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: SEPTEMBER 30, 2004
Commission File Number: 0-26351
99 CENT STUFF, INC.
(Exact name of registrant as specified in its charter)
Florida 20-0233210
------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1801 Clint Moore Road 33487
Boca Raton, Florida -----
------------------- (Zip Code)
(Address of principal executive offices)
(561) 999-9815
--------------
(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 September 30, 2004, was 5,833,950 shares.
99 CENT STUFF, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited) at September 30, 2004.................. 3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2004 and 2003............... 4
Consolidated Statement of Shareholders' (Deficit)
For the Nine Months Ended September 30, 2004.................................. 5
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2004 and 2003......................... 6
Notes to Consolidated Financial Statements (Unaudited)........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risks..........14
Item 4. Control and Procedures...............................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................15
Item 2. Changes in Securities and Use of Proceeds............................15
Item 3. Defaults Upon Senior Securities......................................15
Item 4. Submission of Matters to a Vote of Security Holders..................15
Item 5. Other Information....................................................15
Item 6. Exhibits and Reports On Form 8-K.....................................15
Signatures....................................................................16
Certifications
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Balance Sheet
(Amount in Thousands, Except Share Data)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
Current assets:
Cash $ -- $ 26
Inventory 4,343 2,531
Prepaid expenses and other assets 240 427
-------- --------
Total current assets 4,583 2,984
-------- --------
Property and equipment, net 3,380 2,607
-------- --------
Other assets:
Security deposits 120 141
-------- --------
Total assets $ 8,083 $ 5,732
======== ========
Current liabilities:
Cash overdraft $ 250 $ --
Lines of Credit 5,298 --
Note payable, related party 500 --
Accounts payable 3,674 2,494
Accrued expenses 500 737
-------- --------
Total current liabilities 10,222 3,231
-------- --------
Long term liabilities:
Note payable, related party 5,192 4,922
Lines of Credit -- 5,648
-------- --------
Total long term liabilities 5,192 10,570
-------- --------
Total liabilities 15,414 13,801
-------- --------
Commitments and contingencies
Shareholders' deficit
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
September 30, 2004 and December 31, 2003, respectively 6 5
Additional paid in capital (3,951) (7,240)
Retained Earnings (3,386) (834)
-------- --------
Total shareholders' deficit (7,331) (8,069)
-------- --------
Total liabilities and shareholders' deficit $ 8,083 $ 5,732
======== ========
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.
3
99 Cent Stuff, Inc
Statement of Operations
For the Three Months and Nine Months Ended September 30, 2004 and 2003
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2004 2003 2004 2003
-------- ------- -------- --------
Net sales $ 11,847 $ 9,456 $ 33,542 $ 28,689
Cost of goods sold 8,568 6,932 24,172 21,036
-------- ------- -------- --------
Gross profit 3,279 2,524 9,370 7,653
Selling, general and administrative expenses 4,236 3,349 11,597 9,921
-------- ------- -------- --------
Loss from operations (957) (825) (2,227) (2,268)
-------- ------- -------- --------
Other income (expense):
Other income 23 19 46 38
Interest expense (126) (308) (371) (1,068)
-------- ------- -------- --------
Total other income (expense) (103) (289) (325) (1,030)
-------- ------- -------- --------
Loss before provision for income taxes (1,060) (1,114) (2,552) (3,298)
Provision for Income Taxes -- -- -- --
-------- ------- -------- --------
Net loss $ (1,060) $(1,114) $ (2,552) $ (3,298)
======== ======= ======== ========
Net loss per share, basic and diluted $ (0.18) $ (0.23) $ (0.45) $ (0.69)
======== ======= ======== ========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,834 4,824 5,718 4,775
======== ======= ======== ========
See the accompanying notes to the condensed consolidated financial statements.
4
99 Cent Stuff, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
For the Year Ended December 31, 2003 and the
Nine Months Ended September 30, 2004
(Amount in Thousands)
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 3,289 -- 3,290
Net loss for the nine months ended September 30, 2004 (2,552) (2,552)
------ ------- ------- ------- -------
Balance, September 30, 2004 5,833 $ 6 $(3,951) $(3,386) $(7,331)
====== ======= ======= ======= =======
See the accompanying notes to the condensed consolidated financial statements.
5
99 Cent Stuff, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003
(Amounts in Thousands)
(Unaudited)
September 30,
--------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net loss $ (2,552) $ (3,298)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 713 632
Interest accrued on payables, related party 270 660
(Increase) decrease in:
Prepaid expenses and other assets 187 (16)
Inventory (1,812) 43
Security deposits 21 11
Increase (decrease) in:
Accounts payable 1,180 121
Accrued expenses (237) (96)
-------- --------
Net cash used in operating activities (2,230) (1,943)
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment (1,486) (258)
-------- --------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party 500 312
Increase (decrease) in cash overdraft 250 (350)
Borrowings under lines of credit 12,078 14,128
Repayments under lines of credit (12,428) (11,889)
Sale of common stock, net of expenses 3,290
-------- --------
Net cash provided by financing activities 3,690 2,201
-------- --------
Net increase (decrease) in cash (26) --
Cash at beginning of year 26 --
-------- --------
Cash at end of period $ -- $ --
======== ========
Supplemental cash flow information:
Interest paid $ 139 $ 105
======== ========
See the accompanying notes to the condensed consolidated financial statements.
6
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
99 Cent Stuff LLC (the "Company") was organized under the laws of the State of
Delaware on September 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 at 14 locations at September 30,
2004. 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 consisting of a
normal and recurring nature considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
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.
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 September 30, 2004 and December 31, 2003,
the allowance for these items was $50.
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
7
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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
SFAS No. 123 "Accounting for Stock Based Compensation", requires the Company to
disclose pro forma information regarding option grants made to its employees.
SFAS No. 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 September
30, 2004:
2004
----
Net loss
As reported $(2,552)
Pro forma $(2,574)
Earnings per share
As reported $ (0.45)
Pro forma $ (0.45)
8
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS
At September 30, 2004 and December 31, 2003, the Company had a long-term note
payable of $5,192 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. In
addition, at September 30, 2004, the Company had a short-term note payable of
$500 for funds advanced from this shareholder. The note is due on demand and
bears interest at the prime rate plus 2%. The Company has the right to prepay
the notes at any time.
NOTE 4 - CREDIT FACILITIES
At September 30, 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 (3.75% at September 30,
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 September 30, 2004, the Company owed $5,298 on its revolving
lines of credit.
At September 30, 2004, the Company had outstanding irrevocable letters of credit
approximating $198. These letters of credit have terms of three months to one
year and 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 -PUBLIC OFFERING
In March 2004 the Company completed its stock offering. The Company sold 767
units (each unit consists of one share of common stock and one warrant) at $5.00
per unit for a total of $3,290, net of expenses of $545.
In July 2004, the Company became aware of a technical violation of the Florida
Securities and Investor Protection Act in connection with its public offering.
Approximately 50,000 shares were sold in Florida. As a result, the Company
offered rescission to Florida purchasers in the offering. The rescission offer
expired in September 2004. No investors elected to rescind their purchase and
accordingly the Company did not establish a reserve for any potential liability.
9
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FINANCIAL ANALYSIS AND LIQUIDITY
As of September 30, 2004, the Company had a working capital deficit of $5,639
and negative net worth of $7,331. From inception on September 28, 1999 to
February 2004, the Company was 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 had negative cash flow from operations during the three months ended
September 30, 2004.
The Company has utilized the offering proceeds primarily for opening new stores,
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 its
current working capital financing together with continuing improvements in
operating results, will be sufficient to meet operating and capital needs for
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 name brand, consumable 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 at 99 cents, including extra value savings of two or three items
for 99 cents. 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 14 retail stores in south Florida. We opened our first three
stores in 1999, five stores in 2000, two stores in 2001 one in 2002 and three in
2004. We expect to open an additional store by the end of 2004. 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 up to 25 stores. 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, until earlier in 2004 we were
not able to purchase inventory in the most efficient fashion and we incurred
lower margins than some of our competitors. This has also affected our revenues.
We have recently begun directly importing goods, including higher-margin toys,
housewares and giftware. This should allow us to offer a more consistent
presentation, better quality goods and superior profit 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 SEPTEMBER 30, 2004
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003
Net sales. Net sales increased $2.4 million, or 25.3%, to $11.9 million for the
three months ended September 30, 2004 from $9.5 million for the three months
ended September 30, 2003. Same store net sales, for stores open all of both
periods, increased $0.9 million for the three months ended September 30, 2004,
11
or 9.6%, compared to the prior year. The increase in net sales was primarily due
to increased levels of inventory, providing more goods for sale, and increased
volume in produce. During the 2004 period, approximately 28.9% of our sales were
of produce, which has a much higher turnover than the other items sold in our
stores. We anticipate that sales of produce will decrease in the future as a
percentage of net sales due to increased purchasing of higher margin items.
Gross profit. Gross profit, which consists of net sales less cost of goods sold,
increased $0.8 million, or 29.9%, to $3.3 million for the three months ended
September 30, 2004 from $2.5 million for the three months ended September 30,
2003. As a percentage of net sales, gross profit increased to 27.7% in the 2004
period from 26.7% in the 2003 period and was primarily attributable to a change
in the product mix, favorable 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 $0.9 million for the three months ended September 30,
2004, or 26.5%, to $4.2 million in the 2004 period from $3.3 million for the
three months ended September 30, 2003. As a percentage of net sales, SG&A
increased to 35.8% in the 2004 period from 35.4% in the 2003 period, which was
primarily due to a combination of expenses for new store openings and costs
related to the two September hurricanes in the our geographic area, plus
increases in wages and related benefits and occupancy costs. One new store
opened in July and another in September. There were no major increases or
decreases in any other category.
Operating loss. Operating loss was $1.0 million for both the three months ended
September 30, 2004 and $0.8 million for the three months ended September 30,
2003. As a percentage of net sales, operating loss decreased 0.6% to 8.1% in
2004 from 8.7% in 2003 and was primarily attributable to the items discussed
above.
Other (income) expense. Interest expense decreased $0.2 million, or 59.1%, to
$0.1 million for the three months ended September 30, 2004 from $0.3 million for
the three months ended September 30, 2003. The decrease was primarily
attributable to decreased borrowings and lower interest rates. As a percentage
of net sales, interest expense decreased 2.2%, to 1.1% in 2004 from 3.3% in
2003.
Net loss. As a result of the above factors, net loss decreased slightly to $1.06
million for the three months ended September 30, 2004 from $1.11 million for the
three months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003
Net sales. Net sales increased $4.9 million, or 16.9%, to $33.6 million for the
nine months ended September 30, 2004 from $28.7 million for the nine months
ended September 30, 2003. Same store net sales, for stores open all of both
periods, increased $2.4 million in the 2004 period, or 8.5%, compared to the
prior year. The increase in net sales was primarily due to increased levels of
inventory, providing more goods for sale, and increased volume in produce.
During the 2004 period, approximately 28.1% 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 net sales less cost of goods sold,
increased $1.7 million, or 22.4%, to $9.4 million for the nine months ended
September 30, 2004 from $7.7 million for the nine months ended September 30,
2003. As a percentage of net sales, gross profit increased to 27.9% in 2004 from
26.7% 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.
12
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, increased $1.7 million, or 16.9%, to $11.6 million the nine months
ended September 30, 2004 from $9.9 million for the nine months ended September
30, 2003 and was primarily attributable to increased wages and related benefits
of $0.8 million, increased occupancy costs of $0.1 million, costs related to the
two September hurricanes in the our geographic area of $0.1 million, new store
pre-opening expenses of $0.3 million and miscellaneous other expenses of $0.1
million.
Operating loss. Operating loss decreased $0.1 million, or 1.8%, to $2.2 million
for the nine months ended September 30, 2004 from $2.3 million for the nine
months ended September 30, 2003. As a percentage of net sales, operating loss
decreased 1.3% to 6.6% in the 2004 period from 7.9% in the 2003 period and was
primarily attributable to the items discussed above. Absent pre-opening store
expenses of $0.3 million included in selling, general and administrative,
operating loss would have been $1.9 million in 2004, or a 15.0% improvement, as
compared to 2003.
Other (income) expense. Interest expense decreased $0.7 million, or 65.3%, to
$0.4 million for the nine months ended September 30, 2004 from $1.1 million for
the nine months ended September 30, 2003. The decrease was primarily
attributable to decreased borrowings and lower interest rates. As a percentage
of net sales, interest expense decreased 2.6 percentage points, to 1.1% in 2004
from 3.7% in 2003.
Net loss. As a result of the above factors, net loss decreased $0.7 million, or
22.6%, to $2.6 million for the nine months ended September 30, 2004 from $3.3
million for the nine months ended September 30, 2003. Absent pre-opening store
expenses of $0.3 million included in selling, general and administrative, net
loss would have been $2.3 million in 2004, or a 31.7% improvement, as compared
to 2003.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in 1999 until completion of our public offering in
the first quarter of 2004, we were funded principally from loans provided by
Raymond Zimmerman, our principal shareholder and bank loans personally
guaranteed by Mr. Zimmerman. Approximately $14.6 million was converted to equity
in September 2003 as part of the reorganization and the remainder of $5.1
million is shown 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.
In September 2004, we borrowed $0.5 million from Mr. Zimmerman to fund
fourth quarter growth. This note bears interest at the prime rate plus 2% and is
payable on demand.
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.
Net cash used by operations was $2.2 million in the nine months ended
September 30, 2004 and $1.9 million in the Nine Months ended September 30, 2003.
Net cash used by operations during the 2004 period included a net loss of $2.6
million, an increase in inventory of $1.8 million, an increase in accounts
payable of $1.2 million and a decrease in accrued expenses of $0.2 million.
Inventory was increased during the period as proceeds from the offering were
used to increase inventory levels in all stores and to provide inventory for the
new stores opened in the three months ended September 30, 2004. In the first
nine months of 2004, we experienced approximately $0.25 million per month of
negative cash flow from operations. As we open the new stores and offer
13
increased inventory at better margins, we expect that cash flow from operations
will improve and thus positively impact cash flow from operations.
Net cash used in investing activities for purchases of property and
equipment was $1.5 million for the nine months ended September 30, 2004 as
fixtures and equipment for new stores was purchased and other equipment was
upgraded. In connection with store openings, we have projected our capital
expenditures to be approximately $0.2 million for the remainder of 2004.
Net cash provided by financing activities was $3.7 million for the nine
months ended September 30, 2004, primarily due to receipt of $3.3 million from
the public offering, $0.5 million advanced by Mr. Zimmerman, $12.1 million of
borrowings under a line of credit, offset by payments under the lines of credit
of $12.4 million. Net cash provided by financing activities was $2.2 million in
the 2003 period.
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million
lines of credit with Bank of America. At September 30, 2004, approximately $0.7
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 $0.3 million as of September 30,
2004 have been included in the accounts payable and accrued expenses, related
party and interest expense.
Our future capital expenditures will depend primarily on the number and
timing of new stores we open. We have identified additional locations that we
are targeting for new stores in new and existing markets. We plan to open one
additional new store by the end of 2004. Net capital expenditures for a new
store average approximately $0.1 million to $0.3 million, depending on landlord
allowances and existing improvements. The average inventory investment for a new
store is approximately $250,000. 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.
We anticipate spending additional capital primarily for opening new
stores, reducing accounts payable and increasing our inventory. We believe that
our existing resources, together with expected improvements in our operating
results, will be sufficient to meet our operating and capital needs for the
remainder of 2004. Should we determine to open additional stores or our
operating results do not meet expectations, we may be required to raise
additional financing, 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 the second half of 2004 as compared
to the rate at September 30, 2004, our total interest expense for 2004 would
increase $0.1 million based on the outstanding balance at September 30, 2004. We
do not hold any derivative instruments and do not engage in hedging activities.
14
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
In July 2004, the Company became aware of a technical violation of the Florida
Securities and Investor Protection Act in connection with its public offering.
Approximately 50,000 shares were sold in Florida. As a result, the Company
offered rescission to Florida purchasers in the offering. The rescission offer
period expired in September 2004. No investors elected to rescind their
purchase.
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: October __, 2004
16