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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, 2004
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
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99 CENT STUFF INC.
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(Exact name of registrant as specified in its charter)
Florida 77-0398908
------------------------ ------------------------------------
(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, 2004 was
$5,100,000. The number of shares outstanding of the issuer's common stock as of
February 15, 2005 was 5,832,950.
DOCUMENTS INCORPORATED BY REFERENCE: None.
1
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 16 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
2004 average net sales per store was $4.2 million for stores open the full year.
In 2004, our average sale per customer was $9.87.
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, our
stores offer a continually changing selection of brands and products. We believe
that over the last few 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 2004, we purchased from more than 500 suppliers, including merchandise
with the brand names General Mills, Colgate-Palmolive, Dial, Eveready Battery,
Heinz, General Electric, Gerber Products, Gillette, Hershey Foods, Johnson &
Johnson, Kraft General Foods, Lever Brothers, Mattel, Nabisco, Nestle,
Pillsbury, Hunts, Del Monte, Procter & Gamble and Revlon.
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. We have recently begun purchasing merchandise in the Far
East.
EXPANSION STRATEGY
The Florida market is rapidly growing and is the fourth most populous
state, with over 17 million residents or nearly 6% of the nation's population.
All of our current stores are in Miami-Dade, Broward, Palm Beach and Martin
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 at least eight stores in 2005. 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 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.
3
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,
2000 2001 2002 2003 2004
----------- ----------- ----------- ----------- -----------
99 Cent Stuff Stores retail sales $14,220,000 $35,890,000 $38,661,000 $39,580,000 $47,147,000
99 Cent Stuff Stores annual sales
growth rate 256.9% 152.4% 7.7%
99 Cent Stuff Stores open at
beginning of year 3 8 10 11 11
99 Cent Stuff Stores open at end
of year 8 10 11 11 15
Average 99 Cent Stuff Stores
sales per store for stores open
the full year $ 3,967,000 $ 3,678,000 $ 3,654,000 $ 3,871,000 $ 4,164,000
Saleable square feet at year end 158,000 172,000 189,000 165,000 235,000
Average net sales per saleable
square foot $ 229 $ 226 $ 214 $ 240 $ 252
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 75% 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 16 of our 99 Cent Stuff stores (15 at
December 31, 2004) are located in south Florida. Our stores average 20,000
square feet. We currently target new store locations of 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 due to the traffic
at that location. The stores are located primarily in more densely populated,
demographically diverse neighborhoods. Five of the stores are in Miami-Dade
County, five are in Palm Beach County, five are in Broward County and one in
Martin 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, food cards or
check. The stores do not accept manufacturers' coupons. 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 signage 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 $600,000. 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 Las Vegas 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 25% of
our total purchases due to the high turnover of inventory, no single supplier
accounted for more than 5% of total purchases in 2004. During 2004, we purchased
from more than 500 suppliers, including merchandise with the General Mills,
Colgate-Palmolive, Dial, Eveready Battery, Heinz, General Electric, Gerber
Products, Gillette, Hershey Foods, Johnson & Johnson, Kraft General Foods, Lever
Brothers, Mattel, Nabisco, Nestle, Pillsbury, Hunts, Del Monte, Procter & Gamble
and Revlon 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 65,000 square foot, single level warehouse and distribution
facility in Medley, Florida. This site is conveniently located near freeway,
rail systems and ports. The distribution facility has 13 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. 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 35 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 information management technology in 2006 to
better manage our inventories for growth beyond 25 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.
EMPLOYEES
At February 14, 2005, we had 482 employees of whom 432 were in our
retail operations, 30 in our warehouse and distribution facility and 20 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.
7
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
Jensen Beach 27,109 22,109 June 2004
Pembroke Pines 27,109 22,109 July 2004
Hialeah 20,560 15,560 August 2004
Pembroke Pines East 12,000 11,000 December 2004
Kendall 19,709 16,000 January 2005
Miami Warehouse 64,000 -- September 2004
Boca Raton Corporate Office 4,300 -- August 2003
The initial terms of the leases expire from 2005 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
We are not currently a party to any legal actions that 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
and our warrants under the symbol NNCTW. 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 and the warrants for the quarters indicated. The common
stock 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.
COMMON STOCK
2002 HIGH LOW
----------- -----------
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
2004
January 1 to March 31 $ 6.05 $ 5.00
April 1 to June 30 $ 5.35 $ 4.60
July 1 to September 30 $ 6.50 $ 4.65
October 1 to December 31 $ 5.90 $ 5.00
WARRANTS
2004
January 1 to March 31 $ 1.00 $ .85
April 1 to June 30 $ 1.10 $ 1.10
July 1 to September 30 $ 1.60 $ 1.60
October 1 to December 31 $ 1.35 $ 1.35
As of February 15, 2005, there were approximately 500 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.
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
None
9
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share numbers)
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
STATEMENT OF
OPERATIONS DATA
Net sales $ 14,219 $ 35,889 $ 35,661 $ 38,580 $ 47,147
Cost of goods sold 10,571 26,261 28,683 28,583 33,975
-------- -------- -------- -------- --------
Gross profit 3,648 9,628 9,978 10,997 13,172
Selling, general
administrative expenses 8,273 14,558 14,035 13,552 16,260
-------- -------- -------- -------- --------
Loss from operations (4,625) (4,930) (4,057) (2,555) (3,088)
-------- -------- -------- -------- --------
Other expense (648) (1,581) (1,288) (1,160) (470)
-------- -------- -------- -------- --------
Net loss $ (5,273) $ (6,511) $ (5,345) $ (3,715) $ (3,558)
======== ======== ======== ======== ========
Net loss per share $ (1.11) $ (1.37) $ (1.13) $ (0.77) (0.62)
======== ======== ======== ======== ========
Weighted average
common
shares outstanding 4,750 4,750 4,750 4,833 5,747
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
BALANCE SHEET DATA (1):
Working capital
(deficit) $ (817) $ (3,254) $ (1,157) $ (247) $ (5,800)
Total assets 8,693 7,881 5,817 5,732 7,805
Total long term debt -- -- 3,200 10,570 --
Total equity (deficit) $ 3,486 $ (661) $ (4,684) $ (8,069) $ (8,333)
- --------------------
(1) The balance sheet data has been restated to give effect to the conversion
of a 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 16 retail stores in south Florida. We opened our first three
stores in 1999, five stores in 2000, two stores in 2001, one in 2002, one in
2003, four in 2004 and one in 2005. 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
and food 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. From time to time, due to our lack of operating cash, we were not
able to purchase inventory in the most efficient fashion and we have generally
incurred lower margins than some of our competitors. This has also affected our
revenues. We have been instituting various changes to our buying and
merchandising to 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, 2004 and December 31, 2003
no inventory was impaired.
Further information is provided in Note 2 to the Consolidated Financial
Statements.
11
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Net sales. Net sales increased $7.5 million, or 19.1%, to $47.1 million
in 2004 from $39.6 million in 2003. Same store net sales, for stores open all of
both periods, increased $2.9 million in 2004, or 7.6%, compared to the prior
year. The increase in net sales was primarily due to increased levels of
inventory resulting in more goods available for sale and increased volume in
produce. During 2004 and 2003, approximately 27.5% 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. Fourth quarter sales were $13.6
million in 2004. High margin merchandise ordered from the Far East and
anticipated to be in our stores during the quarter arrived late and was delayed
in customs, which limited to some extent our fourth quarter gains in sales and
margin. These goods will now flow through operations in the first quarter 2005.
Gross profit. Gross profit, which consists of net sales less cost of
goods sold, increased $2.2 million, or 19.8%, to $13.2 million in 2004 from
$11.0 million in 2003. As a percentage of net sales, gross profit increased to
27.9% in 2004 from 27.8% in 2003 and was primarily attributable to a change in
the product mix and cost variations, partially offset by increased sales in
produce, which generally has lower margins and increased shrinkage than
non-perishable products.
Selling, general and administrative. Selling, general and
administrative expenses, or SG&A, which include operating expenses and
depreciation and amortization, increased $2.7 million, or 20.0%, to $16.3
million in 2004 from $13.6 million in 2003 and was primarily attributable to
increased wages and related benefits of $1.4 million, occupancy costs of $0.6
million, new store pre-opening expenses of $0.4 million insurance expense of
$0.2 million and additional costs of being a public company for the full year in
2004. As a percentage of sales SG&A was 34.6% in 2004 compared to 34.3% in 2003.
We expect that SG&A as a percentage of sales will decrease as we open additional
stores.
Operating loss. Operating loss increased $0.5 million, or 20.9%, to
$3.1 million in 2004 from $2.6 million in 2003. As a percentage of net sales,
operating loss was 6.5% in both 2004 and 2003 and was primarily attributable to
the items discussed above.
Other (income) expense. Interest expense decreased $0.7 million, or
55.5%, to $0.5 million in 2004 from $1.2 million in 2003. The decrease was
primarily attributable to decreased borrowings and lower interest rates.
Interest expense decreased to 1.1% of net sales in 2004 from 3.1% in 2003.
Net loss. As a result of the items discussed above, net loss decreased
$0.2 million, or 4.2%, to $3.5 million in 2004 from $3.7 million in 2003.
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.
12
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.
LIQUIDITY AND CAPITAL RESOURCES
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.
From inception on June 28, 1999 until the first closing of our public
offering February 2004, we were funded principally from loans provided by
Raymond Zimmerman, our principal shareholder and bank loans personally
guaranteed by Mr. Zimmerman, and did not have other external sources of
financing. Virtually all of our fixed assets, including fixtures and equipment,
were purchased using advances made to 99 Cent Stuff from Mr. Zimmerman. In
September 2004, we had utilized all of the proceeds of the offering and borrowed
$0.5 million from Mr. Zimmerman to fund fourth quarter growth. In November 2004
we borrowed an additional $250,000 and an additional $0.5 million in January
2005. These amounts bear interest at the prime rate plus 2% and are payable on
demand commencing January 1, 2007.
At December 31, 2004, we had negative working capital of $5.8 million,
primarily due to the existing bank loans being due in 2005. At that date we had
no cash and $0.2 million in borrowing availability.
At December 31, 2004, Mr. Zimmerman had advanced an aggregate of $6.1
million, which was carried on the balance sheet as accounts payable and accrued
expenses, related party. Interest was accrued at a rate equal to the prime rate.
Of this amount $5.0 million was converted into an unsecured convertible note.
This note was originally due December 1, 2005 and has been extended to December
31, 2006 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
2003, notes payable of $14.6 million was converted into 4,750,000 shares of
common stock as part of the merger with iVideoNow.
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. 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, 2004 have been included in the accounts
payable and accrued expenses, related party.
At December 31, 2004, approximately $0.2 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, but over the remainder of
the year an additional $3.6 million was borrowed to fund expansion and
operations. In March 2005, the bank agreed to extend the maturity of the loans
from June 2005 to June 2007. As a result, these loans will be reclassified to
long-term liabilities.
In addition, Mr. Zimmerman has agreed to provide up to $3 million of
additional capital during 2005 to fund any deficits in operating cash flow.
Other than the existing Bank of America lines of credit and this commitment,
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.
13
Net cash used by operations was $2.6 million in 2004 and $2.2 million
in 2003. Net cash used by operations during the 2004 period included a net loss
of $3.6 million, depreciation of $1.0 million, and increase in inventory of $1.2
million, of accounts payable of $1.2 million and accrued interest, related party
of $0.4 million. Net cash used by operations during 2003 included a net loss of
$3.7 million, accrued interest, related party of $1.1 million, depreciation of
$0.9 million an increase in inventories of $0.3 million, and a decrease in
accounts payable of $0.1 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 2004.
Net cash used in investing activities for purchases of property and
equipment was $1.8 million in 2004 and $0.3 million in 2003. The increase was
principally attributable to new store openings.
Net cash provided by financing activities was $4.3 million in 2003,
primarily due to $3.3 million from the sale of common stock in the public
offering, $0.1 million of borrowings under a line of credit, increases in cash
overdrafts of $0.1 million and increases in accounts payable and accrued
interest, related party of $0.8 million. 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 reflects increases in
borrowings under a line of credit personally guaranteed by Mr. Zimmerman in the
amount of $0.1 million in 2004 and $2.4 million during 2003. We used all of the
proceeds of the public offering in 2004.
Our future capital expenditures will depend primarily on the number and
timing of new stores we open. We plan to open between eight and ten additional
new stores by the end of 2005. 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. Total cost of a new
store ranges from $400,000 to $600,000.
In connection with store openings, we have projected our capital
expenditure needs in 2005 to be approximately $2.0 million.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables summarize our contractual obligations and
commercial commitments as of December 31, 2004:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------
SIGNIFICANT CONTRACTUAL OBLIGATIONS TOTAL WITHIN 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------------------- ----------- ------------- ---------- ---------- -------------
Operating Leases $16,246,000 $2,833,000 $5,284,000 $3,884,000 $4,245,000
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. We do not have any capital leases.
We moved to a larger warehouse facility in 2004. Our current warehouse
facility should be sufficient at least through 2006. We expect to upgrade our
information technology system in 2006. The cost of this upgrade cannot be
estimated at this time.
We are currently seeking additional financing and have retained an
investment banking firm, which is currently soliciting interest from
institutional investors in a private placement of convertible securities. No
assurances can be given that the offering will be successful or that the terms
of any such offering will not be dilutive to existing shareholders.
14
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the SEC issued SAB No. 104. SAB No. 104 revises or
rescinds portions of the interpretive guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. It also rescinds the Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers document issued in
conjunction with Topic 13. Selected portions of that document have been
incorporated into Topic 13. The adoption of SAB No. 104 did not have a material
impact on the Company's financial position, results of operations or cash flows.
In July 2004, the Emerging Issues Task Force ("EITF") published its
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments." EITF Issue No. 03-1 addresses the
meaning of other than temporary impairment and its application to debt and
equity securities within the scope of SFAS No. 115, certain debt and equity
securities within the scope of SFAS No. 124, and equity securities that are not
subject to the scope of SFAS No. 115 and accounted for under the equity method.
In September 2004, the FASB issued FASB Staff Position ("FSP") EITF Issue No.
03-1-1, which delays the effect date for the recognition and measurement
guidance in EITF Issue No. 03-1. In addition, the FASB has issued a proposed FSP
to consider whether further application guidance is necessary for securities
analyzed for impairment under EITF issue No. 03-1. The Company continues to
assess the potential impact that the adoption of the proposed FSP could have on
our financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
"Share-Based Payment," that addresses the accounting for share-based payment
transactions in which a Company receives employee services in exchange for (a)
equity instruments of the Company or (b) liabilities that are based on the fair
value of the Company's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Under SFAS No. 123R companies
are required to record compensation expense for all share based payment award
transactions measured at fair value. This statement is effective for quarters
ending after June 15, 2005. The Company has not yet determined the impact of
applying the various provisions of SFAS No. 123R.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs". This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). In addition, this Statement
requires that allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. The provisions of
this Statement will be effective for the Company beginning with its fiscal year
ending 2005. The Company is currently evaluating the impact of this new
standard, but believes that it will not have a material impact on the Company's
financial position, results of operations or cash flows.
15
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Non-monetary Assets--an amendment of APB Opinion No. 29". This Statement amended
APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Company is
currently evaluating the impact of this new standard, but believes that it will
not have a material impact upon the Company's financial position, results of
operations or cash flows.
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 its investment.
WE HAVE HAD LOSSES SINCE INCEPTION IN 1999, WHICH HAS AFFECTED OUR WORKING
CAPITAL.
We had losses of $3.6 million in 2004 and $3.7 million in 2003. We
cannot assure you that we will have a profit in 2005 or any future year. Due to
these losses, we had a negative working capital of $5.8 million at December 31,
2004 and have continued to need cash for operations. This amount excludes
approximately $6.1 million owed to Raymond Zimmerman, our chairman and principal
shareholder. Our losses since inception in 1999 were due to
o costs associated with the opening of all of its stores,
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. Given our operating expenses, we need to increase our gross
margins in order to be profitable.
WE HAVE BEEN FINANCIALLY DEPENDENT ON OUR PRINCIPAL SHAREHOLDER FOR MUCH OF OUR
CAPITAL.
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. Other than the public offering that
raised approximately $3.4 of net proceeds, we have not generally relied upon
other external sources of financing. Although Mr. Zimmerman converted $14.6
million to equity, he is still owed approximately $6.1 million and has ongoing
personal guarantees of $6.0 million of bank loans and of property leases. Mr.
Zimmerman has also committed to provide up to $3 million during 2005 to fund
deficits in operating cash flow. 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 WILL NEED ADDITIONAL CAPITAL TO IMPLEMENT OUR LONG TERM 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.
16
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;
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.
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 2005 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 Medley, 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.
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.
17
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 2004. 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.
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
18
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.
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.
19
WE ARE CONTROLLED BY OUR PRIMARY SHAREHOLDER. HIS INTERESTS MAY CONFLICT WITH
YOUR INTERESTS.
Raymond Zimmerman and his family beneficially own approximately 81% 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 $6.1 million for advances he has
made. Approximately $5.0 million of 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.
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK.
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 2005 as compared to the rate at
December 31, 2004, our interest expense for 2005 would increase $0.1 million
based on the outstanding balance at December 31, 2004. 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 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 iVideoNow on any matter of accounting principles or
practices, 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.
20
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.
ITEM 9B. OTHER INFORMATION
There is no other information that was required to be disclosed in a
report on Form 8-K during the fourth quarter of 2004 that we did not report.
PART III
Because we will file a Proxy Statement within 120 days after the end of
the fiscal year ending December 31, 2004, this Annual Report on Form 10-K omits
certain information required by Part III and incorporates by reference certain
information included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information about our executive officers and directors and all other
matters required to be disclosed in Item 10 appears under "Election of
Directors" in the Proxy Statement. That portion of the Proxy Statement is hereby
incorporated by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information about compliance with Section 16(a) of the Securities
Exchange Act of 1934 appears under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the "Election of Directors" section of the Proxy Statement and is
hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information about compensation of our named executive officers appears
under "Executive Compensation" in the "Election of Directors" section of the
Proxy Statement and is hereby incorporated by reference. Information about
compensation of our directors appears under "Director Compensation" in the
"Election of Directors" section of the Proxy Statement and is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information about security ownership of certain beneficial owners and
management appears under "Security Ownership of Directors and Executive
Officers" in the "Election of Directors" section of the Proxy Statement and is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information about certain relationships and related transactions
appears under "Certain Relationships and Related Transactions in the "Election
of Directors" section of the Proxy Statement and is hereby incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
Information about the fees and services of our principal accountants
appears under "Audit Committee Report" and "Fees of Independent Auditors" in the
"Ratification of Appointment of Independent Public Accountants" section of the
Proxy Statement and is hereby incorporated by reference.
21
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
None
Note: Copies of each Exhibit to this Form 10-K are available upon request.
22
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 30, 2005
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 March 30, 2005
- --------------------- Chief Executive Officer
Raymond Zimmerman
/s/ Barry Bilmes Chief Financial Officer and March 30, 2005
- ---------------- Principal Accounting Officer
Barry Bilmes
/s/ Kevin Keating Director March 30, 2005
- -----------------
Kevin Keating
/s/ Leonard Florence Director March 30, 2005
- --------------------
Leonard Florence
/s/ Nathan Light Director March 30, 2005
- ----------------
Nathan Light
23
99 CENT STUFF, LLC
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Registered Public Accounting Firm.....................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2004 and 2003 ...............F-3
Consolidated Statements of Operations for
the years ended December 31, 2004, 2003 and 2002 ........................F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended December 31, 2004, 2003 and 2002.....................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 ........................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
[LETTERHEAD OF Daszkal Bolton LLP]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Shareholders
99 Cent Stuff, Inc. and Subsidiary
We have audited the accompanying balance sheets of 99 Cent Stuff, Inc. and
subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for the years ended December 31, 2004, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 99 Cent Stuff, Inc. at December
31, 2004 and 2003, and the results of their operations and their cash flows for
the years ended December 31, 2004, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Daszkal Bolton LLP
- ----------------------
Boca Raton, Florida
February 16, 2005, except for
Note 8, which is dated
March 29, 2005
F-2
99 CENT STUFF, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
================================================================================
ASSETS
2004 2003
-------- --------
Current assets:
Cash $ -- $ 26
Inventory 3,771 2,531
Prepaid expenses and other assets 467 427
-------- --------
Total current assets 4,238 2,984
-------- --------
Property and equipment, net 3,396 2,607
-------- --------
Other assets:
Security deposits 171 141
-------- --------
Total assets $ 7,805 $ 5,732
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Lines of credit $ 5,798 $ --
Cash overdraft 115 --
Accounts payable 3,698 2,494
Accrued expenses 468 737
-------- --------
Total current liabilities 10,079 3,231
-------- --------
Long term liabilities:
Accounts payable and accrued expenses,
related party 6,059 4,922
Lines of credit -- 5,648
-------- --------
Total long term liabilities 6,059 10,570
-------- --------
Total liabilities 16,138 13,801
-------- --------
Commitments and Contingencies
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 5,833,950 and 5,066,000
issued and outstanding 6 5
Additional paid-in capital (3,947) (7,240)
Accumulated deficit (4,392) (834)
-------- --------
Total shareholders' deficit (8,333) (8,069)
-------- --------
Total liabilities and shareholders' deficit $ 7,805 $ 5,732
======== ========
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, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
===============================================================================
2004 2003 2002
-------- -------- --------
Net sales $ 47,147 $ 39,580 $ 38,661
Cost of goods sold 33,975 28,583 28,683
-------- -------- --------
Gross profit 13,172 10,997 9,978
Selling, general and administrative expense 16,260 13,552 14,035
-------- -------- --------
Loss from operations (3,088) (2,555) (4,057)
-------- -------- --------
Other income (expense):
Other income 71 55 60
Interest expense (541) (1,215) (1,348)
-------- -------- --------
Total other income (expense) (470) (1,160) (1,288)
-------- -------- --------
Net loss $ (3,558) $ (3,715) $ (5,345)
======== ======== ========
Loss per share:
Net loss per share, basic and diluted $ (0.62) $ (0.77) $ (1.13)
Weighted average number of common and common
equivalent shares outstanding - basic and diluted 5,747 4,833 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, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
===============================================================================
Common Stock
-------------------
Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
------- ------- ------- ------- -------
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)
Sale of common stock, net of expenses 767 1 3,293 -- 3,294
Net loss -- -- -- (3,558) (3,558)
------- ------- ------- ------- -------
Balance, December 31, 2004 $ 5,833 $ 6 $(3,947) $(4,392) $(8,333)
======= ======= ======= ======= =======
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, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
===============================================================================
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net loss $ (3,558) $ (3,715) $ (5,345)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 974 850 899
Interest accrued on payables, related party 388 1,053 1,249
Loss on store closing -- -- 150
(Increase) decrease in:
Prepaid expenses and other assets (40) (145) (23)
Inventory (1,240) (345) 1,199
Security deposits (30) 26 (1)
Receivable from former officer -- -- 175
Increase (decrease) in:
Accounts payable 1,204 (102) (821)
Accrued expenses (269) 141 402
-------- -------- --------
Net cash used in operating activities (2,571) (2,237) (2,116)
-------- -------- --------
Cash flows used in investing activities:
Purchase of property and equipment (1,763) (275) (256)
-------- -------- --------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party 750 523 1,956
Increase (decrease) in cash overdraft 115 (433) 116
Borrowings under lines of credit 16,102 17,347 15,865
Repayments under lines of credit (15,952) (14,899) (15,565)
Sale of common stock, net of expenses 3,293 -- --
-------- -------- --------
Net cash provided by financing activities 4,308 2,538 2,372
-------- -------- --------
Net increase (decrease) in cash (26) 26 --
Cash at beginning of year 26 -- --
-------- -------- --------
Cash at end of year $ -- $ 26 $ --
======== ======== ========
Supplemental cash flow information:
Interest paid $ 139 $ 145 $ 104
======== ======== ========
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 fifteen locations at
December 31, 2004 and eleven locations at December 31, 2003 and 2002. 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, 2004 and 2003, the total credit and debit card receivables were $59
and $53, 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, 2004 and 2004, the
allowances for these items were $5 and $50, 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 were taxed separately on
their distributive share of the Partnership's income whether or not that income
was 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 $27, $6 and $13 for the years ended December 31, 2004, 2003 and
2002, 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, 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, 2004, 2003 and 2002.
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. 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 year periods ended
December 31, 2004:
2004
----------
Net loss
As reported $ (3,558)
=========
Pro forma $ (3,625)
=========
Earnings per share
As reported $ (0.62)
=========
Pro forma $ (0.63)
=========
New Accounting Pronouncements
- -----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities
(VIE)," (revised December 2003 by FIN No. 46R), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. For variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For any VIEs that
must be consolidated under FIN No. 46R that were created before January 1, 2004,
the assets, liabilities and non-controlling interests of the VIE initially would
be measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. The adoption of FIN No. 46R did not have a material impact
on the Company's financial position, results of operations or cash flows as the
Company does not have any VIEs.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF 03-01 provides guidance on
other-than-temporary impairment models for marketable debt and equity securities
accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and SFAS No. 124, "Accounting for Certain Investments
Held by Not-for-Profit Organizations," and non-marketable equity securities
accounted for under the cost method. The EITF developed a basic three-step model
to evaluate whether an investment is other-than-temporarily impaired.
F-9
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
In September 2004, the FASB issued FASB Staff Position EITF 03-01-1, which
delays the effective date until additional guidance is issued for the
application of the recognition and measurement provisions of EITF 03-01 to
investments in securities that are impaired; however, the disclosure
requirements are effective for annual periods ending after June 15, 2004. The
adoption of the disclosure provisions of EITF 03-01 did not have a material
effect on the Company's results of operations or financial condition.
In November 2004, the FASB issued SFAS 151, Inventory Costs--an amendment of ARB
No. 43, Chapter 4 . The Statement amends the guidance of ARB No. 43, Chapter 4,
Inventory Pricing , by clarifying that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and by requiring the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. It does not appear that this Statement will have a material effect
on the financial position, operations or cash flows of the Company when it
becomes effective in 2006.
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), a revision to SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, including obtaining employee services
in share-based payment transactions. SFAS 123R applies to all awards granted
after the required effective date and to awards modified, repurchased, or
cancelled after that date. Adoption of the provisions of SFAS 123R is effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. The Company is currently in the process of evaluating the
potential impact that the adoption of SFAS 123R will have on its consolidated
financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary
Assets--an amendment of APB Opinion No. 29". This Statement amended APB Opinion
No. 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Company is
currently evaluating the impact of this new standard, but believes that it will
not have a material impact upon the Company's financial position, results of
operations or cash flows.
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following at December 31, 2004 and 2003:
2004 2003
------- -------
Computer equipment $ 759 $ 516
Furniture, fixtures and equipment 4,523 3,621
Leasehold improvements 2,028 1,410
------- -------
Total property and equipment 7,310 5,547
Less: accumulated depreciation and amortization (3,914) (2,940)
------- -------
Net property and equipment $ 3,396 $ 2,607
======= =======
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$974, $850 and $899, respectively.
F-10
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
At December 31, 2004 and 2003, the Company was indebted to a shareholder in the
amount of $6,059 and $4,922 respectively, for funds advanced to the Company. On
December 1, 2003, this indebtedness was converted into a note payable, due
December 1, 2006 and bears interest at the prime rate (5.25% at December 31,
2004). As of December 31, 2004, 2003 and 2002, interest expense of $229, $1,053
and $1,134 was accrued and included in this indebtedness to the shareholder.
Included in the amount owing to a shareholder is $5,005, which is convertible
into Common Stock at the $5.20 per share 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, 2004, 2003 and 2002, interest
expense of $153, $134 and $115 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 sheets.
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.
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 $2,753, $2,392 and
$2,371 for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, future minimum lease payments for these leases are as
follows:
Year Ending December 31,
----------------------------
2005 $ 2,833
2006 2,654
2007 2,630
2008 2,109
2009 1,775
Thereafter 4,245
--------
Total minimum lease payments $ 16,246
========
NOTE 6 - CREDIT FACILITIES
- --------------------------
At December 31, 2004 and 2003, the Company has 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 (4.25% and 3.00% at
December 31, 2004 and 2003, respectively). 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, 2004 and 2003, the
Company owed $5,798 and $5,648, respectively on its revolving lines of credit.
At December 31, 2004 and 2003, the Company had outstanding irrevocable letters
of credit approximating $230 and $102, respectively. These letters of credit,
which have terms of three months to one year, collateralize the Company's
F-11
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
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 - LEGAL MATTERS
- ----------------------
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 and this amount was paid in
November 2003.
NOTE 8 - FINANCIAL ANALYSIS AND LIQUIDITY
- -----------------------------------------
At December 31, 2004, the Company had negative working capital of $5.8
million, primarily due to the existing bank loans being due in 2005. At that
date the Company had no cash and $0.2 million in borrowing availability. 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 closeout and other special-situation
opportunities, which frequently result in volume purchases requirements, 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 purchases.
At December 31, 2004, approximately $0.2 million was available under
the Company's lines of credit. In February and March 2004, the Company paid down
the lines by approximately $3.4 million from the proceeds of the public
offering, but over the remainder of the year an additional $3.6 million was
borrowed to fund expansion and operations. In March 2005, the bank agreed to
extend the maturity of the loans from June 2005 to June 2007. In addition, Mr.
Zimmerman has personally guaranteed to fund the Company up to an additional $3.0
million during 2005 for any operating income shortfalls.
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. 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
extension on the line of credit and guarantee by Mr. Zimmerman, 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, 2003 and 2002 have been reclassified to conform with the current
year presentation, with no effect on reported net loss.
F-12
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
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 reasonable 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 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 were 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 in prior years. As part of the reorganization of the
Company this note was converted into equity.
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 98,000 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
- ---------------------------
In 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 employment
with the Company. The following is a summary of option activity for the years
ended December 31, 2004 and 2003.
F-13
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES (NOT IN THOUSANDS)
--------- ------------------
Outstanding at January 1, 2003 -- --
Granted 92 $ 5.00
Exercised -- --
Forfeited -- --
Outstanding at December 31, 2003 92 $ 5.00
Granted 26 $ 5.00 to 5.85
Exercised -- --
Forfeited (20) --
----- --------------
Outstanding at December 31, 2004 98 $ 5.00 to 5.85
===== ==============
Exercisable at December 31, 2004 --
=====
Available for issuance at December 31, 2004 152
=====
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 0.302
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.
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 year ended December 31,
2004 and 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
reported 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.
2004 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:
F-14
99 CENT STUFF, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
================================================================================
2004 2003
------- -------
Taxes computed at combined federal and state tax rate $(1,210) $(1,263)
Non-deductible expenses 1 980
State income taxes, net of federal income tax benefit (129) (30)
Increase (decrease) in deferred tax asset
valuation allowance 1,338 313
------- -------
Provision (benefit) for income taxes $ -- $ --
======= =======
The components of the deferred tax asset were as follows at December 31:
2004 2003
------- -------
Deferred tax assets:
Net operating loss carryforward $ 1,234 $ 209
Depreciation (38) 33
Accrued expenses 140 52
Inventory reserve 2 19
------- -------
Total deferred tax assets 1,338 313
------- -------
Valuation allowance:
Beginning of year (313) --
Decrease (increase) during the year (1,025) (313)
------- -------
Ending balance (1,338) (313)
------- -------
Net deferred taxes $ -- $ --
======= =======
As of December 31, 2004, the Company had an unused net operating loss
carryforward of approximately $3,834 available for use on its future corporate
income tax returns. This net operating loss carryforward expires beginning in
December 2023. Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of any of the Company's net operation 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 2004, 2003 and 2002, one supplier provided approximately 25% of total
purchases.
F-15