U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2003
Commission File Number: 0-26351
99 CENT STUFF, INC.
(Exact name of registrant as specified in its charter)
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Florida 20-0233210
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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1801 Clint Moore Road 33487
Boca Raton, Florida -----
------------------- (Zip Code)
(Address of principal executive offices)
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(561) 999-9815
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(Issuer's Telephone Number)
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iVideoNow, Inc.
383 Inverness Parkway, Suite 100, Englewood, Colorado 80112
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes __X__ No ____.
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act) Yes ____ No __X__.
The number of shares of the registrant's common stock issued and outstanding, as
of November 14, 2003, was 5,000,000 shares.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(Amounts in Thousands, Except Share Data)
September 30, December 31,
2003 2002
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(Unaudited)
ASSETS
Current assets:
Inventory $ 2,144 $ 2,186
Prepaid expenses and other assets 298 282
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Total current assets 2,442 2,468
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Property and equipment, net 2,808 3,182
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Other assets:
Security deposits 156 167
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Total assets $ 5,406 $ 5,817
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 83 $ 433
Accounts payable 2,717 2,596
Accrued expenses 501 596
Lines of credit 5,439 3,200
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Total current liabilities 8,740 6,825
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Long term liabilities:
Accounts payable and accrued expenses, related party 4,648 3,676
Total Liabilities 13,388 10,501
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Shareholders' Equity:
Preferred Stock, .01 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares authorized,
5,000,000 shares issued and outstanding 5 5
Additional paid in capital (7,570) (4,689)
Retained Earnings (417) --
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Total shareholders' equity (7,982) (4,684)
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Total liabilities and shareholders' equity $ 5,406 $ 5,817
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
99 Cent Stuff, Inc
Statement of Operations
For the Three Months and Nine Months Ended September 30, 2003 and 2002
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 9,456 $ 9,057 $ 28,689 $ 27,854
Cost of goods sold 6,932 6,630 21,036 20,697
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Gross profit 2,524 2,427 7,653 7,157
Selling, general and administrative expenses 3,349 3,579 9,921 10,143
----------- ----------- ----------- -----------
Loss from operations (825) (1,152) (2,268) (2,986)
----------- ----------- ----------- -----------
Other income (expense):
Other income 19 42 38 54
Interest expense (308) (348) (1,068) (999)
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Total other income (expense) (289) (306) (1,030) (945)
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Loss before provision for income taxes (1,114) (1,458) (3,298) (3,931)
Provision for Income Taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (1,114) $ (1,458) $ (3,298) $ (3,931)
=========== =========== =========== ===========
Net loss per share, basic and diluted $ (0.22) $ (0.29) $ (0.66) $ (0.79)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,000,000 5,000,000 5,000,000 5,000,000
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
99 Cent Stuff, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
September30,
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2003 2002
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Cash flows from operating activities:
Net loss $(3,298) $(3,931)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 632 667
Interest accrued on payables, related party 660 754
(Increase) decrease in:
Prepaid expenses and other assets (16) (42)
Inventory 42 242
Security deposits 11 (9)
Increase (decrease) in:
Accounts payable 121 359
Accrued expenses (95) 373
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Net cash used in operating activities (1,943) (1,587)
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Cash flows used in investing activities:
Purchase of property and equipment (258) (150)
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Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party 312 1,508
Change in cash overdraft (350) 4
Net borrowings under lines of credit 2,239 225
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Net cash provided by financing activities 2,201 1,737
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Net increase (decrease) in cash -- --
Cash at beginning of year -- --
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Cash at end of year $ -- $ --
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Supplemental cash flow information:
Interest paid $ 105 $ 73
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - DESCRIPTION OF BUSINESS
99 Cent Stuff LLC (the "Company") was organized under the laws of the State of
Delaware on June 28, 1999 as a limited liability company. In July 2003, the
Company merged with a public shell, iVideoNow, Inc., and became a C corporation.
The Company is a specialty, single-priced retailer that primarily targets
individuals and small businesses with one-stop shopping for food, produce,
consumable hard lines, health and beauty aids, novelty and impulse items. The
Company was operating retail outlets in eleven locations and ten locations at
December 31, 2002 and December 31, 2001, respectively. The locations are
separately incorporated as limited liability companies and are wholly owned by
the Company. All of the stores are in southeast Florida.
The Company's ability to provide quality merchandise at the 99 cents price point
is subject to certain economic factors, which are beyond the Company's control,
including inflation. Inflation could have a material adverse effect on the
Company's business and results of operations, especially given the constraints
on the Company to pass on any incremental costs due to price increases or other
factors. A sustained trend of significant inflationary pressure could require
the Company to abandon its single price point of 99 cents per item, which could
have a material adverse effect on the Company's business and results of
operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management of the Company, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the financial statements and footnotes included in the Company's S-1 filing
on October 10, 2003 for the year ended December 31, 2002.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash, short-term payables,
borrowings under a line of credit and notes payable. The Company believes that
the carrying amounts approximate fair value.
INVENTORY
Inventory is stated at the lower of average cost or market, with cost determined
on a first-in, first-out (FIFO) basis, and consists of merchandise held for
resale. The Company provides an allowance for certain merchandise that may
become totally obsolete or damaged. Management believes that there is no
obsolete
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99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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or damaged merchandise in its inventory at September 30, 2003 and December 31,
2002, respectively, and therefore no adjustment was necessary.
INCOME TAXES
Prior to the merger with iVideoNow, Inc. the Company was a limited liability
company; the Company was treated as a partnership for Federal and State income
tax purposes. Under subchapter K of the Internal Revenue Code, members are taxed
separately on their distributive share of the Partnership's income whether or
not that income is actually distributed. Upon the completion of the merger, the
Company became a C corporation. Since the Company had a loss since inception, no
income tax expense has been recorded as of September 30, 2002 or 2003. The tax
benefit from the losses has been offset by a valuation allowance.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary limited liability companies, after
eliminations of all material intercompany transactions.
ADVERTISING COSTS
Advertising and sales promotion costs are expensed as incurred.
REVENUE RECOGNITION
Revenue is recognized at the point of sale.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the opening
of new retail stores.
NOTE 3 - RELATED PARTY TRANSACTIONS
At December 31, 2002 and 2001, the Company had notes payable of $14,591,553 for
funds advanced from a shareholder of the Company. As of December 31, 2002
accrued interest of $1,004,602 on this note payable was included in accounts
payable and accrued expenses, related party. As part of the reorganization of
the Company this note was converted into equity.
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99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 4 - CREDIT FACILITIES
On January 10, 2003, the Company entered into an agreement with a financial
institution for an additional revolving line of credit in the amount of
$2,000,000 that requires quarterly interest payments at the bank's prime rate
minus one percent (3.0% at September 30, 2003). The line is secured by a
personal guarantee of a shareholder of the Company and is due January 10, 2004.
The shareholder is compensated 2% per annum of the total amount available under
the line of credit for the personal guaranty of this facility.
At December 31, 2002, the Company had a $3,500,000 and a $500,000 revolving line
of credit with a financial institution that required quarterly interest payments
at the bank's prime rate minus one percent (3.25% at December 31, 2002). The
line is secured by a personal guaranty of a shareholder of the Company and is
due February 4, 2004. The shareholder is compensated 2% per annum of the total
amount available under the line of credit for the personal guaranty of this
facility.
NOTE 5 - CONTINGENCIES
The Company is involved in various claims and lawsuits arising in the normal
course of business. Management believes that any financial responsibility that
may be incurred in settlement of such claims and lawsuits are not material to
the Company's financial position.
Winn-Dixie Stores v. 99 Cent Stuff--Trail Plaza LLC and Metropolitan Life
Insurance Company (Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida). In June 2000, Winn-Dixie Stores filed for an injunction
seeking to limit the sale of grocery items to 500 square feet in the Trail Plaza
store. No damages were sought. As a result of an injunction and other motions
granted in 2002, we must limit the sales of grocery items to 500 linear feet.
This restriction has negatively impacted the sales and profitability of this
store. In 2003 we were found in contempt of the injunction and Winn Dixie is
seeking damages and payment of legal fees. On October 16, 2003, the Company
settled the contempt charges for $175,000 and this amount has been accrued at
September 30, 2003 and is included in SG&A expenses.
NOTE 6 - FINANCIAL ANALYSIS AND LIQUIDITY
The Company has incurred significant operating losses and negative cash flows
from operations and has funded its start up costs and related operating deficits
by loans from a shareholder of the Company. The Company is dependent on this and
other sources of financing to meet its future obligations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan is to fund short-term cash requirements with additional
shareholder financing and is also reviewing possible sources of capital and
financing. The accompanying consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE 7 - MERGER AGREEMENT
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 4 reverse
stock split on September 14, 2003) exercisable only in the event Keating
Investments LLC does not arrange for at least $3 million of equity financing on
terms reasonably acceptable to the Company by December 31, 2003, in exchange for
all of the outstanding membership interests of the Company (the "Merger
Agreement"). For accounting purposes, the share exchange was treated as a
recapitalization of the
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99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Companies. The value of the net assets of the Companies after the share exchange
is the same as their historic book value.
NOTE 8 - 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 5,000,000 warrants, contingently exercisable. 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 9 - STOCKHOLDERS' EQUITY RECAPITALIZATION
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 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 $22,156,917 to
additional paid in capital.
NOTE 10 - NEW PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This Statement amends Statement No. 133 to
clarify the financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement is effective for contracts entered into or
modified after June 30, 2003. The Company does not believe the adoption of this
standard will have a material impact on its financial reporting.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Account Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. The requirements of this Statement apply to issuers'
classification and measurement of freestanding financial instruments. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For nonpublic entities, mandatorily
redeemable financial instruments are subject to the provisions of this Statement
for the first fiscal period beginning after December 15, 2003. The Company does
not believe the adoption of this standard will have a material impact on its
financial reporting.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, An Interpretation of Accounting Research Bulletin No. 51. The primary
objectives of FIN 46 are to provide guidance on how to identify entities for
which control is achieved through means other than through voting rights
(variable interest entities "VIE" and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity in which either (1) the
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99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
equity investors do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. FIN 46 will be fully adopted in the third
quarter of 2003. The Company does not believe the adoption of this standard will
have a material impact on its financial reporting.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
99 Cent Stuff is a Florida-based single-priced deep-discount retailer
of primarily, consumable general merchandise. Our stores offer a wide assortment
of regularly available consumer goods as well as a broad variety of quality,
closeout merchandise. Our product offerings are comprised of brand name
merchandise and closeouts merchandise that may be available for reorder. Every
product is sold for 99 cents or less. We provide our customers value on their
everyday household needs and a positive shopping experience in
customer-service-oriented stores, which are attractively merchandised, brightly
lit and well maintained. We believe that our name-brand focus, along with a
product mix emphasizing value-priced food and beverage and other everyday
household items, increases the frequency of consumer visits and impulse
purchases and reduces some of our exposure to seasonality and economic cycles.
We believe that our format appeals to value-conscious customers in all
socio-economic groups and results in a high volume of sales.
We operate 11 retail stores in south Florida. We opened our first three
stores in 1999, five stores in 2000, two stores in 2001 and one in 2002. In
early 2003 we closed one store and opened a new one in mid-2003. In the past, as
part of our strategy to expand retail operations, we have opened new stores in
close proximity to existing stores so that would be more efficient in
distribution, marketing and branding. We have built corporate and warehouse
support staff and systems that we believe can handle our planned expansion. As a
result of our start-up costs, operating costs and these expenses, we have
recorded losses since inception.
Our customers use cash, checks and third-party credit and debit cards
to purchase our products. We do not issue private credit cards or make use of
complicated financing arrangements.
Our auditors report on our consolidated financial statements for the
year ended December 31, 2002 contains a going-concern explanatory paragraph. For
the year ended December 31, 2002, 99 Cent Stuff incurred net losses of $5.3
million, and had a shareholders' deficit of $6.9 million, at December 31, 2002.
These losses raise substantial doubt about our ability to continue as a going
concern. We believe that financing will be available from Raymond Zimmerman to
continue operations until the pending public offering is completed. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event we cannot
continue in existence.
99 Cent Stuff only operates in one business segment, which is retail
operations.
The key to achieving profitability in the value business is to be able
to rapidly purchase goods and be able to pay within terms in order to obtain the
lowest prices. Due to our lack of operating cash, we have not been able to
purchase inventory in the most efficient fashion and we have incurred lower
margins than some of our competitors. This has also affected our revenues. We
need the proceeds of our pending public offering so that we can effectively
purchase inventory and increase our gross margins to satisfactory levels.
Our success depends in large part on our ability to locate and purchase
quality closeout and special-situation merchandise at attractive prices. We must
continuously seek out buying opportunities from our existing suppliers and from
new sources. We compete for these opportunities with other wholesalers and
retailers, value, discount and deep-discount chains, mass merchandisers, food
markets, drug chains, club stores and various privately-held companies and
individuals.
11
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales. Net sales increased $0.4 million, or 4.4%, from $9.1 million in 2002
to $9.5 million in 2003. Same store net sales, for stores open all of both
periods, increased $0.9 million in 2003, or 11.8%, compared to the prior year.
The increase in net sales was primarily due to increased volume in produce.
During the 2003 period, approximately 28% of our sales were of produce, which
has a much higher turnover than most other items sold in our stores. We
anticipate that sales of produce will decrease as a percentage of net sales due
to increased purchasing of higher margin items,
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $ 0.1 million, or 4.0%, from $2.4 million in 2002 to $2.5 million in
2003. The increase in gross profit dollars was primarily due to higher sales
volume. As a percentage of net sales, gross profit decreased 0.1% from 26.8% in
2002 to 26.7% in 2003 and was primarily attributable to increased sales of
produce, which generally has lower margins, offset by a change in the product
mix, and cost variations, primarily in food products.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, decreased $0.2 million in 2003, or 6.4%, from $3.6 million in 2002
to $3.4 million in 2003 and was primarily attributable to decreased wages and
related benefits of $0.2 million and rents and related expenses of $0.3 million,
partially offset by increases in insurance of $0.1 million and a non-recurring
Winn-Dixie lawsuit settlement expense of $0.1 million.
Operating loss. Operating loss decreased $0.3 million, or 28.4%, from $1.1
million in 2002 to $0.8 million in 2003. As a percentage of net sales, operating
loss decreased from 12.7% in 2002 to 8.7% in 2003 and was primarily attributable
to increased net sales and gross profit and decreased SG&A expenses.
Other (income) expense. Other (income) expense remained virtually unchanged in
the two periods. As a percentage of net sales, other (income) expense decreased
0.2% from 3.3% in 2002 to 3.1% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $0.4
million, or 23.6% from $1.5 million in 2002 to $1.1 million in 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales. Net sales increased $0.8 million, or 3.0%, from $27.9 million in 2002
to $28.7 million in 2003. Same store net sales, for stores open all of both
periods, increased $2.0 million in 2003, or 8.5%, compared to the prior year.
The increase in net sales was primarily due to increased volume in produce.
During the 2003 period, approximately 28% of our sales were of produce, which
has a much higher turnover than most other items sold in our stores. We
anticipate that sales of produce will decrease as a percentage of net sales due
to increased purchasing of higher margin items.
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $ 0.5 million, or 6.9%, from $7.2 million in 2002 to $7.7 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 1.0% from 25.7% in
2002 to 26.7% in 2003 and was primarily attributable to a change in the product
mix, cost variations, primarily in food products, partially offset by increased
sales in produce, which generally has lower margins.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, decreased $0.2 million in 2003, or 2.2%, from $10.1 million in
2002 to $9.9 million in 2003 and was primarily attributable to decreased wages
and related
12
benefits of $0.7 million and rents and related expenses of $0.3 million,
partially offset by increases in insurance of $0.3 million, miscellaneous other
- - net of $0.3 million and a non-recurring Winn-Dixie lawsuit settlement expense
of $0.2 million.
Operating loss. Operating loss decreased $0.7 million, or 24.0%, from $3.0
million in 2002 to $2.3 million in 2003. As a percentage of net sales, operating
loss decreased 2.8% from 10.7% in 2002 to 7.9% in 2003 and is primarily
attributable to increased net sales and gross profit and decreased SG&A
expenses.
Other (income) expense. Interest expense increased $0.1 million, or 6.9%, from
$1.0 million in 2002 to $1.1 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 increased 0.1%, from 3.6% in 2002
to 3.7% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $0.6
million, or 16.1%, from $3.9 million in 2002 to $3.3 million in 2003.
LIQUIDITY AND CAPITAL RESOURCES
Since inception on June 28, 1999, we have been funded principally from
loans provided by Raymond Zimmerman, our principal shareholder and bank loans
personally guaranteed by Mr. Zimmerman, and have not generally relied upon other
external sources of financing. Virtually all of our fixed assets, including
fixtures and equipment, have been purchased using advances made to 99 Cent Stuff
from Mr. Zimmerman. Approximately $14.6 million was converted to equity in
September 2003 as part of the merger and the remainder is shown in the balance
sheet in the form accounts payable, related party. Our capital requirements
result primarily from purchases of inventory, expenses related to new store
openings and working capital requirements for new and existing stores. We take
advantage of closeout and other special-situation opportunities, which
frequently result in volume purchases requirements, and as a consequence, our
cash requirements are not constant or predictable during the year and can be
affected by the timing and size of our purchases.
Our negative working capital as of September 30, 2003 was due to
o $5.8 million of property and equipment acquired,
o cash shortfall due to operating losses, and
o increases in accounts payable due to operating losses.
Net cash used by operations was $1.9 million in the nine months ended
September 30, 2003and $1.6 million in the nine months ended September 30, 2002.
Net cash used by operations during the 2003 period included a net loss of $3.3
million, depreciation was $0.6 million and accrued interest, related party was
$0.7 million. Net cash used by operations was $2.1 million in the year ended
December 31, 2002. Net cash used by operations during 2002 included a net loss
of $5.3 million, a decrease in inventories of $1.2 million, and a decrease in
accounts payable of $0.8 million. We are currently using approximately $150,000
per month of cash in operations and expect to continue with a negative cash flow
from operations until completion of our public offering, at which time we expect
that the proceeds will be utilized to increase inventory, which we expect will
increase sales and margins and thus positively impact cash flow from operations.
A decrease in operating cash flow from current levels would greatly reduce the
availability of funds and would force us to obtain additional capital from
either Mr. Zimmerman or elsewhere.
13
Net cash used in investing activities for purchases of property and
equipment was $0.3 million for the nine months ended September 30, 2003 and $0.2
million for the nine months ended September 30, 2002 and.
Net cash provided by financing activities was $2.2 million for the nine
months ended September 30, 2003, primarily due to $2.2 million of borrowings
under a line of credit offset by decreases in cash overdrafts of $.3 million and
increases in accounts payable and accrued interest, related party of $.3
million. Net cash provided by financing activities was $1.7 million in 2002.
Also, net cash provided by financing activities reflects increases in borrowings
under a line of credit personally guaranteed by Mr. Zimmerman in the amount of
$0.3 million in 2002.
At September 30, 2003, Mr. Zimmerman has advanced an aggregate of $4.6
million, which is carried on the balance sheet as accounts payable, related
party. The notes payable was $14.6 million at December 31, 2002,. Interest was
accrued at a rate equal to the prime rate plus 2%. In September 2003, the notes
payable of $14.6 million was converted into 4,750,000 shares of common stock as
part of the merger with iVideoNow. In November 2003, Mr. Zimmerman loaned us an
additional $500,000, to provide cash reserves pending the completion of our
public offering. Any amounts not used prior to the closing of the offering will
be returned to Mr. Zimmerman.
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million
lines of credit with Bank of America. At September 30, 2003, approximately $0.6
millioin is available under these lines. As a result of these guarantees, the
interest rate on these lines has been prime minus 1%, which we believe would be
several points higher without the guarantee. As a result of the personal
guarantees, these lines of credit do not have any financial covenants or ratios
and the only events of default are standard payment defaults. Mr. Zimmerman has
also guaranteed some of our property leases. The lease guarantees will terminate
when our shareholders' equity is at least $3 million. We have been accruing fees
of 2% of the lines of credit and the guaranteed property leases. The accrued
fees of $0.1 million as of September 30, 2003 have been included in the accounts
payable and accrued expenses, related party.
In addition, Mr. Zimmerman has advanced and interest has been accrued
on the notes payable of approximately $1.8 million at September 30, 2003 that
has been carried as accounts payable, related party, of which $3.7 million was
outstanding at December 31, 2002 and $4.7 million at September 30, 2003. These
funds were used for equipment purchases, interest accrued on the unpaid balances
and working capital. These amounts and all other amounts that may be accrued or
advanced prior to the completion of our public offering are being converted into
a convertible note and not into common stock. This note will be due two years
from the date of the prospectus for the public offering and bear interest at the
prime rate. The note will be convertible into common stock at the option of the
holder at a conversion price equal to the public offering price per share,
subject to adjustment. We will have the right to prepay the note at any time.
In addition to the commitments described above, our future capital
expenditures will depend primarily on the number and timing of new stores we
open. We have identified 10 locations that we will target for new stores in new
and existing markets. We plan to open between four and seven additional new
stores by the end of 2004 depending on the proceeds of the planned public
offering. Net capital expenditures for a new store are expected to average
approximately $150,000 to $300,000, depending on landlord allowances and
existing improvements. The average inventory investment for a new store is
approximately $250,000. Pre-opening expenses, such as marketing, salaries,
supplies and utilities, are expected to average approximately $30,000 per new
store and are expensed as incurred. To date, we have not entered into any type
of capital or operating leases for the new store build-out but anticipate doing
so in the future to leverage our resources.
In connection with store openings, we have projected our capital
expenditure to be approximately $1.2 million in 2004.
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We expect to spend significant additional capital primarily for opening
new stores, reducing accounts payable and increasing our inventory. We believe
that the net proceeds from the public offering, together with our improvements
in our expected operating results, will be sufficient to meet our operating and
capital needs for at least the next 12 months. If only the minimum units are
sold, we may be forced to scale back the opening of new stores. It is possible
that we may be required to raise additional financing in some future period
through public or private financings, strategic relationships or other
arrangements even if the minimum units are sold or we are unable to achieve
increased operating margins. Other than the existing Bank of America lines of
credit, there are not currently any other borrowing arrangements or commitments
for any capital. While Mr. Zimmerman has indicated he will provide additional
capital or guarantees in the future, he is under no obligation to do so. We may
not be able to raise additional funds when needed, or on acceptable terms, or at
all. Also, any additional equity financings may be dilutive to shareholders, and
debt financing, if available, may involve restrictive covenants. We will stage
the opening of the new stores to match the receipt of proceeds from our pending
public offering. To the extent that the minimum units are not sold, we will rely
on operating cash flow and our existing lines of credit for our cash needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to risks resulting from interest rate fluctuations since
interest on our borrowings under the bank facility are based on variable rates.
If the prime rate were to increase 1.0% in 2003 as compared to the rate at
September 30, 2003, our interest expense for 2004 would increase $0.1 million
based on the outstanding balance at September 30, 2003. We do not hold any
derivative instruments and do not engage in hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of the end of the period covered by this report. Based upon the
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date of the evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Winn-Dixie Stores v. 99 Cent Stuff--Trail Plaza LLC and Metropolitan Life
Insurance Company (Circuit Court of the 11th Judicial Circuit in and for Dade
County, Florida). In June 2000, Winn-Dixie Stores filed for an injunction
seeking to limit the sale of grocery items to 500 square feet in the Trail Plaza
store. No damages were sought. As a result of an injunction and other motions
granted in 2002, we must limit the sales of grocery items to 500 linear feet.
This restriction has negatively impacted the sales and profitability of this
store. In 2003 we were found in contempt of the injunction and Winn Dixie is
seeking damages and payment of legal fees. On October 16, 2003, the Company
settled the contempt charges for $175,000 and this amount has been accrued at
September 30, 2003 and is included in SG&A expenses.
ITEM 2. CHANGES IN SECURITIES
Effective September 15, 2003, a 1-30 reverse split and an additional 1-4
reverse stock split was effected.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 1, 2003, 99 Cent Stuff LLC executed a merger agreement with
iVideoNow, Inc. where 99 Cent Stuff would be acquired by iVideoNow in exchange
for 4,750,000 shares of common stock and that iVideoNow would effect a reverse
stock split such that on the closing date there would be 250,000 shares of
common stock outstanding. On August 13, 2003, iVideoNow mailed an information
statement to its shareholders that stated that the board of directors and a
majority of its shareholders had approved the reverse stock split, a name change
to 99 Cent Stuff, Inc., the reincorporation into Florida and a stock option
plan. The merger was effective on September 3, 2003 and the 1-30 reverse split
and an additional 1-4 reverse stock split were effective on September 15, 2003.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
31.1 Certification of Raymond Zimmerman, President and Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14 (a), promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Barry Bilmes, Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14 (a), promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by Raymond Zimmerman,
Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Emil Hensel, Chief
Financial Officer
(b) The Company filed a Report on Form 8-K pursuant to which it reported a
change of control under Item 1 as a result of the merger, Item 2 acquisition of
assets, Item 4, changes in accountants and Item 7 Financial Statements.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
99 CENT STUFF, INC.
By: /s/ Raymond Zimmerman
---------------------
Raymond Zimmerman, President
Dated: November 12, 2003
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