U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: MARCH 31, 2004
Commission File Number: 0-26351
99 CENT STUFF, INC.
(Exact name of registrant as specified in its charter)
Florida 20-0233210
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1801 Clint Moore Road
Boca Raton, Florida 33487
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(Address of principal executive offices) (Zip Code)
(561) 999-9815
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(Issuer's Telephone Number)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ].
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X].
The number of shares of the registrant's common stock issued and outstanding, as
of March 31, 2004, was 5,833,950 shares.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Balance Sheet
(Amount in Thousands, Except Share Data)
MARCH 31, DECEMBER 31,
2004 2003
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(UNAUDITED)
Current liabilities:
Cash overdraft $ 198 $ --
Accounts payable 2,657 2,494
Accrued expenses 486 737
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Total current liabilities 3,341 3,231
Long term liabilities:
Lines of Credit 3,173 5,648
Accounts payable and accrued expenses, related party 5,016 4,922
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Total Liabilities 11,530 13,801
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Commitments and contingencies
Shareholders' Equity:
Preferred Stock,$.01 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares authorized,
5,833,950 and 5,067,000 shares issued and outstanding at March 31, 2004
and December 31, 2003, respectively 6 5
Additional paid in capital (3,947) (7,240)
Retained Earnings (1,538) (834)
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Total shareholders' equity (5,479) (8,069)
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Total liabilities and shareholders' equity $ 6,051 $ 5,732
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
2
99 Cent Stuff, Inc
Statement of Operations
For the Three Months Ended March 31, 2004 and 2003
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
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2004 2003
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Net sales $ 10,787 $ 9,625
Cost of goods sold 7,790 7,079
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Gross profit 2,997 2,546
Selling, general and administrative expenses 3,566 3,308
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Loss from operations (569) (762)
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Other income (expense):
Other income 11 10
Interest expense (146) (363)
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Total other income (expense) (135) (353)
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Loss before provision for income taxes (704) (1,115)
Provision for Income Taxes -- --
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Net loss $ (704) $(1,115)
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Net loss per share, basic and diluted $ (0.13) $ (0.23)
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Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,486 4,750
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
99 Cent Stuff, Inc.
Consolidated Statements of Shareholders' (Deficit)
For the Year Ended December 31, 2003 and the Three Months Ended March 31, 2004
(Amounts in Thousands)
(Unaudited)
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Common Stock Additional
--------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ---------- ----------- -------
Balance, December 31, 2003 5,066 $5 $(7,240) $ (834) $(8,069)
Sale of common stock,
net of expenses 767 1 3,293 -- 3,294
Net loss for the
three months ended
March 31, 2004 -- - -- (704) (704)
----- -- ------- ------- -------
Balance, March 31, 2004 5,833 $6 $(3,947) $(1,538) $(5,479)
===== == ======= ======= =======
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
99 Cent Stuff, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003
(Amounts in Thousands)
(Unaudited)
2004 2003
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Cash flows from operating activities:
Net loss $ (704) $(1,115)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 219 206
Interest accrued on payables, related party 94 320
(Increase) decrease in:
Prepaid expenses and other assets 146 (225)
Inventory (543) 34
Security deposits -- 25
Increase (decrease) in:
Accounts payable 163 369
Accrued expenses (251) (262)
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Net cash used in operating activities (876) (648)
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Cash flows used in investing activities:
Purchase of property and equipment (167) (18)
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Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party -- (78)
Change in cash overdraft 198 (278)
Borrowings under lines of credit 4,553 6,510
Repayments under lines of credit (7,028) (5,488)
Sale of common stock, net of expenses 3,294
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Net cash provided by financing activities 1,017 666
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Net increase (decrease) in cash (26) --
Cash at beginning of period 26 --
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Cash at end of period $ -- $ --
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Supplemental cash flow information:
Interest paid $ 61 $ 34
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - DESCRIPTION OF BUSINESS
99 Cent Stuff LLC (the "Company") was organized under the laws of the State of
Delaware on June 28, 1999 as a limited liability company. In July 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 11 locations at March 31, 2004 and 2003.
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
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the management of the Company, all adjustments of a normal and
recurring nature considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
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. The
Company has no cash equivalents.
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.
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 of merchandise held for
resale. The Company provides an allowance for certain merchandise that may
become totally obsolete or damaged. At both March 31, 2004 and December 31,
2003, the allowance for these items were $50.
6
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 a limited liability company; the Company was
treated as a partnership for Federal and State income tax purposes. Members were
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.
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.
7
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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. 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.
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,
because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," specifies that no compensation charge arises when the price of the
employees' stock options equal the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees SFAS
No. 123 pro forma numbers are as follows for the fiscal period ended March 31,
2004:
2004
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Net loss
As reported $ (704)
Pro forma $ (722)
Earnings per share
As reported $(0.13)
Pro forma $(0.13)
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
March 31, 2004 and 2003.
8
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - RELATED PARTY TRANSACTIONS
At March 31, 2004 and December 31, 2003, the Company had a note payable of
$5,016 and $4,922, respectively, for funds advanced from a shareholder of the
Company. The 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. The Company has the
right to prepay the note at any time.
NOTE 4 - CREDIT FACILITIES
At March 31, 2004, the Company had a $3,500, $2,000 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 (3.0% at March 31, 2004). The line is
secured by a personal guarantee of a shareholder of the Company and is 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 of this facility.
At March 31, 2004, the Company owed $3,173 on its revolving lines of credit.
Interest expense primarily consists of interest on these lines of credit.
At March 31, 2004, the Company had outstanding irrevocable letters of credit
approximating $102. These letters of credit 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 5 - 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.
NOTE 6 - 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 ("LLC"), whereby iVideoNow, Inc. issued
4,750 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 did not arrange for at least $3 million of
equity financing on terms reasonable acceptable to the Company 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
was 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 are treated as a constructive
distribution to the owners of the LLC followed by a contribution of the 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. As part of the reorganization of the Company this
note was converted into equity.
9
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 7 - PUBLIC OFFERING
In March 2004 the Company completed its stock offering. The Company sold 766
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.
NOTE 8 - FINANCIAL ANALYSIS AND LIQUIDITY
As of March 31, 2004, the Company had working capital of $14 and negative net
worth of $5,479. 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 with a negative cash flow from operations until it is able to implement
the use of proceeds from the offering.
The Company expects to spend the offering proceeds primarily for opening new
stores, reducing accounts payable, increasing inventory and to fund cash-flow
deficits 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 remainder of 2004.
10
ITEM 2. 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. The
Company expects to spend the proceeds of our recently completed offering
primarily for opening new stores, reducing accounts payable, increasing
inventory and to fund cash-flow deficits 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.
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.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net sales. Net sales increased $1.2 million, or 12.1% to $10.8 million for the
three months ended March 31, 2004, from $9.6 million for the three months ended
11
March 31, 2003. Same store net sales, for stores open all of both periods,
increased $0.7 million in the 2004 period, or 7.4%, compared to the prior year.
The increase in net sales was primarily due to increased levels of inventory and
increased volume in produce. During the 2004 period, approximately 28.6% of our
sales were of produce, which has a much higher turnover than 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 $ 0.5 million, or 17.7% to $3.0 million for the three months ended
March 31, 2004, from $2.5 million for the three months ended March 31, 2003. As
a percentage of net sales, gross profit increased 1.3% to 27.8% in the 2004
period from 26.5% in the 2003 period 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, increased $0.3 million for the three months ended March 31, 2004,
or 7.8%, to $3.6 million in the 2004 period from $3.3 million in the 2003 period
and was primarily attributable to increased wages and related benefits, rents
and related expenses and insurance of $0.1 million, $0.1 million and $0.1
million, respectively. There were no major increases or decreases in any other
category. As a percentage of sales, SG&A decreased to 33.1% for the three months
ended March 31, 2004 as compared to 34.7% for the three months ended March 31,
2003.
Operating loss. Operating loss decreased $0.2 million, or 25.3%, to $0.6 million
for the three months ended March 31, 2004 from $0.8 million in the 2003 period.
As a percentage of net sales, operating loss decreased 2.6% to 5.3% in 2004 from
7.9% in 2003 and is primarily attributable to the items discussed above.
Other (income) expense. Interest expense decreased $0.2 million, or 59.8%, to
$0.1 million for the three months ended March 31, 2004 from $0.3 million in the
2003 period. The decrease is primarily attributable to decreased borrowings and
lower interest rates. As a percentage of net sales, interest expense decreased
2.4%, to 1.4% in 2004 from 3.8% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $0.4
million, or 36.9%, to $0.7 million for the three months ended March 31, 2004
from $1.1 million in the 2003 period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception on June 28, 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. Virtually all of our fixed assets, including
fixtures and equipment, have been purchased using advances made to 99 Cent Stuff
from Mr. Zimmerman. Approximately $14.6 million was converted to equity in
September 2003 as part of the merger and the remainder is shown in the balance
sheet in the accounts payable, related party. 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 limited working capital as of March 31, 2004 was due to
o $6.0 million of property and equipment acquired,
o cash shortfall due to operating losses, and
o increases in accounts payable due to operating losses.
12
Net cash used by operations was $0.9 million in the three months ended
March 31, 2004 and $0.6 million in the three months ended March 31, 2003. Net
cash used by operations during the 2004 period included a net loss of $0.7
million, an increase in inventory of $0.5 million and a decrease in accrued
expenses of $0.3 million. Inventory was increased during the period as proceeds
from the offering were used to increase inventory levels in all stores. We are
currently experiencing approximately $0.1 million per month of negative cash
flow from operations and expect to continue with a negative cash flow from
operations until we implement the proceeds of our public offering, at which time
we expect that the proceeds will result in increased sales and margins and thus
positively impact cash flow from operations.
Net cash used in investing activities for purchases of property and
equipment was $0.2 million for the three months ended March 31, 2004.
Net cash provided by financing activities was $1.0 million for the
three months ended March 31, 2004, primarily due to receipt of $3.4 million from
the public offering, $4.6 million of borrowings under a line of credit and
increases in cash overdrafts of $0.2 million, offset by payments under the lines
of credit of $7.0 million. Net cash provided by financing activities was $0.7
million in the 2003 period.
At March 31, 2004, Mr. Zimmerman has advanced an aggregate of $5.0
million, which is carried on the balance sheet as convertible note, related
party. 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 have the right to
prepay the note at any time.
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million
lines of credit with Bank of America. At March 31, 2004, approximately $2.8
million is available under these lines. 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. 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 March 31, 2004 have been included in the accounts
payable and accrued expenses, related party and interest expense.
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 to be approximately $1.2 million in 2004.
13
We anticipate spending additional capital primarily for opening new
stores, reducing accounts payable and increasing our inventory. We believe that
the net proceeds from the public 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. 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.
ITEM 3. 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 March
31, 2004, our interest expense for 2004 would increase $0.1 million based on the
outstanding balance at March 31, 2004. We do not hold any derivative instruments
and do not engage in hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of the end of the period covered by this report. Based upon the
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date of the evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
31.1 Certification of Raymond Zimmerman, President and Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14 (a), promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Barry Bilmes, Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14 (a), promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by Raymond Zimmerman,
Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Barry Bilmes, Chief
Financial Officer
(b) Reports on Form 8-K
Not applicable
15
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
and 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, President
Dated: April __, 2004
16