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, 2005
Commission File Number: 0-26351
99 CENT STUFF, INC.
(Exact name of registrant as specified in its charter)
Florida 20-0233210
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1801 Clint Moore Road 33487
Boca Raton, Florida ----------
------------------- (Zip Code)
(Address of principal executive offices)
(561) 999-9815
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(Issuer's Telephone Number)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ].
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X].
The number of shares of the registrant's common stock issued and outstanding, as
of September 30, 2005, was 5,833,950 shares.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Balance Sheet
(Amount in Thousands, Except Share Data)
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SEPTEMBER 30, DECEMBER 31,
2005 2004
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(UNAUDITED)
Current assets:
Cash $ - $ -
Inventory 4,766 3,771
Prepaid expenses and other assets 206 467
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Total current assets 4,972 4,238
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Property and equipment, net 3,497 3,396
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Other assets:
Security deposits 194 171
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Total assets $ 8,663 $ 7,805
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Current liabilities:
Lines of credit $ - $ 5,798
Cash overdraft 309 115
Accounts payable 3,949 3,698
Accrued expenses 456 468
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Total current liabilities 4,714 10,079
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Long term liabilities:
Accounts payable and accrued expenses, related party 11,207 6,059
Lines of credit 5,610 -
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Total long term liabilities 16,817 6,059
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Total liabilities 21,531 16,138
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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 shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively 6 6
Additional paid in capital (3,872) (3,947)
Retained Earnings (9,002) (4,392)
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Total shareholders' deficit (12,868) (8,333)
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Total liabilities and shareholders' deficit $ 8,663 $ 7,805
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SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note: The balance sheet at December 31, 2004 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.
99 Cent Stuff, Inc
Statement of Operations
For the Three Months and Nine Months Ended September 30, 2005 and 2004
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
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Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- -------------- -------------- ---------------
Net sales $ 14,260 $ 11,847 $ 41,334 $ 33,542
Cost of goods sold 10,456 8,568 30,071 24,172
--------------- -------------- -------------- ---------------
Gross profit 3,804 3,279 11,263 9,370
Selling, general and administrative expenses 5,249 4,236 15,145 11,597
--------------- -------------- -------------- ---------------
Loss from operations (1,445) (957) (3,882) (2,227)
--------------- -------------- -------------- ---------------
Other income (expense):
Other income 19 23 65 46
Interest expense (350) (126) (793) (371)
--------------- -------------- -------------- ---------------
Total other income (expense) (331) (103) (728) (325)
--------------- -------------- -------------- ---------------
Loss before provision for income taxes (1,776) (1,060) (4,610) (2,552)
Provision for income taxes - - - -
--------------- -------------- -------------- ---------------
Net loss $ (1,776) $ (1,060) $ (4,610) $ (2,552)
=============== ============== ============== ===============
Net loss per share, basic and diluted $ (0.30) $ (0.18) $ (0.79) $ (0.45)
=============== ============== ============== ===============
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 5,834 5,834 5,834 5,718
=============== ============== ============== ===============
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
For the Year Ended December 31, 2004 and the Nine Months Ended
September 30, 2005
(Amount in Thousands, Except Share Data)
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Common Stock Additional
----------------- Paid-In Accumulated
Shares Amount Capital (Deficit) Total
------ ------ ---------- ----------- --------
Balance, December 31, 2004 5,834 $ 6 $ (3,947) $ (4,392) $ (8,333)
Contributed services of chief executive officer 75 75
Net loss for the nine months ended September 30, 2005 (4,610) (4,610)
------ ------ ---------- ----------- --------
Balance, September 30, 2005 5,834 $ 6 $ (3,872) $ (9,002) $(12,868)
====== ====== ========== =========== ========
SEE THE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
99 Cent Stuff, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2005 and 2004
(Amounts in Thousands)
(Unaudited)
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September 30,
--------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net loss $ (4,610) $ (2,552)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 867 713
Interest accrued on payables, related party 588 270
Contributed services of chief executive officer 75 -
(Increase) decrease in:
Prepaid expenses and other assets 261 187
Inventory (995) (1,812)
Security deposits (23) 21
Increase (decrease) in:
Accounts payable 251 1,180
Accrued expenses (12) (237)
-------- --------
Net cash used in operating activities (3,598) (2,230)
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment (968) (1,486)
-------- --------
Cash flows from financing activities:
Increase in accounts payable and accrued expenses,
related party 4,560 500
Change in cash overdraft 194 250
Borrowings under lines of credit 9,600 12,078
Repayments under lines of credit (9,788) (12,428)
Sale of common stock, net of expenses 3,290
-------- --------
Net cash provided by financing activities 4,566 3,690
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Net increase (decrease) in cash - (26)
Cash at the beginning of period - 26
-------- --------
Cash at the end of period $ - $ -
======== ========
Supplemental cash flow information:
Interest paid $ 261 $ 139
======== ========
SEE THE ACCOMPANYING NOTES TO THE CONDENSED 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 September 2003, the
Company merged with a public shell, iVideoNow, Inc., and became a C corporation.
The Company is a specialty, single-priced retailer that primarily targets
individuals and small businesses with one-stop shopping for food, produce,
consumable hard lines, health and beauty aids, novelty and impulse items. The
Company was operating retail outlets at 18 locations at September 30, 2005. 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 consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management of the Company, all
adjustments of a normal and recurring nature considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. 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, 2004.
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 September 30, 2005 and December 31,
2004, the allowance for these items was $5.
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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.
REVENUE RECOGNITION
Revenue is recognized at the point of sale.
PRE-OPENING COSTS
The Company expenses, as incurred, all pre-opening costs related to the opening
of new retail stores.
OPERATING SEGMENTS
The Company has one business segment, which is our retail operations. The
majority of the product offerings include recognized brand-name consumable
merchandise, regularly available for reorder. The Company had no customers
representing more than 10 percent of net sales. Substantially all of the
Company's net sales were to customers located in the United States.
EARNINGS PER SHARE
Basic net earnings (loss) per common share are computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period. In periods when losses are reported, the
weighted-average number of common shares outstanding excludes common stock
equivalents, because their inclusion would be anti-dilutive.
STOCK OPTIONS
SFAS No. 123 "Accounting for Stock Based Compensation", requires the Company to
disclose pro forma information regarding option grants made to its employees.
SFAS No.123 specifies certain valuation techniques that produce estimated
compensation charges that are included in the pro forma results below. These
amounts have not been reflected in the Company's Statement of Operations,
because Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," specifies that no compensation charge arises when the price of the
employees' stock options equal the market value of the underlying stock at the
grant date, as in the case of options granted to the Company's employees SFAS
No. 123 pro forma numbers are as follows for the fiscal period ended September
30, 2005:
2005
----------
Net loss
As reported $ (4,610)
Pro forma $ (4,682)
Earnings per share
As reported $ (0.79)
Pro forma $ (0.80)
NOTE 3 - RELATED PARTY TRANSACTIONS
At September 30, 2005 and December 31, 2004, the Company had a long-term note
payable of $11,207 and $6,059, respectively, for funds advanced from a
shareholder of the Company. The notes are due December 31, 2006 and bear
interest at various rates that range from 6.75% to 8.75% at September 30, 2005.
Included in the amount owing to a shareholder is $5,005, which is convertible
into common stock at the option of the holder at a conversion price equal to
$5.00 per share. The Company has the right to prepay this note at any time.
NOTE 4 - CREDIT FACILITIES
At September 30, 2005, the Company had a $5,500 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 (5.75% at September 30, 2005). In June
2005, the line was extended to June 30, 2007 from June 30, 2005 and is secured
by a personal guarantee of a shareholder of the Company. The shareholder is
compensated 2% per annum of the total amount available under the line of credit
for the personal guaranty of this facility. At September 30, 2005, the Company
owed $5,610 on its revolving lines of credit.
At September 30, 2005, the Company had outstanding irrevocable letters of credit
approximating $420. These letters of credit have terms of three months to one
year and collateralize the Company's obligation to third parties for the
purchase of goods or services. The fair value of these letters of credit
approximates contract values based on the nature of the fee arrangements with
the issuing banks, usually 1 to 1.5% of the credit issued.
NOTE 5 - CONTINGENCIES
The Company is involved in various claims and lawsuits arising in the normal
course of business. Management believes that any financial responsibility that
may be incurred in settlement of such claims and lawsuits are not material to
the Company's financial position.
NOTE 6 - FINANCIAL ANALYSIS AND LIQUIDITY
As of September 30, 2005, the Company had working capital of $258 and negative
net worth of $12,868. Since inception in 1999, the Company was principally
funded from loans and capital contributions provided by the principal
shareholder, by bank loans personally guaranteed by the principal shareholder,
and a public equity offering. 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 utilized the proceeds from an equity offering in March 2004 and
advances from its principal shareholder primarily for opening new stores,
increasing inventory and to fund cash-flow deficits from operations. It is
possible that the Company may be required to raise additional financing in some
future period through public or private financings, strategic relationships or
other arrangements if the Company is unable to achieve increased operating
margins. A decrease in operating cash flow from current levels would greatly
reduce the availability of funds and would force the Company to obtain
additional capital. The Company may not be able to raise additional funds when
needed, or on acceptable terms, or at all. Also, any additional equity
financings may be dilutive to shareholders, and debt financing, if available,
may involve restrictive covenants. The Company's management believes that its
current working capital financing, commitments from its principal shareholder,
together with improvements in operating results, will be sufficient to meet
operating and capital needs for the remainder of 2005.
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.
At September 30, 2005, we operated 18 retail stores in south Florida. We
opened our first three stores in 1999, five stores in 2000, two stores in 2001
one in 2002 and four in 2004 and three in 2005. Another store is expected to
open in the fourth quarter of 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 up to 25 stores. As a result of our start-up costs,
operating costs and these expenses, we have recorded losses since inception.
Our customers use cash, checks and third-party credit and debit cards to
purchase our products. We do not issue private credit cards or make use of
complicated financing arrangements.
99 Cent Stuff only operates in one business segment, which is retail
operations.
The key to achieving profitability in the value business is to be able to
rapidly purchase goods and be able to pay within terms in order to obtain the
lowest prices. 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.
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 September 30, 2005 no inventory was
impaired.
Further information is provided in Note 2 to the Consolidated Financial
Statements.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004
Net sales. Net sales increased $2.5 million, or 20.4%, to $14.3 million for the
three months ended September 30, 2005 from $11.8 million for the three months
ended September 30, 2004. Same store net sales, for stores open all of both
periods, decreased $0.4 million for the three months ended September 30, 2005,
or 3.6%, compared to the prior year. The increase in net sales was primarily due
to new store openings in the second half of 2004 and January and April 2005. Our
planned strategy was to remerchandise our stores with higher margin inventory,
and therefore we slowed down shipments to our stores so that we could sell off
our lower margin merchandise and thereby enable us to effectuate this
conversion. The transition has taken longer than we anticipated and we incurred
some execution problems including overstocking at our warehouse and reduced
inventory at the store level. We continue to believe that our strategy is the
correct one and that we will be able to increase both net sales and gross margin
for the fourth quarter of this year. We have now resumed regular shipments to
our stores and anticipate the negative trend in same store sales to reverse
itself later this year. We have also resumed our profitable direct import
program. During the 2005 period, approximately 28.0% 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.
During late October and early November, as a result of Hurricane Wilma, several
of our stores and our main warehouse were closed due to loss of power. Some
inventory had to be discarded and some stores suffered minor property damage,
although all stores are now fully operational. Accordingly, we expect that
fourth quarter results will be impacted by the hurricane.
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $0.5 million, or 16.0%, to $3.8 million for the three months ended
September 30, 2005 from $3.3 million for the three months ended September 30,
2004. As a percentage of net sales, gross profit decreased to 26.7% in the 2005
period from 27.7% in the 2004 period and was primarily attributable to a change
in the product mix and cost variations. We traveled to the Far East in the third
quarter to resume our direct import program, which we anticipate will increase
our margin.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, increased $1.0 million for the three months ended September 30,
2005, or 23.9%, to $5.2 million in the 2005 period from $4.2 million for the
three months ended September 30, 2004 and was primarily attributable to
increased wages and related benefits of $0.5 million, increased occupancy costs
of $0.4 million and increased insurance expense of $0.1 million. The 2005 SG&A
includes a $25,000 per quarter non-cash charge relating to deemed compensation
of our principal shareholder and chief executive officer, who does not receive a
cash salary.
Operating loss. Operating loss increased $0.4 million or 51.0%, to $1.4 million
for the three months ended September 30, 2005 from $1.0 million in the 2004
period. As a percentage of net sales, operating loss was 10.1% in 2005 and 8.1%
in 2004 and the increase is primarily attributable to the items discussed above.
Other (income) expense. Interest expense increased $0.2 million, or 177.8%, to
$0.3 million for the three months ended September 30, 2005 from $0.1 million for
the three months ended September 30, 2004. The increase was primarily
attributable to increased borrowings and higher interest rates. As a percentage
of net sales, interest expense increased 1.4%, to 2.5% in 2005 from 1.1% in
2004.
Net loss. As a result of the items discussed above, net loss increased $0.7
million, or 67.5%, to $1.8 million for the three months ended September 30, 2005
from $1.1 million for the three months ended September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004
Net sales. Net sales increased $7.8 million, or 23.2%, to $41.3 million for the
nine months ended September 30, 2005 from $33.5 million for the nine months
ended September 30, 2004. Same store net sales, for stores open all of both
periods, decreased $2.0 million in the 2005 period, or 6.0%, compared to the
prior year. The decrease in same store sales was primarily due to our planned
strategy to remerchandise our stores with higher margin inventory, and therefore
we slowed down shipments to our stores so that we could sell off our lower
margin merchandise and thereby enable us to effectuate this conversion. The
transition has taken longer than we anticipated and we incurred some execution
problems including overstocking at our warehouse and reduced inventory at the
store level. We continue to believe that our strategy is the correct one and
that we will be able to increase both net sales and gross margin during the
fourth quarter of this year. We have now resumed regular shipments to our stores
and anticipate the negative trend in same store sales to reverse itself later
this year. We have also resumed our profitable direct import program During the
2005 period, approximately 29.1% of our sales were of produce, which has a much
higher turnover the other items sold in our stores. We anticipate that sales of
produce will decrease as a percentage of net sales due to increased purchasing
of higher margin items.
Gross profit. Gross profit, which consists of total sales less cost of sales,
increased $1.9 million, or 20.2%, to $11.3 million for the nine months ended
September 30, 2005 from $9.4 million for the nine months ended September 30,
2004. As a percentage of net sales, gross profit decreased to 27.2% in 2005 from
27.9% in 2004 and was primarily attributable to a change in the product mix and
cost variations.
Selling, general and administrative. Selling, general and administrative
expenses, or SG&A, which include operating expenses and depreciation and
amortization, increased $3.5 million, or 30.6%, to $15.1 million for the nine
months ended September 30, 2005 from $11.6 million for the nine months ended
September 30, 2004 and was primarily attributable to increased wages and related
benefits of $1.6 million, occupancy expenses of $1.3 million, insurance expense
of $0.3 million and miscellaneous other expenses of $0.3 million, respectively.
Operating loss. Operating loss increased $1.7 million, or 74.3%, to $3.9 million
for the nine months ended September 30, 2005 from $2.2 million for the nine
months ended September 30, 2004. As a percentage of net sales, operating loss
was 9.4% in the 2005 period compared to 6.6% in the 2004 period and was
primarily attributable to the items discussed above.
Other (income) expense. Interest expense increased $0.4 million, or 113.7%, to
$0.8 million for the nine months ended September 30, 2005 from $0.4 million for
the nine months ended September 30, 2004. The increase was primarily
attributable to increased borrowings and higher interest rates. As a percentage
of net sales, interest expense increased 0.8%, to 1.9% in the 2005 period from
1.1% in the 2004 period.
Net loss. As a result of the items discussed above, net loss increased $2.0
million, or 80.6%, to $4.6 million for the nine months ended September 30, 2005
from $2.6 million for the nine months ended September 30, 2004.
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 in 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. During the nine months ended September 30,
2005 we borrowed $4.6 million from Mr. Zimmerman to fund operating losses and
open new stores. These amounts bear interest at the prime rate plus 2% and are
payable on December 31, 2006.
At September 30, 2005, we had working capital of $0.3 million, and we had
$0.4 million in borrowing availability. The Company's management believes that
its current working capital financing, commitments from its principal
shareholder, together with anticipated improvements in operating results, will
be sufficient to meet operating and capital needs for the remainder of 2005.
At September 30, 2005, Mr. Zimmerman had advanced an aggregate of $11.2
million, which was carried on the balance sheet as accounts payable and accrued
expenses, related party. Interest was accrued at various rates from the prime
rate to the prime rate plus 2%. Of this amount $5.0 million was converted into
an unsecured convertible note. This note is due December 31, 2007 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.
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. 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 expire on various dates in 2007. We have been accruing fees
of 2% of the lines of credit and the guaranteed property leases.
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. Mr. Zimmerman agreed to fund up to an additional $3.5 million
during 2005 for any operating shortfalls and has funded $4.6 million through
September 30, 2005.
Net cash used by operations was $3.6 million for the nine months ended September
30, 2005 and $2.2 million for the nine months ended September 30, 2004. Net cash
used by operations during the 2005 period included a net loss of $4.6 million,
depreciation of $0.9 million and an increase in
inventory of $1.0 million.. Net cash used by operations during the 2004 period
included a net loss of $2.6 million, depreciation of $0.7 million an increase in
inventory of $1.8 million and an increase in accounts payable of $1.2 million,
offset by a decrease in accrued expenses of $0.2 million.
Net cash used in investing activities for purchases of property and
equipment was $1.0 million for the nine months ended September 30, 2005 and $1.5
million for the nine months ended September 30, 2004. The increase was
principally attributable to new store openings.
Net cash provided by financing activities was $4.6 million for the nine
months ended September 30, 2005, primarily due to an increase in accounts
payable and accrued expenses, related party of $4.6 million and the net decrease
in borrowings under the line of credit by $0.2 million. Net cash provided by
financing activities was $3.7 million for the nine months ended September 30,
2004, primarily due to $3.3 million from the sale of common stock in the public
offering and a net decrease of borrowings of $0.3 million under a line of
credit. We used all of the proceeds of the public offering in 2004.
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 2005 as compared to the rate at
September 30, 2005, our total interest expense for 2005 would increase $0.2
million based on the outstanding balance at September 30, 2005. 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 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 and is accumulated and communicated to management, including its principal
executive officer and principal financial officer as appropriate to allow timely
decisions regarding required disclosure.
There have been no 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
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
31.1 Certification of Raymond Zimmerman, President and Chief Executive
Officer pursuant to Rule 13a-14(a) and Rule 15d-14 (a), promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Barry Bilmes, Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14 (a), promulgated under the Securities
Exchange Act of 1934, as amended.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 by Raymond Zimmerman,
Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350 by Barry Bilmes, Chief
Financial Officer
(b) Reports on Form 8-K
Not applicable
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 11, 2005