolitan areas in Florida such as the Tampa, Orlando,
Jacksonville and Naples/Fort Myers areas.
As a result of our expansion plans, we developed a warehouse and
information systems for a substantially larger chain. Management believes that
the operating infrastructure we have in place today is capable of integrating a
significant number of new stores with minimal increase in corporate, warehouse
and
3
other infrastructure expenses. Virtually all of our senior management executives
have held similar positions at retail chains of substantially greater size. We
believe that our buying teams have sufficient levels of experience to support
our expected new store growth.
TARGET CUSTOMERS
We target value-conscious consumers from a wide range of socio-economic
backgrounds with a diverse ethnic mix and other demographic characteristics. We
have placed our stores in areas where there are at least 50,000 to 100,000
residents within a three-mile radius and where most households have income
ranging from $20,000 to $50,000. While most of our targeted customers are low
middle to middle income workers, higher income customers are also attracted by
the everyday values. The ages of our customers are distributed over the full
spectrum of ages. We believe that our stores have a relatively small shopping
radius, which allows us to concentrate multiple stores in a single market.
OUR STORES
Our stores offer customers a wide assortment of regularly available
consumer goods as well as a broad variety of quality, closeout merchandise, all
at discounted prices. All merchandise sold in our stores sells for 99 cents per
item or multiple units for 99 cents.
The following table sets forth relevant information with respect to the
growth of our existing 99 Cent Stuff store operations:
YEAR ENDED DECEMBER 31,
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- ----------
99 Cent Stuff Stores retail sales $ 3,980,000 $14,220,000 $35,890,000 $38,661,000 $39,580,000
99 Cent Stuff Stores annual sales 256.9% 152.4% 7.7%
growth rate
99 Cent Stuff Stores open at 0 3 8 10 11
beginning of year
99 Cent Stuff Stores open at end 3 8 10 11 11
of year
Average 99 Cent Stuff Stores -- $ 3,967,000 $ 3,678,000 $ 3,654,000 $ 3,871,000
sales per store for stores open
the full year
Saleable square feet at year end 49,000 158,000 172,000 189,000 165,000
Average net sales per saleable $ 368 $ 229 $ 226 $ 214 $ 240
square foot
Merchandising. We believe that the appeal of our 99 Cent Stuff stores
arises from the perceived value in selling products that generally retail
elsewhere from $1.19 to $9.99, for only 99 cents per item or group of items.
Each store typically carries over 6,000 to 8,000 different stock keeping units
or SKUs. The merchandise sold in the stores primarily consists of a wide variety
of basic consumer items, including:
o Arts and crafts supplies o Frozen foods
o Bakery products o Gifts
o Beverages o Glassware
o Books o Grocery
o Candy and snacks o Health and beauty aids
o Canned goods o Home hardware and automotive
o Cereals and crackers o Household/kitchen plastic products
o Cleaning supplies o Office and School Supplies
o Costume jewelry o Paper products
o Domestics o Fresh produce and flowers
o Ethnic foods o Pet food and supplies
o Seasonal goods
Approximately 70% of our products sold are food and candy, health and
beauty aids, household basics and seasonal goods.
4
Although our stores regularly carry a variety of basic household
consumer items, unlike typical discount retail stores, we do not continuously
stock complete lines of merchandise. Although some of the merchandise we
purchase is available for reorder, the mix of brands and products frequently
changes, depending upon the availability of merchandise at suitable prices. In
some of the stores we offer additional ethnic food products that are targeted to
the store's local customer base. To date, we have found that there is an
adequate supply of name brand closeouts and re-orderable merchandise available
to purchase at attractive prices. We believe that continuously changing specific
name-brands found in stores from one week to the next encourages impulse and
larger volume purchases and results in customers shopping more frequently.
Unlike many discount retailers, we rarely impose a limit on the quantity of
specific items that may be purchased by a single consumer.
Store Characteristics. All 11 of our 99 Cent Stuff Stores are located
in south Florida. Our stores average 20,000 square feet. We currently target new
store locations of 15,000 to 20,000 square feet. The larger stores allow us 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 stores are located in neighborhood shopping centers where consumers
are more likely to do their regular household shopping. We seek locations where
there is another anchor tenant such as a discount superstore or supermarket due
to the traffic at that location. The stores are located primarily in more
densely populated, demographically diverse neighborhoods. Four of the stores are
in Miami-Dade County, four are in Palm Beach County and three are in Broward
County.
Our stores are attractively merchandised, brightly lit,
well-maintained, "destination" locations. The layout of each of the stores is
customized to the size and configuration of the individual location and the
desire to focus on particular product lines from time to time. The interior of
each store is, however, designed to reflect a uniform format, like a typical
supermarket, featuring traditional 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 and price tags. Merchandising displays are
maintained throughout the day, change frequently and often incorporate seasonal
themes. We believe that due to the continuously changing brand-names and layout,
the typical customer tends to shop the whole store.
Customer purchases are by cash, credit and debit cards or check. The
stores do not currently accept manufacturers' coupons and we are adding food
cards on a store by store basis. The stores are generally open 9 A.M. to 9 P.M.
every day.
Store Management. Typically a store is staffed with a manager and an
assistant manager. We currently employ one district manager responsible for
store operations. In the future, each district manager will be responsible for
approximately fifteen stores. The store managers report to the district manager
and the district manager report to the CEO. The District manager visits each
store at least twice a week and focuses on the implementation of policies,
operations and merchandising philosophy. The district manager also helps train
store management and assist store management with scheduling.
Advertising/Promotion. To date, we have done limited advertising.
Initial awareness of new store openings is created using local newspaper "grand
opening" ads and pre-opening handout flyers. For future store openings, we plan
to use a grand opening promotional campaign that will include distribution of an
advertising flyer and possibly radio and television spots. Our stores feature
bright colorful signing to grab customers' attention and emphasize everyday
values. We also use in-store coupons to entice customers to purchase multiple
items and to return for future purchases of the same item.
New Store Costs. The total cost of a new store ranges from
approximately $400,000 to $650,000. The capital investment for each new store
ranges from $150,000 to $300,000, depending on landlord allowances and existing
improvements, and a least $250,000 required for opening inventory. We also spend
approximately $30,000 for pre-opening expenses. To date, we have not financed
any of the capital expenditures through third parties but may do so in the
future in order to leverage our resources.
5
PURCHASING
Our purchasing department staff consists of five buyers. Substantially
all merchandise buying decisions are made at headquarters. We believe a primary
factor contributing to our success will be our ability to identify and take
advantage of opportunities to purchase merchandise with high customer interest
at lower than regular wholesale prices. We purchase most of our merchandise from
wholesalers, manufacturers, importers and other retailers. All of our purchases
are for cash. Over time, we expect that our purchases directly from the
manufacturer will increase substantially to up to 50% of our purchases. We
continually seek to develop new sources of merchandise primarily by attending
industry trade shows, and through advertising, marketing brochures and
referrals. Our buyers also regularly travel to New York, Los Angeles, Chicago
and Toronto to source identify, inspect and purchase new merchandise.
We do not have any contracts for the purchase of merchandise and we
continuously seek out buying opportunities from both existing suppliers and new
sources. Other than our produce supplier, which represented approximately 27% of
our total purchases due to the high turnover of inventory, no single supplier
accounted for more than 5% of total purchases in 2003. During 2002, we purchased
from more than 500 suppliers, including merchandise with the General Mills,
Colgate-Palmolive, Dial, Eveready Battery, Heinz, Conagra, General Electric,
Gerber Products, Gillette, Hershey Foods, Johnson & Johnson, Kraft General
Foods, Lever Brothers, Mattel, Nabisco, Nestle, Pillsbury, Procter & Gamble,
Revlon and SmithKline Beecham brand names. Some purchases are directly from the
manufacturer and some are from suppliers and distributors.
Approximately half of the merchandise we purchased is re-orderable and
the remainder was closeout or special-situation merchandise. Our buyers search
continuously for closeout opportunities and quality re-orderable merchandise.
Our experience and expertise in buying merchandise has enabled us to develop
relationships with many manufacturers that offer some or all of their closeout
and special-situation merchandise to us prior to attempting to sell it through
other channels because it can be moved quickly through our stores. Our
relationships with many manufacturers and distributors, along with our ability
to purchase in large volumes, also enables us to purchase re-orderable
name-brand goods at discounted wholesale prices. We believe that our
relationship with suppliers is further enhanced by our ability to minimize
channel conflict for the manufacturer by quickly selling name-brand merchandise
without, if requested by the supplier, advertising the item.
We believe that our relationships with our current suppliers is
excellent. Due to our cash flow problems that occurred until completion of our
offering, we were unable to purchase merchandise from certain suppliers because
we were unable to meet the payment schedules that the supplier required.
Instead, we purchased only from vendors that were willing to accept our payment
terms, which may have hurt our margins. In order to achieve the lowest prices,
many suppliers require payment prior to delivery of the goods or payment at the
time of delivery. Our inability to pay in advance has thus required us to pay
higher prices at certain times, limited our ability to purchase from those
suppliers that require payments not on terms or forced us to make late payment
penalties. A portion of the proceeds of our offering are being used to improve
our purchasing power, which should allow us to purchase from additional
suppliers at better prices by increasing our ability to pay on accelerated
terms.
WAREHOUSING AND DISTRIBUTION
We lease a 35,234 square foot, single level warehouse and distribution
facility in Miami, Florida. This site is conveniently located near freeway, rail
systems and ports. The distribution facility has 14 dock doors available for
receiving. Most of our merchandise is shipped directly from manufacturers and
other suppliers to this facility and the remainder is delivered directly to our
stores. We contract with local shippers to deliver merchandise to our stores
from the warehouse. Deliveries are made from our distribution center to each
store two to five times a week, depending on need. Most merchandise is
automatically replenished to our stores using a computerized stock distribution
model that orders new merchandise for delivery based on recent sales. Store
managers are generally required to order certain types of merchandise on a
weekly basis. The size of the distribution center allows storage of bulk
one-time closeout purchases and seasonal or holiday items without incurring
additional costs. We believe that the current warehouse and distribution
facility will be able to support distribution to approximately 25 total stores
in south Florida.
6
INVENTORY MANAGEMENT AND INFORMATION SYSTEMS
Our inventory management system records transactions by SKU from the receipt of
goods at the warehouse through the shipment to the stores. Most goods have UPC
barcodes to record sales allowing our point of sale or POS system to track the
merchandise. Tracking by UPC allows us to manage and track sales by SKU, vendor
and department. This allows us to identify sales trends early and to attempt to
purchase additional inventory of fast-moving items. It also identifies
slow-moving inventory on a timely basis so that we can develop orderly programs
to sell any slow-moving inventory in the ordinary course of business or to cut
back on future purchases of these items.
Our information technology is based on SBT Pro Series system. We have a
custom-designed POS system with a simple and efficient interface very specific
to the 99 cents price point. Checkout registers are fully integrated into the
POS system. The warehouse uses the SBT Purchase Order and Inventory Control
modules.
We intend to upgrade our inventory management technology to better
manage our inventories for growth beyond 20 stores. The new systems implemented
in this project will provide us with valuable sales information to assist our
buyers and improve merchandise allocation to our stores. Controlling our
inventory levels will result in more efficient distribution and store
operations.
COMPETITION
There are no major competitors in big-box, single-price deep discount
sector in our south Florida market at this time. However, we do face competition
in both the acquisition of inventory and sale of merchandise from other value
discount stores, traditional retail stores, grocery stores and mass
merchandisers. Similar concepts exist in other regional markets, such as
o 99 Cents Only Stores (NYSE: NDN), located primarily in California,
Arizona and Nevada;
o Dollar Tree (Nasdaq: DLTR), Family Dollar (NYSE: FDO) and Dollar
General (NYSE: DG) located nationally including Florida; and
o over 4,000 small retailers
We believe that our concept is most similar to 99 Cents Only. Family
Dollar and Dollar General offer multi-priced merchandise at prices of up to $30
and generally both operate smaller stores in urban locations catering to lower
income customers. Dollar Tree also offers less closeout merchandise than our
stores.
Industry competitors also include a large number of privately held
companies and individuals. There is increasing competition with other
wholesalers and retailers, including other value retailers, for the purchase of
quality closeout and other special-situation merchandise. Some of these
competitors have substantially greater financial resources and buying power than
us. Our ability to compete will depend on many factors including the success of
our purchase and resale of such merchandise at lower prices than the
competition. We may face intense competition in the future from new entrants in
the value retail industry, among others, that could take away our customers,
which could hurt our revenues.
TRADEMARKS AND SERVICE MARKS
The trademarks we own and use in connection with our goods and services
are not registered. There are several federally-registered trademarks containing
"99 Cents" and the owners of these trademarks may challenge the use of our name
and other marks which include "99 Cent". If challenged, we may be forced to
change the name of our stores and our other marks. We cannot assure you that we
will have the right to use our current name and other marks in the future.
Management believes that our current name and other trademarks have name
recognition value in our market but are not critical elements of our
merchandising strategy. We have applied for trademarks for some of our names but
cannot assure you that they will be granted.
7
EMPLOYEES
At March 5, 2004, we had 364 employees of whom 329 were in our retail
operations, 17 in our warehouse and distribution facility and 18 in our
corporate offices. None of our employees is party to a collective bargaining
agreement. We consider relations with our employees to be good. We offer certain
benefits, including health insurance, to our full time employees.
ITEM 2. PROPERTIES
All of our stores are leased. We typically seek leases with an initial
five-year to ten-year term and with one or more five-year options. We identify
potential sites through a network of contacts within the brokerage and real
estate communities. We expect that many of our new sites will be former big box
retailers or grocery stores. For some of the sites we have taken space that
exceeds our needs due to a desirable location or a favorable rent arrangement.
The following table describes the location and size of our properties.
SALEABLE SQUARE
LOCATION GROSS SQUARE FEET FEET DATE OPENED
- ------------------------------------ -------------------- -------------------- --------------------
Miami 24,207 18,155 October 1999
South Miami 22,000 16,500 October 1999
Boynton Beach 19,590 14,693 October 1999
Lake Worth 19,360 25,200 December 2000
West Palm Beach 19,235 14,520 January 2001
Coral Springs 20,432 14,426 December 2000
Delray Beach 20,000 15,324 November 2000
Deerfield Beach 44,000 15,000 January 2001
North Miami 17,760 25,080 April 2001
Commercial 22,000 17,000 May 2002
Northlake 12,000 11,000 June 2003
Miami Warehouse 35,234
Boca Raton Corporate Office 4,300
The initial terms of the leases expire from 2004 to 2015 and the base
rent varies from $2.75 to $9.00 per square foot. Most of the leases have renewal
options. Some of our leases are currently guaranteed by Raymond Zimmerman, our
chairman and principal shareholder. Mr. Zimmerman is paid a fee equal to 2% of
the amounts guaranteed.
At our Boca Raton corporate office we have our administrative,
purchasing, finance and information technology departments.
ITEM 3. LEGAL PROCEEDINGS
Winn-Dixie Stores v. 99 Cent Stuff--Trail Plaza LLC and Metropolitan
Life Insurance Company (Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida). In June 2000, Winn-Dixie Stores filed for an injunction
seeking to limit the sale of grocery items to 500 square feet in the Trail Plaza
store. No damages were sought. As a result of an injunction and other motions
granted in 2002, we must limit the sales of grocery items to 500 linear feet.
This restriction has negatively impacted the sales and profitability of this
store. In 2003 we were found in contempt of the injunction and in October 2003
we settled this matter through the payment of $175,000.
We are not currently a party to any other legal actions if determined
adversely that would materially affect us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the OTC Bulletin Board under the symbol
NNCT. The following table sets forth the range of high and low closing sale
price as reported by the OTC Bulletin Board for our common stock for the
quarters indicated. The prices have been adjusted for the 1-for-30 reverse split
and the additional 1-for-4 reverse split effective September 15, 2003. The OTC
Bulletin Board quotations represent quotations between dealers without
adjustment for retail mark-up, markdowns or commissions and may not represent
actual transactions.
2001 HIGH LOW
------ -------
January 1 to March 31 $18.00 $15.60
April 1 to June 30 $16.80 $ 6.00
July 1 to September 30 $16.80 $ 6.00
October 1 to December 31 $ 7.20 $ 3.36
2002
January 1 to March 31 $ 9.60 $ 6.00
April 1 to June 30 $ 6.00 $ 6.00
July 1 to September 30 $ 9.00 $ 4.80
October 1 to December 31 $14.40 $ 6.00
2003
January 1 to March 31 $10.80 $ 4.80
April 1 to June 30 $12.00 $ 7.20
July 1 to September 30 $ 9.75 $ 6.05
October 1 to December 31 $ 9.60 $ 5.10
As of March 1, 2004, there were approximately 450 record holders of the
Common Stock. In addition, there were approximately 700 shareholders in street
name whose shares are held in the name of other nominees. The transfer agent for
the common stock is Signature Stock Transfer, Inc., Dallas, Texas.
Our warrants are quoted for trading on the OTC Bulletin Board under the
symbol "NNCTW".
DIVIDEND POLICY
We intend to retain all our earnings to finance the growth and
development of our business. We do not anticipate paying any cash dividends on
our common stock in the foreseeable future. Any future change in our dividend
policy will be made at the discretion of our board of directors and will depend
on any applicable contractual restrictions on us contained in our financing
credit facilities and other agreements, our results of operations, earnings,
capital requirements and other factors considered relevant by our board of
directors.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the merger of 99 Cent Stuff LLC with and into
iVideoNow, Inc. an aggregate of 4,750,000 shares of its common stock was issued
to Raymond Zimmerman and family members in exchange for outstanding limited
liability company interests. The transaction was an exempt transaction under
Section 4(2) of the Securities Act of 1933.
On June 30, 2003, we compensated Keating Investments, LLC by issuing
33,333 shares of our restricted common stock in connection with the Agreement of
Reorganization between 99 Cent Stuff and iVideoNow. The president and 60% owner
of Keating Investments is Timothy J. Keating, who is the son of Kevin R.
Keating, who was president and a director at the time and is currently a
director. Such transaction was exempt from registration under Section 4(2).
On December 31, 2003, Raymond Zimmerman converted $330,000 of payables
owed to him into 66,000 shares of restricted common stock. He then gifted such
shares to family members. The transaction was an exempt transaction under
Section 4(2) of the Securities Act of 1933.
9
ITEM 6. SELECTED FINANCIAL DATA
PERIODS ENDED DECEMBER 31
--------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(in thousands, except per share numbers)
STATEMENT OF OPERATIONS
DATA
Net sales $ 3,985 $ 14,219 $ 35,889 $ 38,661 $ 39,580
Cost of goods sold 3,197 10,571 26,261 28,683 28,583
-------- -------- -------- -------- --------
Gross profit 788 3,648 9,628 9,978 10,997
Selling, general
administrative expenses 2,808 8,273 14,558 14,035 13,552
-------- -------- -------- -------- --------
Loss from operations (2,020) (4,625) (4,930) (4,057) (2,555)
-------- -------- -------- -------- --------
Other expense 125 (648) (1,581) (1,288) (1,160)
-------- -------- -------- -------- --------
Net loss $ (2,145) $ (5,273) $ (6,511) $ (5,345) $ (3,715)
======== ======== ======== ======== ========
Net loss per share $ (0.45) $(1.11) $ (1.37) $ (1.13) $ (0.77)
======== ======== ======== ======== ========
Weighted average
common
shares outstanding 4,750 4,750 4,750 4,750 4,833
PERIODS ENDED DECEMBER 31
--------------------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
BALANCE SHEET DATA (1):
Working capital
(deficit) $ (3,362) $ (817) $ (3,254) $ (1,157) $ (247)
Total assets 4,020 8,693 7,881 5,817 5,732
Total long term debt -- -- -- 3,200 10,570
Total equity (deficit) $ (2,146) $ 3,486 $ (661) $ (4,684) $ (8,069)
- ----------
(1) The balance sheet data has been restated to give effect to the conversion
of the related party notes payable and accrued interest to shareholders'
equity of $10,905 at December 31, 2000 and $14,592 at December 31, 2001 and
2002.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
99 Cent Stuff is a Florida-based single-priced deep-discount retailer
of primarily, consumable general merchandise. Our stores offer a wide assortment
of regularly available consumer goods as well as a broad variety of quality,
closeout merchandise. Our product offerings are comprised of brand name
merchandise and closeouts merchandise that may be available for reorder. Every
product is sold for 99 cents or less. We provide our customers value on their
everyday household needs and a positive shopping experience in
customer-service-oriented stores, which are attractively merchandised, brightly
lit and well maintained. We believe that our name-brand focus, along with a
product mix emphasizing value-priced food and beverage and other everyday
household items, increases the frequency of consumer visits and impulse
purchases and reduces some of our exposure to seasonality and economic cycles.
We believe that our format appeals to value-conscious customers in all
socio-economic groups and results in a high volume of sales.
We operate 11 retail stores in south Florida. We opened our first three
stores in 1999, five stores in 2000, two stores in 2001 and one in 2002. In
early 2003 we closed one store and opened a new one in mid-2003. In the past, as
part of our strategy to expand retail operations, we have opened new stores in
close proximity to existing stores so that would be more efficient in
distribution, marketing and branding. We have built corporate and warehouse
support staff and systems that we believe can handle our planned expansion. As a
result of our start-up costs, operating costs and these expenses, we have
recorded losses since inception.
Our customers use cash, checks and third-party credit and debit cards
to purchase our products. We do not issue private credit cards or make use of
complicated financing arrangements.
99 Cent Stuff only operates in one business segment, which is retail
operations.
The key to achieving profitability in the value business is to be able
to rapidly purchase goods and be able to pay within terms in order to obtain the
lowest prices. Due to our lack of operating cash, we have not been able to
purchase inventory in the most efficient fashion and we have incurred lower
margins than some of our competitors. This has also affected our revenues. We
need the proceeds of this offering so that we can effectively purchase inventory
and increase our gross margins to satisfactory levels.
Our success depends in large part on our ability to locate and purchase
quality closeout and special-situation merchandise at attractive prices. 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, value, discount and deep-discount chains, mass merchandisers, food
markets, drug chains, club stores and various privately-held companies and
individuals.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts. The estimates
and assumptions are evaluated on an on-going basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to, fixed asset lives,
intangible assets, income taxes, and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. 99 Cent Stuff believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of the financial statements.
Revenue recognition: Revenue is recognized at the point of sale.
Inventory: Our accounting for inventory and cost of goods sold requires
us to estimate the value of such assets and cost of such assets sold and to
continually assess whether such assets are impaired and the cost of goods sold
is presented fairly. We believe that at December 31, 2003 and 2002 that no
inventory is impaired.
11
Further information is provided in Note 2 to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net sales. Net sales increased $0.9 million, or 2.4%, from $38.7 million in 2002
to $39.6 million in 2003. Same store net sales, for stores open all of both
periods, increased $2.6 million in 2003, or 8.1%, compared to the prior year.
The increase in net sales was primarily due to increased volume in produce.
During the 2003 period, approximately 26.5% of our sales were of produce, which
has a much higher turnover the other items sold in our stores. We anticipate
that sales of produce will decrease as a percentage of net sales due to
increased purchasing of higher margin items.
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $1.0 million, or 10.2%, from $10.0 million in 2002 to $11.0 million
in 2003. The increase in gross profit dollars was primarily due to higher sales
volume. As a percentage of net sales, gross profit increased 2.0% from 25.8% in
2002 to 27.8% in 2003 and was primarily attributable to a change in the product
mix, cost variations, primarily in food products, and reduced shrinkage,
partially offset by increased sales in produce, which generally has lower
margins.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, decreased $0.4 million in 2003, or 2.9%, from $14.0 million in
2002 to $13.6 million in 2003 and was primarily attributable to decreased wages
and related benefits, rents and related expenses and professional fees of $1.0
million, $0.2 million and $0.1 million respectively, partially offset by
increases in insurance and miscellaneous other - net, of $0.5 million and $0.4
million respectively.
Operating loss. Operating loss decreased $1.5 million, or 37.0%, from $4.1
million in 2002 to $2.6 million in 2003. As a percentage of net sales, operating
loss decreased 4.0% from 10.5% in 2002 to 6.5% in 2003 and is primarily
attributable to increased net sales and gross profit and decreased SG&A
expenses.
Other (income) expense. Interest expense decreased $0.1 million, or 7.8%, from
$1.3 million in 2002 to $1.2 million in 2003. The increase is primarily
attributable to increased borrowings, partially offset by lower interest rates.
As a percentage of net sales, interest expense decreased 0.4%, from 3.5% in 2002
to 3.1% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $1.6
million, or 30.5%, from $5.3 million in 2002 to $3.7 million in 2003.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales. Net Sales increased $2.8 million, or 7.7%, from $35.9
million in 2001 to $38.7 million in 2002. The increase was primarily
attributable to the effect of one new store opened in 2002 and the full year
effect of one store opened in 2001. Same store net sales, for the nine stores
open all of both years, decreased $0.1 million in 2002, or 0.4%, vs. a year ago.
The decrease in same store net sales was primarily due to a legal action
enforcing a provision in the lease for one of our stores limiting the sales of
grocery items to 500 square feet instead of the 7,500 square feet in most other
stores.
Gross Profit. Gross Profit increased $0.4 million, or 3.6%, from $9.6
million in 2001 to $10.0 million in 2002. The increase in gross profit was
primarily attributable to higher sales volume. As a percentage of net sales,
gross profit decreased 1.0% from 26.8% in 2001 to 25.8% in 2002 and was
primarily attributable to increased produce sales, a lower margin item, and a
change in the product mix in one store due to the legal action discussed above
that limited the sales of high margin grocery items.
Selling, General and Administrative. SG&A decreased $0.5 million, or
3.6%, from $14.5 million in 2001 to $14.0 million in 2002. The decrease was
primarily attributable to a decrease in payroll and related costs of $0.6
million and insurance of $0.3 million, partially offset by increase in rent of
$0.3 million. SG&A for 2002 included $174,518 of an advance to John Isaac, Jr.,
who was the head of stores, which was forgiven when his employment terminated
and included as compensation. There were no material increases or decreases in
any other category. As a percentage of net sales, SG&A decreased 4.3% from 40.6%
in 2001 to 36.3% in 2002.
12
Operating Loss. Operating loss decreased $0.8 million, or 17.7%, from
$4.9 million in 2002 to $4.1 million in 2002. As a percentage of net sales,
operating loss decreased 3.2% from 13.7% in 2001 to 10.5% in 2002 and was
primarily attributable to increased net sales and gross profit and decreased
SG&A expenses.
Other (Income) Expense. Interest expense decreased $0.3 million, or
16.6%, from $1.6 million in 2001 to $1.3 million in 2002. The decrease was
primarily attributable to lower interest rates in 2002, partially offset by
increased borrowings. As a percentage of net sales, interest expense decreased
1.0% from 4.5% in 2001 to 3.5% in 2002.
Net Loss. Net loss decreased $1.2 million, or 17.9%, from $6.5 million
in 2001 to $5.3 million in 2002 and was primarily attributable to the items
discussed above. As a percentage of net sales, net loss decreased 4.3 % from
18.1% in 2001 to 13.8% in 2002.
LIQUIDITY AND CAPITAL RESOURCES
From inception on June 28, 1999 to February 2004, we were funded
principally from loans provided by Raymond Zimmerman, our principal shareholder
and bank loans personally guaranteed by Mr. Zimmerman, and have not generally
relied upon other external sources of financing. Virtually all of our fixed
assets, including fixtures and equipment, have been purchased using advances
made to 99 Cent Stuff from Mr. Zimmerman. Our capital requirements result
primarily from purchases of inventory, expenses related to new store openings
and working capital requirements for new and existing stores. We take advantage
of closeout and other special-situation opportunities, which frequently result
in volume purchases requirements, and as a consequence, our cash requirements
are not constant or predictable during the year and can be affected by the
timing and size of our purchases.
Our negative working capital as of December 31, 2003 was due to
o $5.8 million of property and equipment acquired,
o cash shortfall due to operating losses, and
o increases in accounts payable due to operating losses.
Net cash used by operations was $2.2 million in 2003 and $2.1 million
in 2002. Net cash used by operations during the 2003 period included a net loss
of $3.7 million, depreciation of $0.9 million, an increase in inventory of $0.3
million and accrued interest, related party of $1.1 million. Net cash used by
operations during 2002 included a net loss of $5.3 million, a decrease in
inventories of $1.2 million, and a decrease in accounts payable of $0.8 million.
We are currently using approximately $150,000 per month of cash in operations
and expect to continue with a negative cash flow from operations until we are
able to implement the use of proceeds from our offering to increase inventory,
which we expect will increase sales and margins and thus positively impact cash
flow from operations. A decrease in operating cash flow from current levels
would greatly reduce the availability of funds and would force us to obtain
additional capital from either Mr. Zimmerman or elsewhere.
Net cash used in investing activities for purchases of property and
equipment was $0.3 million in 2002 and 2003.
Net cash provided by financing activities was $2.5 million in 2003,
primarily due to $2.4 million of borrowings under a line of credit offset by
decreases in cash overdrafts of $0.4 million and increases in accounts payable
and accrued interest, related party of $0.5 million. Net cash provided by
financing activities was $2.4 million in 2002. Net cash provided by financing
activities reflects increases in borrowings under a line of credit personally
guaranteed by Mr. Zimmerman in the amount of $2.4 million during 2003 and $0.3
million in 2002.
At December 31, 2003, Mr. Zimmerman had advanced an aggregate of $4.9
million, which was carried on the balance sheet as accounts payable and accrued
expenses, related party. The note payable was $14.6 million at December 31,
2002. Interest was accrued at a rate equal to the prime rate plus 2%. The note
payable was converted into 4,750,000 shares of common stock as part of the
merger with iVideoNow. In November 2003, Mr. Zimmerman loaned us an additional
$500,000, to provide cash reserves pending the completion of the offering.
13
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million
lines of credit with Bank of America. As a result of these guarantees, the
interest rate on these lines has been prime minus 1%, which we believe would be
several points higher without the guarantee. Also as a result of the personal
guarantees, these lines of credit do not have any financial covenants or ratios
and the only events of default are standard payment defaults. Mr. Zimmerman has
also guaranteed some of our property leases. The lease guarantees will terminate
when our shareholders' equity is at least $3 million. We have been accruing fees
of 2% of the lines of credit and the guaranteed property leases. The accrued
fees of $0.1 million as of December 31, 2003 have been included in the accounts
payable and accrued expenses, related party.
At December 31, 2003, approximately $0.4 million was available under
these lines. In February and March 2004, we paid down the lines by approximately
$3.4 million from the proceeds of the public offering.
In addition, Mr. Zimmerman has advanced and interest has been accrued
on the notes payable of approximately $0.5 million at December 31, 2003 that has
been carried as accounts payable, related party, of which $3.7 million was
outstanding at December 31, 2002. These funds were used for equipment purchases,
interest accrued on the unpaid balances and working capital. These amounts and
all other amounts that may be accrued or advanced prior to the completion of
this offering are being converted into a convertible note and not into common
stock. This note is due December 1, 2005 and bears interest at the prime rate.
The note is convertible into common stock at the option of the holder at a
conversion price equal to $5.00, subject to adjustment. We will have the right
to prepay the note at any time.
In addition to the commitments described above, our future capital
expenditures will depend primarily on the number and timing of new stores we
open. We have identified 10 locations that we will target for new stores in new
and existing markets. We plan to open between three and seven additional new
stores by the end of 2004. Net capital expenditures for a new store are expected
to average approximately $150,000 to $300,000, depending on landlord allowances
and existing improvements. The average inventory investment for a new store is
approximately $250,000. Pre-opening expenses, such as marketing, salaries,
supplies and utilities, are expected to average approximately $30,000 per new
store and are expensed as incurred. To date, we have not entered into any type
of capital or operating leases for the new store build-out but anticipate doing
so in the future to leverage our resources.
In connection with store openings, we have projected our capital
expenditure needs in 2004 to be approximately $1.4 million.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables summarize our contractual obligations and
commercial commitments as of December 31, 2003:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
SIGNIFICANT CONTRACTUAL OBLIGATIO TOTAL WITHIN 1YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
--------------------------------- ----- ------------ ----------- ------------ -------------
Operating Leases $2,300,000 $3,000,000 $3,500,000 $4,600,000
Capital Leases --
We are committed under noncancelable operating leases for all store and
office spaces, expiring at various dates through 2015. These leases generally
provide minimum rent plus payments for real estate taxes and operating expenses,
subject to escalations, and some of them also require us to pay contingent rent
based on sales. As of December 31, 2003, our lease payment obligations under
these leases totaled $2.4 million for 2003, and an aggregate of $8.3 million
through 2015. We do not have any capital leases.
Our current warehouse facility should be sufficient at least through
2004 and we believe that we may be able to obtain a larger space able to support
additional stores for the same rent if we move when the current lease expires in
2004. A move would not involve a material amount of capital. It is possible that
we would upgrade our inventory management system in 2005 if we have at least 20
stores open at that time. The cost of this upgrade cannot be estimated at this
time.
14
We expect to spend significant additional capital primarily for opening
new stores, reducing accounts payable and increasing our inventory. We believe
that the net proceeds from our offering, together with our improvements in our
expected operating results, will be sufficient to meet our operating and capital
needs for at least the next 12 months. It is possible that we may be required to
raise additional financing in some future period through public or private
financings, strategic relationships or other arrangements even if the minimum
units are sold or we are unable to achieve increased operating margins. Other
than the existing Bank of America lines of credit, there are not currently any
other borrowing arrangements or commitments for any capital. While Mr. Zimmerman
has indicated he will provide additional capital or guarantees in the future, he
is under no obligation to do so. We may not be able to raise additional funds
when needed, or on acceptable terms, or at all. Also, any additional equity
financings may be dilutive to shareholders, and debt financing, if available,
may involve restrictive covenants.
SEASONALITY AND QUARTERLY FLUCTUATIONS
99 Cent Stuff has historically experienced some seasonal fluctuation in
our net sales, operating expenses and net loss. The highest sales periods are
the Christmas and Halloween seasons, although the Christmas season does not
increase as much as many other retailers because a high proportion of our
products are for every day use and not gifts. A greater amount of our net sales
and operating income is generally realized during the fourth quarter. Quarterly
results of operations may also fluctuate significantly as a result of a variety
of other factors, including the timing of certain holidays, such as Easter and
the timing of new store openings and the merchandise mix.
NEW AUTHORITATIVE PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for classifying and measuring as liabilities
certain financial instruments that have characteristics of both liabilities and
equity. This statement is effective immediately for instruments entered into or
modified after May 31, 2003 and for all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003. However, the provisions of SFAS No. 150 will be applied to mandatorily
redeemable instruments of nonpublic companies in fiscal periods beginning after
December 15, 2003. Early adoption of SFAS No. 150 is not permitted. Application
of this
15
standard to pre-existing instruments will be recognized as a cumulative effect
of a change in accounting principle. The provisions of this statement require
that any financial instruments that are mandatorily redeemable on a fixed or
determinable date or upon an event certain to occur be classified as
liabilities. We do not believe that the adoption of SFAS 150 will have a
material impact on our financial position or results of operations.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
If any of the following risks and uncertainties actually occur, our
business' financial condition or operating results may be materially and
adversely affected. In this event, the trading price of our common stock may
decline and investors may lose part or all of their investment.
WE HAVE HAD LOSSES SINCE INCEPTION IN 1999, WHICH HAS AFFECTED OUR WORKING
CAPITAL.
We had losses of $1.6 million in 2003 and $5.3 million in 2002. We
cannot assure you that we will have a profit in 2004 or any future year. Due to
these losses, we had a negative working capital of $.2 million at December 31,
2003 and have continued to need cash for operations. This amount includes
approximately $4.9 million owed to Raymond Zimmerman, our chairman and principal
shareholder, at December 31, 2003 after conversion of $14.6 million of debt to
equity. Our losses since inception in 1999 are due to
o costs associated with the opening of all of its stores,
o delays in opening stores and the costs of carrying extra inventory
and rent,
o inability from time to time to properly purchase inventory and stock
the stores due to cash shortfalls,
o costs associated with establishing our warehouse and corporate
operations, and
o costs associated with developing and implementing our information
technology systems for the warehouse and stores.
WE WILL BE UNABLE TO GENERATE PROFITS UNLESS WE INCREASE OUR GROSS MARGINS AND
VOLUME.
The key to achieving profitability in the value business is to be able
to rapidly purchase goods and be able to pay within terms in order to obtain the
lowest prices. Due to our lack of operating cash, we have not been able to
purchase inventory in the most efficient fashion and we have incurred lower
margins than some of our competitors. This has also affected our revenues.
Our operating losses have decreased working capital and limited our
ability to buy sufficient inventory at higher margins. Also, we have not been
able to control the mix of sales and margins that would maximize sales and
provide higher margins. During any future period in which we have limited
working capital, it is likely that our margins will decrease.
WE HAVE BEEN FINANCIALLY DEPENDENT ON OUR PRINCIPAL SHAREHOLDER FOR MUCH OF OUR
CAPITAL AND HAVE BEEN UNABLE TO RAISE OUTSIDE FUNDS ON TERMS ACCEPTABLE TO US.
Since inception in 1999, we have been funded principally from loans
provided by Raymond Zimmerman, our principal shareholder and bank loans
personally guaranteed by Mr. Zimmerman, and have not generally relied upon other
external sources of financing. Although Mr. Zimmerman converted $14.6 million to
equity, he is still owed approximately $4.9 million and has ongoing personal
guarantees of $6.0 million of bank loans and of property leases. While Mr.
Zimmerman has indicated that he will continue the guarantees indefinitely, his
failure to continue these guarantees will cause the loans and leases to default
and thus materially harm our financial position if we were unable to renegotiate
acceptable terms.
WE NEED NEW STORE OPENINGS OR WE WILL NOT ACHIEVE FUTURE GROWTH.
Our operating results depend largely on our ability to open and operate
new stores successfully and to manage a larger business profitably. Our strategy
depends on our ability to secure financing to open and operate these stores. Any
failure by us to:
o identify suitable markets and sites for our new stores;
o negotiate leases with acceptable terms;
16
o achieve our expansion goals on a timely basis;
o obtain acceptance in markets in which we currently have limited or
no presence;
o appropriately upgrade our financial and management information
systems; and
o control or manage operating expenses
could decrease our future operating results and hurt our ability to execute our
business strategy. Some of these factors are beyond our control and we cannot
assure you that we will be able to achieve our goals.
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 new 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 may reduce retail sales of existing stores in those
markets, negatively affecting comparable store sales.
WE WILL NEED ADDITIONAL CAPITAL TO IMPLEMENT OUR LONG TERM PLANS.
Although the proceeds of our recently completed offering will be
sufficient to fund our short-term expansion plans, we will need additional
capital if we are to implement our long-term expansion plans. It is also
possible that we will be unable to obtain the additional funding when we need
it. If we are unable to obtain additional funding as and when needed, we could
be forced to delay opening new stores. Additional capital could be raised
through the sale of additional equity or debt securities or the exercise of
warrants. Additional equity may be obtained on terms that would be dilutive to
existing investors or purchasers in this offering.
COST INCREASES COULD IMPACT OUR ABILITY TO PROVIDE QUALITY MERCHANDISE FOR 99
CENTS.
Our ability to provide quality merchandise at the 99 cents price point
is subject to certain economic factors, which are beyond our control, including
inflation, tariffs on imported goods, general trade conditions and the
availability of merchandise at prices that would permit us to maintain our price
point with acceptable margins. Due to our inability to raise our prices,
inflation or other cost increases could hurt our margins. Our methods to respond
to ordinary price increases resulting from inflationary pressures is to adjust
the number of items sold at for 99 cents and by changing our selection of
merchandise. A sustained trend of significantly increased inflationary pressure
could require us to abandon our single price point of 99 cents per item or to
raise our price point, which could force us to change our strategy and change
our business model.
ALL OF OUR OPERATIONS ARE IN SOUTH FLORIDA, LEAVING US VULNERABLE TO EVENTS
SPECIFIC TO THIS REGION.
All of our 99 Cent Stuff Stores are currently located in south Florida,
although we intend to open one or more stores in 2004 in central Florida.
Accordingly, our results of operations and financial condition largely depend
upon trends in the south Florida economy. Although this region's economy has
remained strong, this trend may not continue and retail spending could decline
in the future. At times, natural disasters such as hurricanes and other events
have disrupted the local economy. These events could also pose physical risks to
our properties.
BECAUSE ALL OF OUR STORES RELY ON A SINGLE DISTRIBUTION CENTER, ANY DISRUPTION
COULD REDUCE OUR NET SALES.
We currently rely on a single distribution center in Miami, Florida.
Any natural disaster or other serious disruption to this distribution center due
to fire, hurricane or any other cause could damage a significant portion of our
inventory and could materially impair both our ability to adequately stock our
stores and our sales and profitability, particularly because much of our
merchandise consists of closeouts and other irreplaceable products.
17
OUR SUCCESS DEPENDS UPON THE AVAILABILITY OF CLOSEOUT AND SPECIAL-SITUATION
MERCHANDISE AND WE MAY NOT BE ABLE TO FIND AND PURCHASE MERCHANDISE IN
QUANTITIES NECESSARY TO ACCOMMODATE OUR GROWTH.
Our success depends in large part on our ability to locate and purchase
quality closeout and special-situation merchandise at attractive prices. We
cannot be certain that 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 any written 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, value, discount and deep-discount chains, mass merchandisers, food
markets, drug chains, club stores and various privately-held companies and
individuals. One of our suppliers provided approximately 25% of our total
purchases in 2003 and 2002. Although we do not depend on this or any other
single supplier or group of suppliers, a disruption in the availability of
merchandise at attractive prices could impair our business.
WE RELY HEAVILY ON RAYMOND ZIMMERMAN AND THE LOSS OF HIM WILL DAMAGE OUR
OPERATIONS.
Our success depends substantially on Raymond Zimmerman, our Chairman
and Chief Executive Officer. Mr. Zimmerman has provided our strategic direction
and financial support since our inception. We do not maintain key person life
insurance on him
WE NEED TO HIRE ADDITIONAL MANAGEMENT AND RETAIN EXISTING MANAGEMENT OR WE WILL
NOT BE ABLE TO GROW OUR BUSINESS.
We believe that we will need to hire additional management to manage
our planned growth. Our success will depend on our ability to identify, attract,
hire, train, retain and motivate highly skilled management personnel and the
loss of Mr. Zimmerman or other key management without suitable replacements will
harm our business.
OUR OPERATING RESULTS MAY FLUCTUATE AND MAY BE AFFECTED BY SEASONAL BUYING
PATTERNS, COMPARABLE STORE SALES AND OTHER FACTORS.
Historically, our highest revenues and operating income have occurred
during months with major holidays such as Christmas, Easter and Halloween, which
affect our operating results. In addition to seasonality, many other factors may
cause our results of operations to vary significantly from quarter to quarter.
If we miscalculate the demand for our products generally or for our product mix
during peak periods, our revenues could decline, resulting in excess inventory,
which could harm our margins and cash flow. Some of these factors are beyond our
control. These factors include:
o the timing of new store openings;
o the integration of new stores into our operations;
o the level of advertising and pre-opening expenses associated with
new stores;
o general economic health of the value and deep-discount retail
industries;
o changes in the mix of products sold;
o unexpected increases in shipping costs;
o ability to successfully manage our inventory levels;
o changes in our personnel;
o fluctuations in the amount of consumer spending; and
o the amount and timing of operating costs and capital expenditures
relating to the growth of our business.
THE RIGHT TO USE OUR CURRENT NAME MAY BE CHALLENGED, WHICH COULD CAUSE US TO
CHANGE OUR NAME AND DISRUPT OUR MARKETING PROGRAM.
The trademarks we own and use in connection with our goods and services
are not registered. There are several federally-registered trademarks containing
"99 Cents" and the owners of these trademarks may challenge the use of our name
and other marks which include "99 Cents". If successfully challenged, we may be
forced to change the name of our stores and our other marks, which would force
us to develop a new name and market awareness.
18
WE FACE STRONG COMPETITION FOR CUSTOMERS AND TO PURCHASE INVENTORY, WHICH
AFFECTS OUR PROFITABILITY.
We compete in both the acquisition of inventory and sale of merchandise
with
o discount and deep-discount stores,
o single price point merchandisers,
o mass merchandisers,
o food markets,
o drug chains, and
o club stores
In the future, new companies may also enter the value retail industry.
Additionally, we currently face increasing competition for the purchase of
quality closeout 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 and the perceived value to consumers. We may not be
able to compete successfully against our current and future competitors. If we
are unable to compete successfully, our operating results will suffer.
WE FACE THE RISK OF LOSS FROM INVENTORY SHRINKAGE.
The retail industry is subject to theft by customers and employees, and
damage to goods in the course of operations. Significant inventory shrinkage in
the future would increase our cost of goods sold and decrease our profitability.
OUR INFORMATION TECHNOLOGY SYSTEMS ARE VULNERABLE TO DAMAGE THAT COULD HARM OUR
ABILITY TO MANAGE OUR INVENTORY SYSTEMS.
Our success, in particular our ability to successfully manage inventory
levels, largely depends upon the efficient operation of our computer hardware
and software systems. We use management information systems to track inventory
information at the store level, communicate customer information and aggregate
daily sales information. These systems and our operations are vulnerable to
damage or interruption from:
o hurricane, fire, flood and other natural disasters;
o power loss, computer systems failures, internet and
telecommunications or data network failure, operator negligence,
improper operation by or supervision of employees, physical and
electronic loss of data or security breaches, misappropriation and
similar events; and
o computer viruses.
Any failure that causes an interruption in our operations or a decrease
in inventory tracking could result in reduced net sales.
OUR ANTI-TAKEOVER PROVISIONS COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR
COMPANY, EVEN IF SUCH CHANGE OF CONTROL WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.
Provisions of our articles of incorporation and bylaws as well as
provisions of Florida law could discourage, delay or prevent a merger,
acquisition or other change in control of our company, even if such change in
control would be beneficial to our shareholders. These provisions include:
o a board of directors that is classified such that only one-third of
directors are elected each year;
o authorizing the issuance of blank check preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares and thwart a takeover attempt;
o limitations on the ability of shareholders to call special meetings
of shareholders; and
o establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can
be acted upon by shareholders at shareholder meetings.
19
In addition, provisions of the Florida Business Corporation Act
restrict business combination transactions with parties that have not been
approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation. These provisions may apply even if the transaction may be
considered beneficial by some shareholders.
WE ARE CONTROLLED BY OUR PRIMARY SHAREHOLDER, WHO WILL CONTINUE TO CONTROL OUR
OUTSTANDING STOCK AFTER THIS OFFERING. HIS INTERESTS MAY CONFLICT WITH YOUR
INTERESTS.
Raymond Zimmerman and his family beneficially own approximately 82% of
our outstanding common stock. For as long as Mr. Zimmerman and his family
continue to own shares of common stock representing more than 50% of the voting
power of our common stock, he will be able to direct the election of all of the
members of our board of directors and determine the outcome of all matters
submitted to a vote of our shareholders, including matters involving mergers or
other business combinations, the acquisition or disposition of assets, the
incurrence of indebtedness, the issuance of any additional shares of common
stock or other equity securities and the payment of dividends on common stock.
Mr. Zimmerman will also have the power to prevent or cause a change in control,
and could take other actions that might be desirable to him but not to other
shareholders. Mr. Zimmerman's interests may be different from the interests of
the other shareholders. This could limit the voting and other rights of our
other shareholders and could depress the market price of our common stock.
OUR FINANCIAL RELIANCE ON OUR PRIMARY SHAREHOLDER MAY ACT AS AN IMPEDIMENT TO A
CHANGE OF CONTROL.
We owe Raymond Zimmerman approximately $4.6 million for advances he has
made. This amount is convertible into common stock at $5.00 per share. He is
also the guarantor on our bank loans and property leases. Mr. Zimmerman's
ability to cancel his guarantees could act as an impediment to a change of
control of the company at such time as Mr. Zimmerman would beneficially own less
than a majority of the outstanding common stock.
OUR STOCK HAS NOT BEEN ACTIVELY TRADED ON A PUBLIC MARKET.
Our common stock has historically traded on a limited basis. If we are
not able to develop an active public trading market for the shares, investors
may have limited liquidity and may be forced to hold the shares for an
indefinite period of time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to risks resulting from interest rate fluctuations since
interest on our borrowings under the bank facility are based on variable rates.
If the prime rate were to increase 1.0% in 2004 as compared to the rate at
December 31, 2003, our interest expense for 2004 would increase $0.1 million
based on the outstanding balance at December 31, 2003. We do not hold any
derivative instruments and do not engage in hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included in this Form 10-K following the signature
pages.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective September 16, 2003, our board of directors dismissed Caldwell
Becker Dervin Petrick & Co. LLP as our independent auditors and engaged Daszkal
Bolton LLP to serve as the new independent auditors. Daszkal Bolton had served
as the auditor for 99 Cent Stuff, LLC prior to the transaction referred to the
merger transaction.
Caldwell Becker's reports on the financial statements of iVideoNow as
of and for the two most recent fiscal years ended December 31, 2002 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to audit scope, or accounting principles.
During iVideoNow's two most recent fiscal years ended December 31,
2002, the subsequent interim periods ending March 31, 2003 and June 30, 2003,
and during the period July 1, 2003 through September 16, 2003, there were no
disagreements between Caldwell Becker and us on any matter of accounting
principles or practices,
20
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Caldwell Becker's satisfaction, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports.
We provided Caldwell Becker with a copy of the foregoing disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Annual Report on Form 10-K. Based on
this evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes in internal control over financial reporting. There was no
change in our internal control over financial reporting that occurred during the
last fiscal quarter covered by this Annual Report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are members of our board of directors executive
officers and key employees, in the capacities indicated:
NAME AGE POSITION
---------------------------- --- -------------------------------------------------
Officers and Directors:
Raymond Zimmerman 70 Chairman of the Board and Chief Executive Officer
Barry Bilmes 57 Chief Financial Officer
Kevin R. Keating 63 Director
Nathan R. Light 68 Director
Leonard Florence 71 Director
Key Employees:
Charlie Cordero 44 Vice President of Merchandise
Russ Fields 46 Vice President of Information Technology
RAYMOND ZIMMERMAN founded 99 Cent Stuff and was the managing member
since 1999 and became the Chairman of the Board and Chief Executive Officer upon
completion of the merger in September 2003.. Mr. Zimmerman was a founder and the
Chairman and Chief Executive Officer of Service Merchandise Company Inc., a
national retail chain, from 1981 to 1997, was Chairman of the Board from 1997 to
1999 and was the Non-Executive Chairman from 1999 to 2000. In March 1999,
Service Merchandise filed for bankruptcy pursuant to Chapter 11 of the United
States Bankruptcy Code. Mr. Zimmerman has also been a director of The Limited,
Inc. since 1984.
BARRY BILMES has been Chief Financial Officer since October 2002. From
2000 to 2002, Mr. Bilmes was Vice President - Finance for NuCo2 , Inc., the
largest supplier in the U.S. of bulk CO2 systems for carbonating fountain
beverages. From 1994 to 2000 Mr. Bilmes served in various financial capacities,
the most recent of which was Vice President - Finance and Administration for
Brothers Gourmet Coffees, Inc., a national wholesaler and retailer of gourmet
coffees. On August 27, 1998, Brothers Gourmet Coffees filed for bankruptcy
pursuant to Chapter 11 of the United States Bankruptcy Code. Prior, thereto,
from 1978 to 1993, Mr. Bilmes was Controller and Treasurer for Weight Watchers,
International, Inc., a provider of weight loss products and services.
LEONARD FLORENCE became a director upon completion of the merger in
September 2003. He has been the Chairman of the Board of Syratech Corporation, a
publicly-traded company which designs, manufactures, imports and markets a
diverse portfolio of tabletop, giftware and seasonal products for home
entertaining and
21
decoration under well-known name brands. He has served as Chairman of the Board
continuously since 1986, and as Chief Executive Officer from 1986 to 2002. Mr.
Florence has been an executive in the tabletop and giftware products industry
for more than 45 years. Mr. Florence is currently a director of Lifetime Hoan
Corporation, a publicly-traded manufacturer and marketer of a broad range of
household cutlery and kitchenware and bakeware products under well-known name
brands.
KEVIN R. KEATING was the president and a director of iVideoNow from
December 2001 until the merger in September 2002 and is currently a director.
Mr. Keating is an investment executive and for the past nine years has been the
Branch Manager of the Vero Beach, Florida, office of Brookstreet Securities
Corporation ("Brookstreet"). Brookstreet is a full-service, national network of
independent investment professionals. Mr. Keating services the investment needs
of private clients with special emphasis on equities. For more than 35 years, he
has been engaged in various aspects of the investment brokerage business. Mr.
Keating began his Wall Street career with the First Boston Corporation in New
York in 1965. From 1967 through 1974, he was employed by several institutional
research boutiques where he functioned as Vice President Institutional Equity
Sales. From 1974 until 1982, Mr. Keating was the President and Chief Executive
Officer of Douglas Stewart, Inc., a New York Stock Exchange member firm. Since
1982, he has been associated with a variety of firms as a registered
representative servicing the needs of individual investors.
NATHAN R. LIGHT became a director upon completion of the merger in
September 2003. Since 1998 he has been an executive of National Electronics
Warranty Corp., the nation's leading provider of extended service plans, buyer
protection services and product support for businesses and consumers currently
serving as vice chairman and formerly chairman and chief executive officer. From
1996 to 1998 he was the chairman and chief executive officer of LDC Group, Inc.,
which developed and operated Only Diamond stores, the first retail chain to sell
diamond merchandise exclusively. From 1977 to 1995, Mr. Light was the chairman
and chief executive officer of Sterling Jewelers, Inc., one of the nation's
largest jewelry chains. He is also a director of Michael Anthony Jewelers, Inc.,
a publicly-traded jewelry retailer.
CHARLIE CORDERO has been Vice President of Merchandise since January
2003. From 2001 to 2002, Mr. Cordero was Divisional Manager for Bills Dollar
Stores, Bonus Dollar Division, a 20-store single price point located in Central
Florida. From 1999 to 2001, Mr. Codero was Vice President of Merchandise for
McCrory Stores, a 200 plus dollar chain. In that capacity, Mr. Cordero oversaw
the buying and merchandising for all stores, as well as extensive traveling to
the Orient to establish Direct Import Programs. From 1998 to 1999, Mr. Codero
was Vice President for Dollar Craze Stores, Hammond, Indiana, a 16-store dollar
store chain. From 1991 to 1998, he served in various merchandising functions at
McCrory Stores, the most recent of which was Merchandise Manager of the 99-cent
Division.
RUSS FIELD has been Vice President of Information Technology since
January 2003 and was Director of Information Systems starting in July 2000. From
1999 to 2000 he was director-information technology of Value Financial Services.
He was director of systems development and support for Thorn Americas from 1989
to 1998, director of information systems of Whiteford Transportation from 1987
to 1989 and systems manager of Kmart Corporation from 1973 to 1987.
BOARD OF DIRECTORS COMPOSITION
Our articles of incorporation provide for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified board of directors structure,
prior to the completion of this offering, two of the members of the board of
directors will be elected to one-year terms, two will be elected to two-year
terms and at least one will be elected to a three-year term. Thereafter,
directors will be elected for
22
three-year terms. At least one additional outside director will be selected
prior to the completion of this offering.
ITEM 11. EXECUTIVE COMPENSATION
The following tables summarize the total compensation paid to Raymond
Zimmerman, our chairman, and Barry Bilmes, who are the only executive officers
with compensation of at least $100,000 in 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ ------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMPENSATION AWARDS ($) OPTIONS/SARS (#)
- --------------------------- ---- -------- ----- ------------ ------------ -----------------
Raymond Zimmerman 2003 -- -- $ 37,985(1) -- --
Chairman 2002 -- -- 25,673(1) -- --
2001 -- -- 30,543(2) -- --
Barry Bilmes 2003 $106,154 -- $ 8,150 -- 10,000
Chief Financial Officer 2002 $ 18,461 -- $ 1,200(2) -- --
2001 $ -- $ -- --
- --------------
(1) Other compensation consists of medical benefits.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS.
There are not currently any employment agreements with our executive
officers.
STOCK OPTION GRANTS
During 2003 an aggregate of 10,000 options were granted to the
executive officers named above. No options were exercised in 2003.
The following table shows the options that were granted under the 2003
Equity Incentive Plan in 2003 to the named executive officers. Each option has
an exercise price equal to $5.00 per share, which was the offering price per
share at that time, has a ten year term and is exercisable as follows: 25
percent on and after the first anniversary of the grant, and an additional 25
percent on and after each of the next three anniversaries. The rates of stock
appreciation presented in this table for the shares under options are not
predictions of future stock prices.
OPTION GRANTS TABLE
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------------------------------------------------------------------------------ -------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------- ----------------- -------------------- ------------ --------------- ------------- -----------
Raymond Zimmerman 0
Barry Bilmes 10,000 10.9% $5.00 12/10/13 $31,450 $79,687
23
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END
ACQUIRED ON REALIZED (#) EXERCISABLE/ ($) EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------- ------------ -------- ----------------------- ----------------------
Raymond Zimmerman - - -- --
Barry Bilmes - - 0/10,000 0/$5,000
2003 EQUITY INCENTIVE PLAN
Our board of directors and shareholders have adopted the 2003 Equity
Incentive Plan, which we refer to as the 2003 Plan, to authorize 250,000 options
to purchase shares of common stock.
PLAN DESCRIPTION. The purpose of the 2003 Plan is to provide an
incentive to attract and retain qualified and competent persons as employees,
directors and consultants, upon whose efforts and judgment our success is
largely dependent, through the encouragement of stock ownership. The 2003 Plan
provides for the grant of options intended to qualify as incentive stock options
or ISOs under Section 422 of the Internal Revenue Code and options that are not
intended to so qualify, which we refer to as Nonstatutory Stock Options. The
2003 Plan also provides for the grant of our restricted stock within the meaning
of Rule 144 of the Securities Act.
AUTHORIZED SHARES. The total number of shares of common stock reserved
for issuance under the 2003 Plan is 250,000 (subject to adjustment in the event
of a stock split, stock dividend, recapitalization or similar capital change).
If any option granted pursuant to the 2003 Plan terminates, expires, or is
canceled or surrendered, in whole or in part, shares subject to the unexercised
portion may again be issued pursuant to the exercise of options granted under
the 2003 Plan. The shares acquired upon exercise of options granted under the
2003 Plan will be authorized and unissued shares of common stock.
ADMINISTRATION. The 2003 Plan will be administered by the board of
directors or any compensation committee of our board of directors, which selects
the eligible persons to whom options will be granted. The compensation committee
also determines the number of shares of common stock subject to each option, the
exercise price therefore and the periods during which options are exercisable.
Further, the compensation committee interprets the provisions of the 2003 Plan
and, subject to certain limitations, may amend the 2003 Plan. Each option
granted under the 2003 Plan will be evidenced by a written agreement between us
and the optionee.
ELIGIBILITY. Options may be granted under the 2003 Plan to all
employees (including officers) directors and certain consultants and advisors.
Incentive stock options may be granted only to persons who are employees. Upon
receiving grants of options, each holder of the options will enter into an
option agreement with that contains the terms and conditions deemed necessary by
the compensation committee.
TERMS AND CONDITIONS OF OPTIONS. The exercise price for ISOs granted
under the 2003 Plan may not be less than the fair market value of the shares of
common stock on the date the option is granted. The exercise price and term for
Nonstatutory Stock Options may be any price not less than par value per share as
determined by the compensation committee. Under the 2003 Plan, the fair market
value is the closing price of shares on the business day immediately preceding
the date of grant. If the shares are not publicly traded, then the fair market
value will be as the compensation committee will in its sole and absolute
discretion determine in a fair and uniform manner.
OPTIONS GRANTED UNDER THE 2003 PLAN HAVE A MAXIMUM TERM OF TEN YEARS.
The exercise price of options granted under the 2003 Plan is payable in cash.
Options granted under the 2003 Plan are not transferable, except by will and the
laws of descent and distribution.
Unless otherwise provided in an option, each outstanding option may, in
the sole discretion of the compensation committee, become immediately fully
exercisable: if there occurs any transaction, or series of transactions, that
has the result that our shareholders immediately before such transaction cease
to own at
24
least 51 percent of our voting stock; upon the closing of a transaction,
consolidation, reorganization, liquidation or dissolution in which we do not
survive; or upon the closing of the sale, lease, exchange or other disposition
of all or substantially all our property and assets.
The compensation committee may in its sole discretion accelerate the
date on which any option may be exercised and may accelerate the vesting of any
shares subject to any option or previously acquired by the exercise of any
option. Options granted to the officers and directors under the 2003 Plan may
not be exercised unless otherwise expressly provided in any option, until six
months following the date of grant.
The compensation committee may also, in its sole discretion, by giving
written notice cancel, effective upon the date of the consummation of certain
corporate transactions that would result in an option becoming fully
exercisable, any option that remains unexercised on such date. Such notice will
be given a reasonable period of time prior to the proposed date of such
cancellation and may be given either before or after Shareholder approval of
such corporate transaction.
TERMINATION OF OPTIONS. The expiration date of an option is determined
by the compensation committee at the time of the grant and is set forth in the
applicable option agreement. In no event may an option be exercisable after ten
years from the date it is granted.
RESTRICTED STOCK. Restricted stock may be granted to employees or
consultants. The grant may be subject to vesting or forfeiture conditions
similar to the options. Additional restrictions on transfer may be imposed.
OUTSTANDING OPTIONS
92,000 options have been granted pursuant to the 2003 Plan.
DIRECTOR COMPENSATION
Outside directors are not currently paid cash for services and receive
the option grants described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In establishing compensation levels, our board of directors has
endeavored to ensure the compensation programs for our executive officers were
effective in attracting and retaining key executives responsible for our success
and were administered in an appropriate fashion in our long-term best interests
and our shareholders. In that regard, our board of directors sought to align the
total compensation for our executive officers with our performance and the
individual performance of each of our executive officers in assisting us in
accomplishing our goals.
All actions of the board with respect to Mr. Zimmerman's compensation
is taken without his involvement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding beneficial
ownership of our common stock as of March 15, 2004:
o each person known to us to be the beneficial owner of more than 5%
of either class of the common stock;
o each of our named executive officers;
o each director; and
o all current directors and executive officers as a group.
25
--------------------------------
SHARES BENEFICIALLY OWNED
--------------------------------
NAME OF BENEFICIAL OWNER SHARES %
-------------------------------------------------- --------------- ---------
Raymond Zimmerman 4,606,718(1) 92.1%
Kevin Keating 16,667 *
Leonard Florence 5,000(2) *
Nathan Light 6,000(3) *
Barry Bilmes 10,000(2) *
All officers and directors as a group (4 persons) 4,623,385 92.5%
- ----------
* Less than 1%
(1) Includes 4,507,805 shares owned by the Raymond Zimmerman Annuity
Trust--2003, 18,317 shares owned by a general partnership in which Mr.
Zimmerman and his wife are the partners, 17,910 for which Mr. Zimmerman is
trustee for family members and 62,686 shares owned by Mr. Zimmerman's wife,
for which he disclaims beneficial ownership. Mr. Zimmerman is the trustee
of the trust and his family members are the beneficiaries.
(2) Represents options to purchase common stock exercisable over four years.
(3) Includes 1,000 shares and options to purchase 5,000 shares of common stock
exercisable over four years
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors, executive officers and persons who own more than 10 percent of a
registered class of our equity securities file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our equity securities. Officers, directors and greater than 10 percent
shareholders are required by the SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to us, we believe that, during the period from January 1, 2003
through December 31, 2003, all Section 16(a) filing requirements applicable to
our officers, directors and greater than 10% beneficial owners were met in a
timely manner.
EQUITY COMPENSATION PLAN
The following table provides information about our common stock that
may be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2003
NUMBER OF
SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
COMPENSATION PLANS
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE (EXCLUDING
BE ISSUED UPON EXERCISE EXERCISE PRICE OF SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (A))
PLAN CATEGORY (A) (B) (C)
------------- ----------------------- -------------------- -------------------
Equity compensation plans 92,000 $ 5.00 158,000
approved by security holders
Equity compensation plans not
approved by security holders 0 $ -- 0
Total 92,000 $ 5.00 158,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through the closing of our public offering in March 2004, substantially
all of the funding for our operations has been provided by Raymond Zimmerman. At
December 31, 2003, he has advanced an aggregate of $19.5 million, of which $4.9
million is carried on the consolidated balance sheet as accounts payable,
related party and $14.6 million was carried as a note payable, related party at
December 31, 2002 and 2001,
26
which included accrued interest of $2.1 million at December 31, 2001. Interest
is being accrued at a rate equal to the prime rate plus 2%. Upon the completion
of the merger, the notes payable were converted into 4,750,000 shares of common
stock. The rights to a portion of these shares have been distributed to some of
Mr. Zimmerman's family and trusts for the benefit of Mr. Zimmerman and his
family.
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million line
of credit with Bank of America. As a result of these guarantees, the interest
rate on these lines has been prime minus 1% when our rate would be several
points higher without the guarantee. Mr. Zimmerman has also guaranteed some of
our property leases. The lease guarantees will terminate when our shareholders'
equity is at least $3 million. We have been accruing fees of 2% of the amount of
the principal amount of the obligations. The accrued fees of $0.2 million have
been included in the interest in the notes payable described above.
In addition, at December 31, 2003, Mr. Zimmerman had advanced
approximately $4.9 million that was carried as accounts payable and accrued
expense, related party, of which $3.67 million was outstanding at December 31,
2002 and $471,000 was outstanding at December 31, 2001. These funds were used
for equipment purchases, reimbursement of expenses and working capital. On
December 31, 2003, Mr. Zimmerman converted $330,000 of payables into 66,000
shares of common stock and gifted these shares to family members. Upon the first
closing of the offering in February 2004, $4.98 million was converted into a
convertible note due December 1, 2005 that bears interest at the prime rate. The
note is convertible into common stock at the option of the holder at $5.00 per
share, subject to adjustment. We will have the right to prepay the note at any
time.
As of December 31, 2001, we had advanced $160,000 to John Isaac, Jr.,
our chief operating officer, which was included in other assets on the
consolidated balance sheet. This advance bore interest at 8% per annum with
interest accrued of $14,518 as of December 31, 2001. The note was repayable 90
days after payment is demanded. In connection with Mr. Isaac's termination, 99
Cent Stuff agreed to forgive the note in exchange for a release from Mr. Isaac,
including any claims related to his ownership in 99 Cent Stuff. The release was
never executed by Mr. Isaac and in February 2004, 99 Cent Stuff instituted a
lawsuit to collect on the note.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
For 2003 and 2002, 99 Cent Stuff paid to Daszkal Bolton LLP audit fees
of approximately $51,000 and $36,000, respectively, billed for professional
services rendered for the audit of 99 Cent Stuff's annual financial statements
and the reviews of the financial statements included in 99 Cent Stuff's
financial statements included in its quarterly filings on Form 10-QSB for the
respective periods.
Audit-related fees
For 2003 and 2002, 99 Cent Stuff paid to Daszkal Bolton LLP fees of
approximately $21,000 and $36,000 respectively, billed for assurance and related
services by 99 Cent Stuff's auditors that are reasonably related to the
performance of the audit or review of 99 Cent Stuff's financial statements
included in 99 Cent Stuff's quarterly filings on Form 10-QSB for the respective
periods. The services thus provided by 99 Cent Stuff's auditors included
accounting consultations and review in connection with registration statements
and consultation concerning financial accounting and reporting standards.
Tax fees
For 2003 and 2002, 99 Cent Stuff paid to Daszkal Bolton LLP fees of
approximately $11,000 and $5,000, respectively, billed for tax compliance, tax
advice and tax planning.
All other fees
There were no other fees paid in 2003 or 2002 not identified above.
The 99 Cent Stuff board approved 100% of the foregoing services rendered by the
auditors.
27
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this report:
1. Consolidated Financial Statements:
2. Financial Statement Schedules:
3. Exhibits:
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- ------------------ -----------------------------------------------------------------------------------------------
2.1* Agreement between iVideoNow, Inc. and 99 Cent Stuff, LLC dated as of July 1, 2003
3.1(1) Articles of Incorporation
3.2(2) Amendment to Articles of Incorporation
3.3(3) Bylaws
3.4 (6) Articles of Incorporation (Florida)
4.2 (6) Warrant Agreement
4.3(4) Underwriter's Unit Purchase Option
10.1(4) 2003 Equity Incentive Plan
10.2(4) Lease for Beacon Warehouse
16.1(5) Letter re Change in Certifying Accountants
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- --------------
(1) Incorporated by reference from Exhibit 3 (i) to Registrant's Form 10-SB12G
filed June 14, 1999
(2) Incorporated by reference to Registrant's Form 10-QSB filed on November 21,
2001
(3) Incorporated by reference from Exhibit 3 (iii) to Registrant's Form 10-SB12G
filed June 14, 1999
(4) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 333-92048) filed by 99 Cent Stuff, Inc. on September 6, 2002.
(5) Incorporated by reference to Registrant's Form 8-K dated September 4, 2003.
(6) Incorporated by reference from the Registration Statement on Form S-1 (File
No. 333-108517) filed by 99 Cent Stuff, Inc. on September 4, 2003
(b) Reports on Form 8-K
On November 14, 2003, the Registrant filed a Report on Form 8-K under Item 12-
Results of Operation and Financial Condition disclosing its results for the
three and nine months ended September 30, 2003.
Note: Copies of each Exhibit to this Form 10-K are available upon request.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
99 CENT STUFF, INC.
By: /s/ RAYMOND ZIMMERMAN
-----------------------
Raymond Zimmerman, Chairman
Date: March 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------------------------- --------------
/s/ RAYMOND ZIMMERMAN Chairman of the Board and Chief Executive Officer March 26, 2004
- ------------------------------
Raymond Zimmerman
/s/ BARRY BILMES Chief Financial Officer and Principal Accounting March 26, 2004
- ------------------------------ Officer
Barry Bilmes
/s/ KEVIN KEATING Director March 26, 2004
- ------------------------------
Kevin Keating
/s/ LEONARD FLORENCE Director March 26, 2004
- ------------------------------
Leonard Florence
/s/ NATHAN LIGHT Director March 26, 2004
- ------------------------------
Nathan Light
29
99 CENT STUFF, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
TABLE OF CONTENTS
-----------------
Independent Auditors' Report................................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2003 and 2002.............F-3
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001..................................F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the years ended December 31, 2003, 2002 and 2001..............F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001..................................F-6
Notes to Consolidated Financial Statements...............................F-7-14
F-1
Michael I. Daszkal, CPA, P.A. 2401 N.W. Boca Raton Boulevard
Jeffrey A. Bolton, CPA, P.A. Boca Raton, FL 33431
Timothy R. Devlin, CPA, P.A. t: 561.367.1040
Michael S. Kridel, CPA, P.A. f: 561.750.3236
Marjorie A. Horwin, CPA, P.A. www.daszkalbolton.com
Patrick D. Heyn, CPA, P.A.
[GRAPHIC OMITTED]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders
99 Cent Stuff, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of 99 Cent Stuff,
Inc. and subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and cash flows for the years ended December 31, 2003, 2002 and 2001. These
consolidated 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 99 Cent Stuff, Inc.
as of December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended December 31, 2003, 2002 and 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Daszkal Bolton LLP
Boca Raton, Florida
January 30, 2004, except for
Notes 8, 10 and 15 which the
date is March 22, 2004
F-2
99 CENT STUFF, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
================================================================================
ASSETS
2003 2002
-------- --------
Current assets:
Cash $ 26 $ --
Inventory 2,531 2,186
Prepaid expenses and other assets 427 282
-------- --------
Total current assets 2,984 2,468
-------- --------
Property and equipment, net 2,607 3,182
-------- --------
Other assets:
Security deposits 141 167
-------- --------
Total assets $ 5,732 $ 5,817
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ -- $ 433
Accounts payable 2,494 2,596
Accrued expenses 737 596
-------- --------
Total current liabilities 3,231 3,625
-------- --------
Long term liabilities:
Accounts payable and accrued expenses, related party 4,922 3,676
Lines of credit 5,648 3,200
-------- --------
Total long term liabilities 10,570 6,876
-------- --------
Total liabilities 13,801 10,501
-------- --------
Commitments and contengencies
Shareholders' deficit:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
-0- issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares authorized
5,066,000 and 4,750,000 issued and outstanding 5 5
Additional paid-in capital (7,240) (4,689)
Accumulated deficit (834) --
-------- --------
Total shareholders' deficit (8,069) (4,684)
-------- --------
Total liabilities and shareholders' deficit $ 5,732 $ 5,817
======== ========
See the accompanying notes to the consolidated financial statements.
F-3
99 CENT STUFF, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
================================================================================
2003 2002 2001
-------- -------- --------
Net sales $ 39,580 $ 38,661 $ 35,889
Cost of goods sold 28,583 28,683 26,261
-------- -------- --------
Gross profit 10,997 9,978 9,628
Selling, general and administrative expense 13,552 14,035 14,558
-------- -------- --------
Loss from operations (2,555) (4,057) (4,930)
-------- -------- --------
Other income (expense):
Other income 55 60 36
Interest expense (1,215) (1,348) (1,617)
-------- -------- --------
Total other income (expense) (1,160) (1,288) (1,581)
-------- -------- --------
Net loss $ (3,715) $ (5,345) $ (6,511)
======== ======== ========
Loss per share:
Net loss per share, basic and diluted $ (0.77) $ (1.13) $ (1.37)
Weighted average number of common and common
equivalent shares outstanding - basic and diluted 4,833 4,750 4,750
See the accompanying notes to the consolidated financial statements.
F-4
99 CENT STUFF, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
================================================================================
Common Stock Additional
------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------------- ---------- ------------- -------
Balance, December 31, 2000 4,750 $ 5 $ 7,167 $ -- $ 7,172
Net loss (see Note 10) -- -- (6,511) -- $(6,511)
----- ------- ------- ------- -------
Balance, December 31, 2001 4,750 $ 5 $ 656 $ -- $ 661
Net loss (see Note 10) -- -- (5,345) -- --
----- ------- ------- ------- -------
Balance, December 31, 2002 4,750 $ 5 $(4,689) $ -- $(4,684)
Net loss for the period January 1, 2003 through
September 2, 2003 (see Note 10) -- -- (2,881) -- (2,881)
Common stock issued in reorganization 250 -- -- -- --
Conversion of related party payable 66 -- 330 -- 330
Net loss for the period September 3, 2003 through
December 31, 2003 (see Note 10) -- $ -- $ -- $ (834) $ (834)
----- ------- ------- ------- -------
Balance, December 31, 2003 5,066 $ 5 $(7,240) $ (834) $(8,069)
===== ======= ======= ======= =======
See the accompanying notes to the consolidated financial statements.
F-5
99 CENT STUFF, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
================================================================================
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net loss $ (3,715) $ (5,345) $ (6,511)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 850 899 853
Interest accrued on payables, related party 1,053 1,249 1,382
Loss on store closing -- 150 --
(Increase) decrease in:
Prepaid expenses and other assets (145) (23) 13
Inventory (345) 1,199 882
Security deposits 26 (1) 6
Receivable from former officer -- 175 (175)
Increase (decrease) in:
Accounts payable (102) (821) 205
Accrued expenses 141 402 (102)
-------- -------- --------
Net cash used in operating activities (2,237) (2,116) (3,447)
-------- -------- --------
Cash flows used in investing activities:
Purchase of property and equipment (275) (256) (766)
-------- -------- --------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party 523 1,956 394
Increase (decrease) in cash overdraft (433) 116 (211)
Borrowings under lines of credit 17,347 15,865 9,265
Repayments under lines of credit (14,899) (15,565) (7,540)
Capital contribution -- -- 2,305
-------- -------- --------
Net cash provided by financing activities 2,538 2,372 4,213
-------- -------- --------
Net increase (decrease) in cash 26 -- --
Cash at beginning of year -- -- --
-------- -------- --------
Cash at end of year $ 26 $ -- $ --
======== ======== ========
Supplemental cash flow information:
Interest paid $ 145 $ 104 $ 191
======== ======== ========
Non-cash transactions
Conversion of related party payable to equity $ 330 $ -- $ --
======== ======== ========
See the accompanying notes to the consolidated financial statements
F-6
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 1 - DESCRIPTION OF BUSINESS
- ---------------------------------
99 Cent Stuff, Inc. (the "Company") was originally organized under the laws of
the State of Delaware on June 28, 1999 as a limited liability company. In
September 2003, the Company merged with a public shell, iVideoNow, Inc., and
became a C corporation. The Company is a specialty, single-priced retailer that
primarily targets individuals and small businesses with one-stop shopping for
food, produce, consumable hard lines, health and beauty aids, novelty and
impulse items. The Company was operating retail outlets in eleven locations at
December 31, 2003, 2002 and 2001, respectively. The locations are separately
incorporated as limited liability companies and are wholly owned by the Company.
All of the stores are in southeast Florida.
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. A sustained trend of significant 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Cash and Cash Equivalents
- -------------------------
The Company considers all investments with original maturities of three months
or less and credit and debit card receivables to be cash equivalents. At
December 31, 2003 and 2002, the total credit and debit card receivables were $53
and $26, respectively.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist mainly of cash, short-term payables,
borrowings under a line of credit and notes payable. The Company believes that
the carrying amounts approximate fair value, due to their short-term maturities
and current interest rates.
Inventory
- ---------
Inventory is stated at the lower of average cost or market, with cost determined
on a first-in, first-out (FIFO) basis, and consists primarily of merchandise
held for resale. The Company provides an allowance for certain merchandise that
may become obsolete, damaged, or slow moving. At December 31, 2003 and 2002, the
allowances for these items were $50 and $0, respectively.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method. The following estimated
lives have been used for financial statement purposes:
Category Lives
- ----------------------------------------------
Computer equipment 5 years
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 7 years
F-7
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- --------------------------------------------------------------
Income Taxes
- ------------
Prior to the merger with iVideoNow, Inc. on September 3, 2003 the Company was a
limited liability company. As an LLC, the Company was treated as a partnership
for Federal and State income tax purposes. Members are taxed separately on their
distributive share of the Partnership's income whether or not that income is
actually distributed. Upon the completion of the merger, the Company became a C
Corporation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary limited liability companies, after
eliminations of all material intercompany transactions.
Advertising Costs
- -----------------
Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $6, $13 and $84 for the years ended December 31, 2003, 2002 and
2001, respectively.
Revenue Recognition
- -------------------
Revenue is recognized at the point of sale.
Pre-Opening Costs
- -----------------
The Company expenses, as incurred, all pre-opening costs related to the opening
of new retail stores.
Operating Segments
- ------------------
The Company has one business segment, which is our retail operations. The
majority of the product offerings include recognized brand-name consumable
merchandise, regularly available for reorder. 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.
Shipping And Handling Costs
- ---------------------------
The Company follows the provisions of Emerging Issues Task Force Issue No. 00
- -10, "Accounting for Shipping and Handling Fees and Costs." Any amounts billed
to third-party customers for shipping and handling is included as a component of
revenue. Shipping and handling costs incurred are included as a component of
cost of sales.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews its long-lived assets for impairment whenever events or
changes indicate that the carrying amount of an asset or group of assets may not
be recoverable. No impairment losses were recorded during the periods ended
December 31, 2003, 2002 and 2001.
F-8
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
- --------------------------------------------------------------
Stock Options
- -------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25" issued in March 2000, to account for its
fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the Stock-Based compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), requires
the Company to disclose pro forma information regarding option grants made to
its employees. SFAS 123 specifies certain valuation techniques that produce
estimated compensation charges that are included in the pro forma results below.
These amounts have not been reflected in the Company's Statement of Operations.
There were no options granted in 2002 and 2001. SFAS No. 123 pro forma is as
follows for the fiscal year ended December 31, 2003:
2003
---------
Net loss
As reported $ (3,715)
=========
Pro forma $ (3,737)
=========
Earnings per share
As reported $ (0.77)
=========
Pro forma $ (0.77)
=========
New Accounting Pronouncements
- ------------------------------
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. The requirements of this Statement apply to issuers'
classification and measurement of freestanding financial instruments. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For nonpublic entities, mandatorily
redeemable financial instruments are subject to the provisions of this Statement
for the first fiscal period beginning after December 15, 2004. The Company does
not expet the adoption of SFAS 150 to have a material impact on their financial
statements.
F-9
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following at December 31, 2003 and 2002:
2003 2002
------- -------
Computer equipment $ 516 $ 459
Furniture, fixtures and equipment 3,621 3,442
Leasehold improvements 1,410 1,367
------- -------
Total property and equipment 5,547 5,268
Less: accumulated depreciation and amortization (2,940) (2,086)
------- -------
Net property and equipment $ 2,607 $ 3,182
======= =======
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was
$850, $899 and $853, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 2003 and 2002, the Company was indebted to a shareholder in the
amount of $4,922 and $3,676 respectively, for funds advanced to the Company. At
December 31, 2002 the indebted was short-term and bears interest at the prime
rate plus 2.0% (6.25%). On December 1, 2003, this indebtedness was converted
into a note payable and is due December 1, 2005 and bears interest at the prime
rate (4% at December 31, 2003). As of December 31, 2003, 2002 and 2001, interest
expense of $1,053, $1,134 and $1,303 was accrued and included in this
indebtedness to the shareholder. The amount is convertible into Common Stock at
the offering price as stated in the S-1 registration statement filed with the
SEC on December 1, 2003.
A shareholder of the Company is the guarantor on several of the lease agreements
for warehouse and retail facilities (Note 5), and also for the lines of credit
and letters of credit (Note 6). As of December 31, 2003, 2002 and 2001, interest
expense of $134, $115 and -0- was accrued for the shareholder's personal
guaranty of these obligations and is included in accounts payable and accrued
expenses, related party on the accompanying consolidated balance sheet.
As of December 31, 2001, the Company had advanced $160 to John Isaac, Jr.,
former chief operating officer, which was included in other assets on the
consolidated balance sheet. This advance bore interest at 8% per annum with
interest accrued of $15 as of December 31, 2001. In connection with Mr. Isaac's
departure from 99 Cent Stuff in 2002, the note was recorded as compensation and
included in selling, general and administrative expenses on the accompanying
consolidated statement of operations for the year ended December 31, 2002. As
part of his termination, 99 Cent Stuff agreed to forgive the note in exchange
for a release from Mr. Isaac. The release was never executed and in February
2004, the Company instituted litigation to collect on the note.
F-10
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 5 - LEASE COMMITMENTS
- --------------------------
The Company leases its retail and warehouse facilities under long-term operating
lease agreements. Rent expense for all operating leases was $2,392, $2,371 and
$2,130 for the years ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, future minimum lease payments for these leases are as
follows:
Year Ending December 31,
========================
2004 $ 2,322
2005 2,014
2006 1,846
2007 1,852
2008 1,625
Thereafter 4,592
-------
Total minimum lease payments $14,251
=======
NOTE 6 - CREDIT FACILITIES
- --------------------------
At December 31, 2003, the Company had $3,500, $2,000 and $500 revolving lines of
credit with a financial institution that requires quarterly interest payments at
the bank's prime rate minus one percent (3.0% at December 31, 2003). The lines
are secured by a personal guaranty of a shareholder of the Company and are due
June 30, 2005. The shareholder is compensated 2% per annum of the total amount
available under the line of credit for the personal guaranty. At December 31,
2003, the Company owed $5,648 on its revolving lines of credit.
At December 31, 2002, the Company had a $3,500 and a $500 revolving line of
credit with a financial institution that requires quarterly interest payments at
the bank's prime rate minus one percent (3.25% at December 31, 2002). The line
was secured by a personal guaranty of a shareholder of the Company and was due
February 4, 2004. The shareholder was compensated 2% per annum of the total
amount available under the line of credit for the personal guaranty. At December
31, 2002, the Company owed $3,200 on its revolving lines of credit.
At December 31, 2003 and 2002, the Company had outstanding irrevocable letters
of credit approximating $102 and $115, respectively. These letters of credit,
which have terms of three months to one year, collateralize the Company's
obligation to third parties for the purchase of goods or services. The fair
value of these letters of credit approximates contract values based on the
nature of the fee arrangements with the issuing banks, usually 1 to 1.5% of the
credit issued.
NOTE 7 - CONTINGENCIES
- ----------------------
The Company is involved in various claims and lawsuits arising in the normal
course of business. Management believes that any financial responsibility that
may be incurred in settlement of such claims and lawsuits are not material to
the Company's financial position.
Winn-Dixie Stores v. 99 Cent Stuff -Trail Plaza LLC and Metropolitan Life
Insurance Company (Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida). In June 2000, Winn-Dixie Stores filed for an injunction
seeking to limit the sale of grocery items to 500 square feet in the Trail Plaza
store. No damages were sought. As a result of an injunction and other motions
granted in 2002, the Company must limit the sales of grocery items to 500 linear
feet. This restriction has negatively impacted the sales and profitability of
this store. In 2003, the Company was found in contempt of the injunction and
Winn Dixie sought damages and payment of legal fees. On October 16, 2003, the
Company settled the contempt charges for $175,000 and this amount was paid in
November 2003.
F-11
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 8 - FINANCIAL ANALYSIS AND LIQUIDITY
- -----------------------------------------
As of December 31, 2003, the Company has negative working capital of $247 and
negative net worth of $8,069. From inception on June 28, 1999 to February 2004,
the Company has been principally funded from loans and capital contributions
provided by the principal shareholder and by bank loans personally guaranteed by
the principal shareholder. Capital requirements result primarily from purchases
of inventory, expenses related to new store openings and working capital
requirements for new and existing stores. The Company takes advantage of
closeouts and other special-situation inventory purchasing opportunities, and as
a consequence, cash requirements are not constant or predictable during the year
and can be affected by the timing and size of the inventory purchases. The
Company expects to continue to incur negative cash flows from operations for the
year ended December 31, 2004. The Company completed its stock offering in March
2004, raising net proceeds of $3,400.
The Company expects to utilize the offering proceeds primarily for opening new
stores, reducing accounts payable, increasing inventory and to fund cash-flow
deficits from operations. If the Company fails to achieve positive cash flows
from operations, it is possible that the Company may be required to raise
additional financing in some future period through public or private financings,
strategic relationships or other arrangements if the Company is unable to
achieve increased operating margins. A decrease in operating cash flow from
current levels would greatly reduce the availability of funds and would force
the Company to obtain additional capital. The Company may not be able to raise
additional funds when needed, or on acceptable terms, or at all. Also, any
additional equity financings may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants. The Company's
management believes that the net proceeds from the offering, together with
improvements in expected operating results, will be sufficient to meet operating
and capital needs for at least the next 12 months.
NOTE 9 - RECLASSIFICATIONS
- --------------------------
Certain amounts in the accompanying consolidated financial statements as of
December 31, 2002 and 2001 have been reclassified to conform with the current
year presentation, with no effect on reported net loss.
NOTE 10 - MERGER AGREEMENTS AND SHAREHOLDERS' EQUITY RECAPITALIZATION
- ---------------------------------------------------------------------
On July 1, 2003 a majority of the shareholders of iVideoNow, Inc. approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") between
iVideoNow, Inc. and 99 Cent Stuff, LLC, whereby iVideoNow, Inc. issued 4,750,000
shares of its common stock and warrants to purchase 5 million shares of common
stock at an exercise price of $.001 per share (reflective of the 1 to 30 and the
1 to 4 reverse stock split on September 15, 2003) exercisable only in the event
Keating Investments LLC does not arrange for at least $3 million of equity
financing on terms reasonably acceptable to 99 Cent Stuff LLC ("LLC") by
December 31, 2003, in exchange for all the outstanding membership interests of
the LLC (the "Merger Agreement"). The offering was completed in March 2004
resulting in net proceeds of $3,400 and the Company waived its rights to the
warrants. For accounting purposes, the share exchange was treated as a
recapitalization of the Companies. The value of the net assets of the Companies
after the share exchange is completed is the same as their historic book value.
Prior to the merger with iVideoNow, Inc. the Company was a limited liability
company. Upon the completion of the merger, the Company became a C Corporation.
Under SEC Staff Accounting Bulletin Topic 4 (B), the undistributed earnings
(losses) of the limited liability company were treated as a constructive
distribution to the owners of the LLC followed by a contribution of capital to
the new C-Corporation. On the effective date of the merger, September 3, 2003,
the Company reclassified the accumulated deficit to date of $22,156 to
additional paid-in capital, net of the $14,591 of funds advanced from a
shareholder of the Company in prior years. As part of the reorganization of the
Company this note was converted into equity.
F-12
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 11 - EARNINGS PER SHARE
- ----------------------------
Basic net earnings (loss) per common share are computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents consisting of 92 options. In periods when losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.
NOTE 12 - STOCK OPTION PLAN
- ---------------------------
During November 2003, the Company established a nonqualified and incentive stock
option plan. The plan provides for the issuance of a maximum of 250 shares of
common stock to officers, directors and consultants and other key employees.
Under the terms of the plan, the options expire after 10 years, as long as the
employee remains employed with the Company. The employee option grants provide
that the option will be canceled ninety days after an employee leaves the
Company. The following is a summary of option activity for the years ended
December 31, 2003:
December 31, 2003
---------------------------
Number of Weighted-Average
Shares Exercise Price
--------- ----------------
Outstanding at beginning of year -- $ --
Granted 92 5.00
Exercised -- --
Forfeited -- --
--- --------
Outstanding at December 31 92 $ 5.00
=== ========
Exercisable at December 31 -- --
===
Available for issuance at December 31 158 --
===
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate 5.0%
Expected dividends 0.0%
Volatility factor 1.03
Weighted average expected Life of Options 10
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
F-13
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 13 - PROVISION FOR INCOME TAXES
- ------------------------------------
The Company's evaluation of the tax benefit of its net operating loss
carryforward is presented in the following table for the period from September
3, 2003 (date of conversion from an LLC to a C-corporation) to December 31,
2003. The members of the 99 Cent Stuff LLC will report the losses of $980 for
the period January 1, 2003 to September 2, 2003 (prior to the conversion to a
C-corporation). At December 31, the tax amounts have been calculated using the
34% federal and 5.5% state income tax rates.
2003
-------
Income tax (benefit) consists of:
Current $ --
Deferred --
-------
Provision (benefit) for income taxes $ --
=======
Reconciliation of the federal statutory income tax rate to the Company's
effective tax rate is as follows:
2003
-------
Taxes computed at combined federal and state tax rate $(1,263)
Non-deductible losses of the LLC 980
State income taxes, net of federal income tax benefit (30)
Increase (decrease) in deferred tax asset --
valuation allowance 313
-------
Provision (benefit) for income taxes $ --
=======
The components of the deferred tax asset were as follows at December 31:
2003
-------
Deferred tax assets:
Net operating loss carryforward $ 209
Depreciation 33
Accrued expenses 52
Inventory reserve 19
-------
Total deferred tax assets 313
=======
Valuation allowance:
Beginning of period --
Decrease (increase) during the year (313)
-------
End of period (313)
-------
Net deferred taxes $ --
=======
As of December 31, 2003, the Company had an unused net operating loss
carryforward of approximately $555 available for use on its future corporate
income tax returns. This net operating loss carryforward begins to expire in
December 2023. Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of any of the Company's net operating loss and credit carry forwards
may be limited if cumulative changes in ownership of more than 50% occur during
any three year period.
NOTE 14 - CONCENTRATIONS
- ------------------------
In 2003 and 2002, one supplier provided approximately 25% of total purchases. No
single supplier provided more than 20% of purchases in 2001.
NOTE 15 - SUBSEQUENT EVENT
- --------------------------
In March 2004 the Company completed its stock offering. The Company sold 766,950
units (each unit consists of one share of common stock and one warrant) at $5.00
per unit for a total of $3,442, net of expenses of $393.
F-14