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: JUNE 30, 2004
Commission File Number: 0-26351
99 CENT STUFF, INC.
(Exact name of registrant as specified in its charter)
Florida 20-0233210
------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801 Clint Moore Road
Boca Raton, Florida 33487
--------------------- ----------
(Address of principal executive offices) (Zip Code)
(561) 999-9815
--------------
(Issuer's Telephone Number)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ].
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X].
The number of shares of the registrant's common stock issued and outstanding, as
of June 30, 2004, was 5,833,950 shares.
99 CENT STUFF, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2004
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited) at June 30, 2004....................... 3
Consolidated Statements of Operations
(Unaudited) For the Three and Six Months Ended June 30, 2004 and 2003....... 4
Consolidated Statement of Shareholders' (Deficit)
For the Six Months Ended June 30, 2004...................................... 5
Consolidated Statements of Cash Flows
(Unaudited)For the Six Months Ended June 30, 2004 and 2003.................. 6
Notes to Consolidated Financial Statements (Unaudited)........................ 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................11
Item 3 - Control and Procedures...............................................14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................15
Item 2 - Changes in Securities and Use of Proceeds......................15
Item 3 - Defaults Upon Senior Securities................................15
Item 4 - Submission of Matters to a Vote of Security Holders............15
Item 5 - Other Information..............................................15
Item 6 - Exhibits and Reports on Form 8-K...............................16
Signatures....................................................................17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Consolidated Balance Sheets
(Amount in Thousands, Except Share Data)
June 30, December 31,
2004 2003
----------- ------------
(Unaudited) (1)
Current assets:
Cash $ 112 $ 26
Inventory 3,622 2,531
Prepaid expenses and other assets 227 427
-------- --------
Total current assets 3,961 2,984
-------- --------
Property and equipment, net 3,021 2,607
-------- --------
Other assets:
Security deposits 141 141
-------- --------
Total assets $ 7,123 $ 5,732
======== ========
Current liabilities:
Lines of Credit $ 5,157 $ --
Accounts payable 2,671 2,494
Accrued expenses 454 737
-------- --------
Total current liabilities 8,282 3,231
-------- --------
Long term liabilities:
Accounts payable and accrued expenses, related party 5,112 4,922
Lines of Credit -- 5,648
-------- --------
Total long term liabilities 5,112 10,570
-------- --------
Total liabilities 13,394 13,801
-------- --------
Commitments and contingencies
Shareholders' deficit
Preferred Stock, .01 par value, 5,000,000 shares authorized,
-0- shares issued and outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares authorized,
5,833,950 and 5,067,000 shares issued and outstanding at June 30, 2004
and December 31, 2003, respectively 6 5
Additional paid in capital (3,951) (7,240)
Retained Earnings (2,326) (834)
-------- --------
Total shareholders' deficit (6,271) (8,069)
-------- --------
Total liabilities and shareholders' deficit $ 7,123 $ 5,732
======== ========
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------
(1) The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
99 Cent Stuff, Inc
Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2004 and 2003
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
-------- ------- -------- --------
Net sales $ 10,908 $ 9,608 $ 21,695 $ 19,233
Cost of goods sold 7,814 7,026 15,604 14,104
-------- ------- -------- --------
Gross profit 3,094 2,582 6,091 5,129
Selling, general and administrative expenses 3,795 3,264 7,361 6,572
-------- ------- -------- --------
Loss from operations (701) (682) (1,270) (1,443)
-------- ------- -------- --------
Other income (expense):
Other income 12 8 23 19
Interest expense (99) (396) (245) (760)
-------- ------- -------- --------
Total other income (expense) (87) (388) (222) (741)
-------- ------- -------- --------
Loss before provision for income taxes (788) (1,070) (1,492) (2,184)
Provision for Income Taxes -- -- -- --
-------- ------- -------- --------
Net loss $ (788) $(1,070) $ (1,492) $ (2,184)
======== ======= ======== ========
Net loss per share, basic and diluted $ (0.14) $ (0.23) $ (0.26) $ (0.46)
======== ======= ======== ========
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,834 4,750 5,661 4,750
======== ======= ======== ========
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
99 Cent Stuff, Inc.
Consolidated Statements of Shareholders' (Deficit)
For the Six Months Ended June 30, 2004
(Amount in Thousands, Except Share Data)
Common Stock Additional
------------------- Paid-In Accumulated
Shares Amount Capital (Deficit) Total
------ ------ ---------- ----------- -------
Balance, December 31, 2003 5,066 $5 $(7,240) $ (834) $(8,069)
Sale of common stock,
net of expenses 767 1 3,289 -- 3,290
Net loss for the
six months ended
June 30, 2004 -- -- -- (1,492) (1,492)
----- -- ------- ------- -------
Balance, June 30, 2004 5,833 $6 $(3,951) $(2,326) $(6,271)
===== == ======= ======= =======
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
99 Cent Stuff, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003
(Amounts in Thousands)
(Unaudited)
June 30,
---------------------
2004 2003
------- --------
Cash flows from operating activities:
Net loss $(1,492) $ (2,184)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 440 412
Interest accrued on accounts payable and
accrued expenses, related party 190 679
(Increase) decrease in:
Prepaid expenses and other assets 200 26
Inventory (1,091) 142
Security deposits -- 25
Increase (decrease) in:
Accounts payable 177 (284)
Accrued expenses (283) (210)
------- --------
Net cash used in operating activities (1,859) (1,394)
------- --------
Cash flows used in investing activities:
Purchase of property and equipment (854) (146)
------- --------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party -- 23
Change in cash overdraft -- (251)
Borrowings under lines of credit 8,706 11,657
Repayments under lines of credit (9,197) (9,889)
Sale of common stock, net of expenses 3,290 --
------- --------
Net cash provided by financing activities 2,799 1,540
------- --------
Net increase (decrease) in cash 86 --
Cash at beginning of period 26 --
------- --------
Cash at end of period $ 112 $ --
======= ========
Supplemental cash flow information:
Interest paid $ 93 $ 67
======= ========
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
99 Cent Stuff LLC (the "Company") was organized under the laws of the State of
Delaware on 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 12 locations at June 30, 2004. The
locations are separately incorporated as limited liability companies and are
wholly owned by the Company. All of the stores are in southeast Florida.
The Company's ability to provide quality merchandise at the 99 cents price point
is subject to certain economic factors, which are beyond the Company's control,
including inflation. Inflation could have a material adverse effect on the
Company's business and results of operations, especially given the constraints
on the Company to pass on any incremental costs due to price increases or other
factors. A sustained trend of significant inflationary pressure could require
the Company to abandon its single price point of 99 cents per item, which could
have a material adverse effect on the Company's business and results of
operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the management of the Company, all adjustments consisting of a
normal and recurring nature considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of three months
or less and credit and debit card receivables to be cash equivalents.
INVENTORY
Inventory is stated at the lower of average cost or market, with cost determined
on a first-in, first-out (FIFO) basis, and consists of merchandise held for
resale. The Company provides an allowance for certain merchandise that may
become totally obsolete or damaged. At both June 30, 2004 and December 31, 2003,
the allowance for these items was $50.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
7
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary limited liability companies, after
eliminations of all material intercompany transactions.
REVENUE RECOGNITION
Revenue is recognized at the point of sale.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the opening
of new retail stores.
OPERATING SEGMENTS
The Company has one business segment, which is our retail operations. The
majority of the product offerings include recognized brand-name consumable
merchandise, regularly available for reorder. The Company had no customers
representing more than 10 percent of net sales. Substantially all of the
Company's net sales were to customers located in the United States.
EARNINGS PER SHARE
Basic net earnings (loss) per common share are computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period. In periods when losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.
STOCK OPTIONS
SFAS No. 123 "Accounting for Stock Based Compensation", requires the Company to
disclose pro forma information regarding option grants made to its employees.
SFAS No. 123 specifies certain valuation techniques that produce estimated
compensation charges that are included in the pro forma results below. These
amounts have not been reflected in the Company's Statement of Operations,
because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," specifies that no compensation charge arises when the price of the
employees' stock options equal the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees SFAS
No. 123 pro forma numbers are as follows for the fiscal period ended June 30,
2004:
2004
-------
Net loss
As reported $(1,492)
Pro forma $(1,514)
Earnings per share
As reported $ (0.26)
Pro forma $ (0.27)
8
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS
At June 30, 2004 and December 31, 2003, the Company had a note payable of $5,112
and $4,922, respectively, for funds advanced from a shareholder of the Company.
The note is due December 1, 2005 and bears interest at the prime rate. The note
is convertible into common stock at the option of the holder at a conversion
price equal to $5.00, subject to adjustment. The Company has the right to prepay
the note at any time.
NOTE 4 - CREDIT FACILITIES
At June 30, 2004, the Company had a $3,500, $2,000 and a $500 revolving line of
credit with a financial institution that requires quarterly interest payments at
the bank's prime rate minus one percent (3.25% at June 30, 2004). The line is
secured by a personal guarantee of a shareholder of the Company and is due June
30, 2005. The shareholder is compensated 2% per annum of the total amount
available under the line of credit for the personal guaranty of this facility.
At June 30, 2004, the Company owed $5,157 on its revolving lines of credit.
At June 30, 2004, the Company had outstanding irrevocable letters of credit
approximating $193. These letters of credit have terms of three months to one
year, collateralize the Company's obligation to third parties for the purchase
of goods or services. The fair value of these letters of credit approximates
contract values based on the nature of the fee arrangements with the issuing
banks, usually 1 to 1.5% of the credit issued.
NOTE 5 - CONTINGENCIES
The Company is involved in various claims and lawsuits arising in the normal
course of business. Management believes that any financial responsibility that
may be incurred in settlement of such claims and lawsuits are not material to
the Company's financial position.
NOTE 6 -PUBLIC OFFERING
In March 2004 the Company completed its stock offering. The Company sold 767
units (each unit consists of one share of common stock and one warrant) at $5.00
per unit for a total of $3,290, net of expenses of $545.
In July 2004, the Company became aware of a technical violation of the Florida
Securities and Investor Protection Act in connection with its public offering.
Approximately 50,000 shares were sold in Florida. As a result, the Company may
be required to offer rescission to Florida purchasers in the offering. The
rescission offer period is expected to occur during the September quarter. The
Company does not expect any investors to rescind their purchase since the
current market price is above the offering price and accordingly has not
established a reserve for any potential liability.
NOTE 7 - FINANCIAL ANALYSIS AND LIQUIDITY
As of June 30, 2004, the Company had a working capital deficit of $4,321 and
negative net worth of $6,271. From inception on June 28, 1999 to February 2004,
the Company was principally funded from loans and capital contributions provided
9
99 CENT STUFF, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by the principal shareholder and by bank loans personally guaranteed by the
principal shareholder. Capital requirements result primarily from purchases of
inventory, expenses related to new store openings and working capital
requirements for new and existing stores. The Company takes advantage of
closeouts and other special-situation inventory purchasing opportunities, and as
a consequence, cash requirements are not constant or predictable during the year
and can be affected by the timing and size of the inventory purchases. The
Company expects to continue with a negative cash flow from operations until it
is able to receive the benefit of the new stores and additional inventory in its
existing stores.
The Company has been utilizing the offering proceeds primarily for opening new
stores, increasing inventory and to fund cash-flow deficits from operations. It
is possible that the Company may be required to raise additional financing in
some future period through public or private financings, strategic relationships
or other arrangements if the Company is unable to achieve increased operating
margins. A decrease in operating cash flow from current levels would greatly
reduce the availability of funds and would force the Company to obtain
additional capital. The Company may not be able to raise additional funds when
needed, or on acceptable terms, or at all. Also, any additional equity
financings may be dilutive to shareholders, and debt financing, if available,
may involve restrictive covenants. The Company's management believes that the
net proceeds from the offering, together with anticipated improvements in
operating results, will be sufficient to meet operating and capital needs for
the remainder of 2004.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
99 Cent Stuff is a Florida-based single-priced deep-discount retailer
of primarily name brand, consumable merchandise. Our stores offer a wide
assortment of regularly available consumer goods as well as a broad variety of
quality, closeout merchandise. Our product offerings are comprised of brand name
merchandise and closeouts merchandise that may be available for reorder. Every
product is sold at 99 cents, including extra value savings of two or three items
for 99 cents. We provide our customers value on their everyday household needs
and a positive shopping experience in customer-service-oriented stores, which
are attractively merchandised, brightly lit and well maintained. We believe that
our name-brand focus, along with a product mix emphasizing value-priced food and
beverage and other everyday household items, increases the frequency of consumer
visits and impulse purchases and reduces some of our exposure to seasonality and
economic cycles. We believe that our format appeals to value-conscious customers
in all socio-economic groups and results in a high volume of sales.
We operate 13 retail stores in south Florida (12 at June 30, 2004). We
opened our first three stores in 1999, five stores in 2000, two stores in 2001
one in 2002 and two in 2004. We expect to open an additional store in September
2004. In early 2003 we closed one store and opened a new one in mid-2003. In the
past, as part of our strategy to expand retail operations, we have opened new
stores in close proximity to existing stores so that would be more efficient in
distribution, marketing and branding. We have built corporate and warehouse
support staff and systems that we believe can handle our planned expansion. As a
result of our start-up costs, operating costs and these expenses, we have
recorded losses since inception.
Our customers use cash, checks and third-party credit and debit cards
to purchase our products. We do not issue private credit cards or make use of
complicated financing arrangements.
99 Cent Stuff only operates in one business segment, which is retail
operations.
The key to achieving profitability in the value business is to be able
to rapidly purchase goods and be able to pay within terms in order to obtain the
lowest prices. Due to our lack of operating cash, until earlier in 2004 we were
not able to purchase inventory in the most efficient fashion and we incurred
lower margins than some of our competitors. This has also affected our revenues.
We have recently begun directly importing goods, including higher-margin toys,
housewares and giftware. This should allow us to offer a more consistent
presentation, better quality goods and superior profit margins.
Our success depends in large part on our ability to locate and purchase
quality closeout and special-situation merchandise at attractive prices. We must
continuously seek out buying opportunities from our existing suppliers and from
new sources. We compete for these opportunities with other wholesalers and
retailers, value, discount and deep-discount chains, mass merchandisers, food
markets, drug chains, club stores and various privately-held companies and
individuals.
Results of Operations
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Net sales. Net sales increased $1.3 million, or 13.5%, to $10.9 million for the
three months ended June 30, 2004 from $9.6 million for the three months ended
June 30, 2003. Same store net sales, for stores open all of both periods,
increased $0.8 million for the three months ended June 30, 2004, or 8.5%,
11
compared to the prior year. On average, stores open at least a year have had
sales in excess of $4.0 million per store. The increase in net sales was
primarily due to increased levels of inventory, providing more goods for sale,
and increased volume in produce. During the 2004 period, approximately 26.6% of
our sales were of produce, which has a much higher turnover than the other items
sold in our stores. We anticipate that sales of produce will decrease in the
future as a percentage of net sales due to increased purchasing of higher margin
items.
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $0.5 million, or 19.8%, to $3.1 million for the three months ended
June 30, 2004 from $2.6 million for the three months ended June 30, 2003. As a
percentage of net sales, gross profit increased to 28.4% in the 2004 period from
26.9% in the 2003 period and was primarily attributable to a change in the
product mix, favorable cost variations, primarily in food products, and reduced
shrinkage, partially offset by increased sales in produce, which generally has
lower margins.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, increased $0.5 million for the three months ended June 30, 2004,
or 16.3%, to $3.8 million in the 2004 period from $3.3 million for the three
months ended June 30, 2003 and was primarily attributable to increased wages and
related benefits of $0.3 million and new store pre-opening expenses of $0.2
million. The increase in new store opening expenses is primarily attributable to
permitting issues and construction delays associated with our new stores. One
new store opened in late June, another in July , and a third store is now
anticipated to open in September. There were no major increases or decreases in
any other category.
Operating loss. Operating loss was $0.7 million for both the three months ended
June 30, 2004 and the three months ended June 30, 2003. As a percentage of net
sales, operating loss decreased 0.7% to 6.4% in 2004 from 7.1% in 2003 and was
primarily attributable to the items discussed above. Absent pre-opening store
expenses of $0.2 million included in selling, general and administrative,
operating loss would have been $0.6 million in 2004, or a 22.0% improvement, as
compared to 2003.
Other (income) expense. Interest expense decreased $0.3 million, or 75.0%, to
$0.1 million for the three months ended June 30, 2004 from $0.4 million for the
three months ended June 30, 2003. The decrease was primarily attributable to
decreased borrowings and lower interest rates. As a percentage of net sales,
interest expense decreased 3.2%, to 0.9% in 2004 from 4.1% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $0.3
million, or 26.4%, to $0.8 million for the three months ended June 30, 2004 from
$1.1 million for the three months ended June 30, 2003. Absent pre-opening store
expenses of $0.2 million included in selling, general and administrative, net
loss would have been $0.6 million in 2004, or a 42.1% improvement, as compared
to 2003. It is expected that the new stores will contribute to operating results
for the remainder of 2004.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net sales. Net sales increased $2.5 million, or 12.8%, to $21.7 million for the
six months ended June 30, 2004 from $19.2 million for the six months ended June
30, 2003. Same store net sales, for stores open all of both periods, increased
$1.5 million in the 2004 period, or 7.9%, compared to the prior year. The
increase in net sales was primarily due to increased levels of inventory,
providing more goods for sale, and increased volume in produce. During the 2004
period, approximately 27.6% 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 18.8%, to $6.1 million for the six months ended June
30, 2004 from $5.1 million for the six months ended June 30, 2003. As a
12
percentage of net sales, gross profit increased to 28.1% in 2004 from 26.7% in
2003 and was primarily attributable to a change in the product mix, cost
variations, primarily in food products, and reduced shrinkage, partially offset
by increased sales in produce, which generally has lower margins.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, increased $0.8 million, or 12.0%, to $7.4 million the six months
ended June 30, 2004 from $6.6 million for the six months ended June 30, 2003 and
was primarily attributable to increased wages and related benefits of $0.4
million, rents and related expenses of $0.2 million, new store pre-opening
expenses of $0.1 million and miscellaneous other expenses of $0.1 million.
Operating loss. Operating loss decreased $0.2 million, or 12.0%, to $1.3 million
for the six months ended June 30, 2004 from $1.5 million for the six months
ended June 30, 2003. As a percentage of net sales, operating loss decreased 1.6%
to 5.9% in the 2004 period from 7.5% in the 2003 period and was primarily
attributable to the items discussed above. Absent pre-opening store expenses of
$0.2 million included in selling, general and administrative, operating loss
would have been $1.1 million in 2004, or a 23.7% improvement, as compared to
2003.
Other (income) expense. Interest expense decreased $0.5 million, or 67.8%, to
$0.2 million for the six months ended June 30, 2004 from $0.7 million for the
six months ended June 30, 2003. The decrease was primarily attributable to
decreased borrowings and lower interest rates. As a percentage of net sales,
interest expense decreased 2.9%, to 1.1% in 2004 from 4.0% in 2003.
Net loss. As a result of the items discussed above, net loss decreased $0.7
million, or 31.7%, to $1.5 million the six months ended June 30, 2004 from $2.2
million the six months ended June 30, 2003. Absent pre-opening store expenses of
$0.2 million included in selling, general and administrative, net loss would
have been $1.3 million in 2004, or a 39.4% improvement, as compared to 2003.
LIQUIDITY AND CAPITAL RESOURCES
From our inception in 1999 until completion of our public offering in
the first quarter of 2004, we were funded principally from loans provided by
Raymond Zimmerman, our principal shareholder and bank loans personally
guaranteed by Mr. Zimmerman. Approximately $14.6 million was converted to equity
in September 2003 as part of the reorganization and the remainder of $5.1
million is shown on the balance sheet as convertible note, related party. This
note is due December 1, 2005 and bears interest at the prime rate. The note is
convertible into common stock at the option of the holder at a conversion price
equal to $5.00, subject to adjustment. We have the right to prepay the note at
any time.
Our capital requirements result primarily from purchases of inventory,
expenses related to new store openings and working capital requirements for new
and existing stores. We take advantage of closeout and other special-situation
opportunities, which frequently result in volume purchases requirements, and as
a consequence, our cash requirements are not constant or predictable during the
year and can be affected by the timing and size of our purchases.
Net cash used by operations was $1.9 million in the six months ended
June 30, 2004 and $1.4 million in the six months ended June 30, 2003. Net cash
used by operations during the 2004 period included a net loss of $1.5 million,
an increase in inventory of $1.1 million and a decrease in accrued expenses of
$0.3 million. Inventory was increased during the period as proceeds from the
offering were used to increase inventory levels in all stores and to provide
inventory for the new stores opened in June and July 2004. In the first six
months of 2004, we experienced approximately $0.1 million per month of negative
cash flow from operations. As we open the new stores and offer increased
inventory at better margins, we expect that cash flow from operations will
improve and thus positively impact cash flow from operations.
13
Net cash used in investing activities for purchases of property and
equipment was $0.9 million for the six months ended June 30, 2004 as fixtures
and equipment for new stores was purchased and other equipment was upgraded. In
connection with store openings, we have projected our capital expenditures to be
approximately $0.4 million for the remainder of 2004.
Net cash provided by financing activities was $2.8 million for the six
months ended June 30, 2004, primarily due to receipt of $3.3 million from the
public offering, $8.7 million of borrowings under a line of credit, offset by
payments under the lines of credit of $9.2 million. Net cash provided by
financing activities was $1.5 million in the 2003 period.
Mr. Zimmerman has personally guaranteed our aggregate $6.0 million
lines of credit with Bank of America. At June 30, 2004, approximately $0.8
million is available under these lines. As a result of these guarantees, the
interest rate on these lines has been prime minus 1%, which we believe would be
several points higher without the guarantee. As a result of the personal
guarantees, these lines of credit do not have any financial covenants or ratios
and the only events of default are standard payment defaults.
Mr. Zimmerman has also guaranteed some of our property leases. The
lease guarantees will terminate when our shareholders' equity is at least $3
million. We have been accruing fees of 2% of the lines of credit and the
guaranteed property leases. The accrued fees of $0.1 million as of June 30, 2004
have been included in the accounts payable and accrued expenses, related party
and interest expense.
Our future capital expenditures will depend primarily on the number and
timing of new stores we open. We have identified additional locations that we
are targeting for new stores in new and existing markets. We plan to open
between one and three additional new stores by the end of 2004. Net capital
expenditures for a new store average approximately $0.1 million to $0.3 million,
depending on landlord allowances and existing improvements. The average
inventory investment for a new store is approximately $250,000. To date, we have
not entered into any type of capital or operating leases for the new store
build-out but anticipate doing so in the future to leverage our resources.
We continue to anticipate spending additional capital primarily for
opening new stores, reducing accounts payable and increasing our inventory. We
believe that our existing resources, together with expected improvements in our
operating results, will be sufficient to meet our operating and capital needs
for the remainder of 2004. Should we determine to open additional stores or our
operating results do not meet expectations, we may be required to raise
additional financing, through public or private financings, strategic
relationships or other arrangements. Other than the existing Bank of America
lines of credit, there are not currently any other borrowing arrangements or
commitments for any capital. While Mr. Zimmerman has indicated he will provide
additional capital or guarantees in the future, he is under no obligation to do
so. We may not be able to raise additional funds when needed, or on acceptable
terms, or at all. Also, any additional equity financings may be dilutive to
shareholders, and debt financing, if available, may involve restrictive
covenants.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to risks resulting from interest rate fluctuations since
interest on our borrowings under the bank facility are based on variable rates.
If the prime rate were to increase 1.0% in the second half of 2004 as compared
to the rate at June 30, 2004, our total interest expense for 2004 would increase
$0.1 million based on the outstanding balance at June 30, 2004. We do not hold
any derivative instruments and do not engage in hedging activities.
14
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of the end of the period covered by this report. Based upon the
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date of the evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 11, 2004, the Company completed a public offering of 767,000 units at
a price of $5.00 per unit. The offering was made pursuant to the Company's
Registration Statement on Form S-1 (File No. 333-108517) filed with the SEC on
September 4, 2003, as amended September 16, 2003 October 10, 2003, Ocotber 29,
2003 November 19, 2003 and November 26, 2003 and declared effective by the SEC
on November 26, 2003. Keating Investments LLC. acted as managing underwriters in
the offering.
The offering provided net proceeds to the Company of $3.3 million, which is net
of underwriters' discounts and commissions of $0.4 million, and related legal,
accounting, printing and other expenses totaling $0.2 million. We used $1.1
million of the proceeds for inventory and $0.9 million for fixtures and
equipment. The remaining $1.3 million was used to repay outstanding bank
indebtedness, which increased our borrowing availability for working capital and
general corporate purposes, including marketing programs and new store openings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
In July 2004, the Company became aware of a technical violation of the Florida
Securities and Investor Protection Act in connection with its public offering.
Approximately 50,000 shares were sold in Florida. As a result, the Company may
be required to offer rescission to Florida purchasers in the offering. The
rescission offer period is expected to occur during the September quarter. The
Company does not expect any investors to rescind their purchase since the
15
current market price is above the offering price and accordingly has not
established a reserve for any potential liability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
31.1 Certification of Raymond Zimmerman, President and Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14 (a), promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Barry Bilmes, Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14 (a), promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by Raymond Zimmerman,
Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Barry Bilmes,
Chief Financial Officer
(b) Reports on Form 8-K
Not applicable
16
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: August 11, 2004
17