UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________________ to
_________________
Commission file number 0-29334
KIDS STUFF, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1843520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio 44718
(Address of principal executive offices)
(Zip Code)
(330) 492-8090
(Registrant's telephone number, including area code)
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 [ ] No [X]
As of July 31, 1997, there were 3,512,856 shares of the Registrant's
Common Stock without par value issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
<TABLE>
Kids Stuff, Inc.
Statements of Operations
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $2,044,340 $1,664,201 $3,509,881 $3,183,917
Cost of Sales 1,204,158 1,116,600 2,029,552 2,110,742
--------- ---------- ---------- ---------
Gross Profit 840,182 547,601 1,480,329 1,073,175
Selling Expenses 609,324 594,325 1,204,165 1,042,718
General and Administrative
Expenses 193,077 155,891 382,520 326,305
--------- ----------- ----------- ---------
Income From Operations 37,781 (202,615) (106,356) (295,848)
Other Expense (15,984) (12,460) (30,803) (18,864)
--------- ---------- ---------- ---------
Net Income (Loss) $ 21,797 $ (215,075) $ (137,159) $ (314,712)
========= ========== ========== =========
Earnings (Loss) Per Share $ 0.01 $ (0.06) $ (0.04) $ (0.09)
========= ========== ========== =========
Weighted Average Shares
Outstanding 2,899,999 3,700,000 3,671,429 3,700,000
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
Kids Stuff, Inc.
Balance Sheets
<CAPTION>
(UNAUDITED)
June 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 0 $ 248,648
Accounts receivable 231,122 165,779
Inventories 560,676 496,395
Deferred catalog expense 203,273 277,469
Due from affiliates 33,930 -
Prepaid expenses and other costs 496,839 169,789
---------- ---------
Total Current Assets 1,525,840 1,358,080
PROPERTY & EQUIPMENT:
Furniture, fixtures, equipment
and leaseholds 354,940 277,702
Less accumulated depreciation 190,956 164,093
---------- ----------
163,984 113,609
---------- ----------
$1,689,824 $1,471,689
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,592,228 $1,102,311
Current portion long term debt
- related parties 474,001 266,858
Line of credit 650,000 650,000
Due to affiliates - 137,070
Customer advances and other 3,078 5,630
--------- ---------
Total Current Liabilities 2,719,307 2,161,869
LONG TERM DEBT - RELATED PARTIES,
less current maturities 200,000 300,000
STOCKHOLDERS' EQUITY:
Common stock ($.001 par value, 2,843 3,700
25,000,000 shares authorized,
2,843,000 and 3,700,000 issued
and outstanding, respectively)
Preferred stock ($.001 par value, 5,000 -
10,000,000 shares authorized,
5,000,000 and no shares issued
and outstanding, respectively)
Additional paid-in capital 352,514 458,800
Retained earnings (1,589,840) (1,452,680)
----------- -----------
Total Stockholders' Equity (1,229,483) (990,180)
----------- -----------
$1,689,824 $1,471,689
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
KIDS STUFF, INC.
Statements of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 1997 and 1996
<CAPTION>
Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 $2,400 $ 0 $ 297,600 $ (931,040) $ (631,040)
Deduction
Net loss - - - (314,712) (314,712)
------- ------- --------- ----------- ------------
Balance - June 30, 1996 $2,400 $ 0 $ 297,600 $(1,245,752) $ (945,752)
======= ======= ========= =========== ===========
Balance - December 31, 1996 $3,700 $ 0 $ 458,800 (1,452,680) (990,180)
Addition
Sale of preferred stock
(unaudited) - 5,000 - - 5,000
Deductions
Repurchase of common stock (857) - (106,287) - (107,144)
Net loss (unaudited) - - - (137,159) (137,159)
------- ------- --------- ---------- ---------
Balance - June 30, 1997
(unaudited) $2,843 $5,000 $ 352,513 $(1,589,839) $(1,229,483)
======= ======= ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
Kids Stuff, Inc.
Statements of Cash Flows
<CAPTION>
(UNAUDITED)
Six Months Ended June 30,
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(137,159) $(314,712)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 26,863 4,787
(Increase) decrease in accounts receivable (65,343) 73,633
(Increase) in inventories (64,281) (203,777)
Decrease (increase) in deferred catalog expense 74,196 (165,922)
(Increase) in prepaid expenses (106,126) -
Increase in accounts payable,
customer advances and other 487,365 426,986
---------- ---------
Net cash provided (used) by operating activities 215,515 (179,005)
Cash Flows From Investing Activities:
Investment in property and equipment (77,239) (37,794)
Prepaid amounts for aquisition costs (22,846) (2,371)
----------- ---------
Net cash (used) by investing activities (100,085) (40,165)
Cash Flows From Financing Activities:
(Decrease) in due to affiliates (171,000) (403,407)
Sale of preferred stock 5,000 -
Borrowings on long-term debt - 366,858
Prepaid amounts for public offering (198,078) -
----------- ---------
Borrowings on line of credit - 220,000
(364,078) 183,451
Net cash (used) provided by financing activities
(248,648) (35,719)
Net Increase (Decrease) in Cash
248,648 35,719
----------- ---------
Cash - Beginning
$ 0 $ 0
=========== =========
Cash - Ending
Supplemental Disclosure Of Cash Flow Information
Cash paid during the period for interest $ 35,123 $ 18,864
============ =========
</TABLE>
For information on non-cash financing activities see footnote 3.
The accompanying notes are an integral part of these financial statements
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 Organization and Business
A Business Description - The Company is in the mail order business
and sells to customers throughout the United States. Perfectly Safe,
a division of the Company, primarily sells children's safety
products for use up to age three. Jeannie's Kids Club, a division of
the Company, sells hard good products for children primarily up to
the age of three. Natural Baby, a division of the Company which was
acquired on July 2, 1997 (see Note 5), sells children's clothes and
toys. Products are purchased from a variety of vendors.
B. Reorganization - Kids Stuff, Inc. ("Kids Stuff" or the
"Company") was incorporated during 1996 as a wholly-owned subsidiary
of Duncan Hill Company, Ltd. ("Duncan Hill"). Prior to a
reorganization occurring June 30, 1996, Kids Stuff had no
operations. The operations shown in the accompanying financial
statements prior to June 30, 1996 are those of Perfectly Safe, Inc.,
which was dissolved as part of the reorganization and is sometimes
referred to as "Predecessor" in these financial statements.
Perfectly Safe, Inc. was also a wholly-owned subsidiary of Duncan
Hill. Effective June 30, 1996, the assets and liabilities of
Perfectly Safe, Inc., reverted to Duncan Hill, and Perfectly Safe,
Inc. was dissolved. As part of the reorganization, the Company
acquired the assets and liabilities of its Predecessor. The Company
also acquired, as part of the reorganization, certain fixed assets
formerly belonging to Duncan Hill at a net book value of $122,143 at
December 31, 1995. The combination of the Company's acquisition of
the assets of its Predecessor and the Company's acquisition of
certain assets of Duncan Hill were accounted for at historical cost
as a reorganization of companies under common control. The
operations of the Predecessor are currently operated as the
Perfectly Safe Division and Jeannie's Kids Club Division of the
Company.
Note 2 Basis of Presentation
The accompanying financial statements have been prepared by the
Company. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. In the opinion of the Company's management, the disclosures
made are adequate to make the information presented not misleading,
and the financial statements contain all adjustments necessary to
present fairly the financial position as of June 30, 1997, results
of operations for the three months and six months ended June 30,
1997, and cash flows for the six months ended June 30, 1997 and
1996.
The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the
full year.
Note 3. Recent Sale of Unregistered Securities
The following shares of unregistered securities have been issued by
the Company since its inception. There were no underwriting
discounts and commissions paid in connection with the issuance of
any said securities.
In connection with the reorganization effective June 30, 1996, the
Company issued to its parent, Duncan Hill Co., Ltd., 2,400,000
shares of Common Stock at a value of $.125 per share.
Commencing October, 1996, the Company sold an aggregate of 1,300,000
shares of Common Stock to eight private investors for the aggregate
purchase price of $162,500. In June 1997, the Company repurchased an
aggregate of 857,144 of those shares from five of those investors,
who were customers of one of the underwriters of the Company's
pending public offering, at a repurchase price of $.125 per share.
This repurchase was required by the National Association of
Securities Dealers as a condition to approving the compensation to
be received by the Underwriters in connection with the public
offering. The Company's repurchase payment is evidenced by five
promissory notes issued by it in the aggregate amount of $107,143.
The notes are payable on the earlier of the closing of the Company's
public offering or on July 31, 1997; provided, however that if the
public offering is not completed by July 31, 1997, no payments will
be made until such time as the Company obtains sufficient capital
surplus to make such payments. The notes bear interest at a rate of
8% per annum commencing the date that the investor initially
subscribed for his Rule 504 Shares.
Note 3. Recent Sale of Unregistered Securities (continued)
In October, 1996, the Company borrowed an aggregate of $200,000
(bridge loan) from three private investors, $75,000 of which is
convertible upon its terms into 1,500,000 Class A Warrants upon the
effective date of the registration statement described in Note 4.
The 1,500,000 Warrants, as well as the shares of Common Stock
underlying those warrants are included as securities being
registered under the registration statement.
Subsequent to the release of the Company's 1996 audited financial
statements, the Bridge Loan was restructured, at the request of VTR
Capital, Inc., the representative of the underwriters, so that the
Bridge lenders would be paid the entire $200,000 face amount of the
Bridge Loan, in cash plus accrued interest at the closing of the
public offering, and would waive the right to convert $75,000 of the
face amount of the loan into 1,500,000 Warrants.
During January 1997, the Company issued to its parent, Duncan Hill
Co., Ltd., 5,000,000 shares of series A Preferred Stock, at a par
value of $.001 per share, as a part of the reorganization(See Note
1.B). The holders of the Series A Preferred Stock are entitled to
one vote for each share held of record on all matters submitted to
a vote of the shareholders.
The Series A Preferred Stock is not subject to redemption and has no
conversion rights or rights to participate in dividend payments. In
the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Company, each share of Series A
Preferred Stock has a liquidation preference of $.001 per share.
Note 4. Public Offering
The Company filed a registration statement in January, 1997 as
amended, relating to the offering by the Company of 300,000 units at
an offering price of $12 per unit, each unit consisting of two
shares of common stock, $.001 par value, and eight Class A Warrants.
The common stock and warrants are immediately separately
transferable as of the date of the prospectus. Each warrant
entitles the holder to purchase one share of common stock at a price
of $5.00 for a period of four years commencing one year after the
date of this prospectus. The Company may redeem the Warrants at a
price of $.05 per Warrant, at any time after they become
exercisable, upon not less than 30 days' prior written notice, if
the closing bid price of the Common Stock has been at least $14.40
per share for 20 consecutive trading days ending on the fifth day
prior to the date on which the notice of redemption is given.
The public offering was declared effective by the Securities and
Exchange Commission on June 26, 1997, and the offering was fully
subscribed and closed on July 2, 1997.The gross proceeds of the
offering were $3,600,000.
Note 5. Subsequent Event - Acquisition of the Natural Baby Catalog
On July 2, 1997, the Company completed its acquisition of The
Natural Baby Catalog ("Baby Co."). The Company paid a cash payment
of $1,225,000 to the seller; a cash payment in the amount of
$219,831 in payment of a note owed by Baby Co. in the principal
amount of $197,603 together with accrued interest in the amount of
$22,228 through July 2, 1997; and a cash payment of $50,134 to Cores
States Bank to pay off Baby Co's line of credit in the principal
amount of $50,000 plus interest of $134; the assumption by the
Company of Baby Co.'s accounts payable incurred in the ordinary
course of business which is approximately $266,287 as of June 30,
1997; assumption of Baby Co.'s remaining lease obligations in the
approximate amount of $24,000 as of June 30, 1997; a convertible
promissory note issued by the Company to Baby Co. in the amount of
$250,000 (Convertible Note); a second promissory note in an amount
which reflects the pre-tax profits of Baby Co. in excess of $300,000
from the date of completion of the acquisition through December 31,
1997 (the "Excess Profit Note") as more fully discussed in the
paragraph below; 70,000 shares of the unregistered Common Stock of
the Company to be issued to Baby Co. which will be subject to a two
year lock-up from the date of the Prospectus; and, the agreement on
the part of the Company's Chief Executive Officer, William Miller,
to guarantee the payments to be made by the Company under the
convertible note on the first and second anniversary dates.
The amount of the Excess Profit Note shall be equal to the pre-tax
profits of Baby Co. in excess of $300,000 from the date of the
completion of the acquisition through December 31, 1997 (the "Excess
Profit Period"). The pre-tax profits of Baby Co. will be determined
by the amount of its merchandise sales (net of returns and
allowances) during the Excess Profit Period, multiplied by the
percentage equal to the pre-tax profits of Baby Co. for the twelve
months preceding the acquisition closing date divided by the amount
of Baby Co.'s merchandise sales (net of returns and allowances)
during that twelve month period. The principal amount of the Excess
Profit Note shall be payable over four equal, annual installments,
together with interest at 8% per annum, commencing April 14, 1998.
The unpaid balance of the Convertible Note is convertible at any
time into unregistered shares of the Company's Common Stock, at the
election of the holder, at a conversion price of $5.00 per share.
The Convertible Note will have an eight-year term and bear interest
at 8% per annum. Upon the first three anniversaries of the
execution of the Convertible Note, only accrued interest in arrears
will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth,
seventh and eighth anniversaries of the execution of the Convertible
Note.
The Company intends to pay the assumed accounts payable and assumed
lease obligations out of The Natural Baby Catalog's cash flow.
The purchase price is based upon Baby Co.'s tangible net worth at
December 31, 1995, and is subject to adjustment in the event that
Baby Co.'s tangible net worth at closing is higher or lower than at
year end 1995. Any adjustment in the purchase price will be made as
an adjustment to the Convertible Note.
Unaudited pro forma combined results of Kids Stuff, Inc. and Natural
Baby Co., as if the acquisition had taken place at the beginning of
1996, for the six months ended June 30, 1997 and 1996 are as
follows:
Six Months Ended June 30,
1997 1996
Total Revenues $6,448,157 $5,919,423
Net Income (loss) 111,579 (303,344)
Earnings (loss) Per Share $ 0.03 $ (0.08)
Note 6. Long-Term Debt - Related Parties
A. Long-term debt - related parties consisted of the following at
June 30, 1997 (unaudited).
Note Payable - Duncan Hill Company, Ltd. (parent company),
unsecured and payable in four annual principal payments
plus interest at 8.0%, matures June 2000. The first
installment is for $66,858 and the three remaining
installments are for $100,000. $ 366,858
Notes Payable - (former Rule 504 Shareholders),
the entire principal plus interest at 8%, payable
on the closing date of the initial public offering. 107,143
Note Payable - (bridge lender - see Note 3),
the entire principal plus interest at 8.0%, payable
on the earlier of September 27, 1997 or the closing
date of the initial public offering of Company's
securities. 200,000
--------
674,001
Less current portion 474,001
--------
$ 200,000
========
Payments on long term debt - Subsequent to June 30, 1997.
The following principal payments on long term debt were made
subsequent to June 30, 1997 from proceeds of the public offering:
Note Payable - Duncan Hill Co., Ltd. (parent company),
first of four annual installments. $66,858
Notes Payable - Former Rule 504 Shareholders 107,143
Notes Payable - Bridge Lenders 200,000
-------
$374,001
=======
Note 7 Recently Issued Accounting Pronouncements
In October 1995, Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, was issued which
establishes accounting and reporting standards for stock-based
compensation plans. This standard encourages the adoption of the
fair value-based method of accounting for employee stock options or
similar equity instruments, but continues to allow the Company to
measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Under the fair value-based method, compensation cost is
measured at the grant date based on the value of the award. Under
the intrinsic value-based method, compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to
acquire the stock. The Company uses the intrinsic value-based method
for stock-based compensation to employees. As a result, this
standard does not have any effect to the Company's financial
statements other than to require disclosure of the pro forma effect
on net income of using the fair value-based method of accounting.
Management believes this effect to currently be immaterial.
Note 7 Recently Issued Accounting Pronouncements (continued)
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share", which is effect for fiscal years
ending after December 15, 1997. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share.
Management believes earnings per share computed in accordance with
SFAS 128 will not be materially different than earnings per share as
currently reported.
Item 2. Management's Discussion and Analysis
The following information should be read in conjunction with the
unaudited financial statements included herein. See Item 1.
RESULTS OF OPERATIONS
Three months ended June 30, 1997, compared to three months ended
June 30, 1996
Total net sales for the three months ended June 30, 1997 increased
$380,139, or 22.8%, to $2,044,340, compared with $1,664,201 for the
three months ended June 30, 1996. Net sales include sales from
merchandise, Jeannie's Kids Club memberships, shipping and handling
charges, and mailing list rentals. The net sales of the Perfectly
Safe Catalog increased from $689,983 for the quarter ended June 30,
1996 to $1,104,533 for the quarter ended June 30, 1997. This
increase is attributable largely to a 31.3% increase in catalog
circulation from 346,578 catalogs mailed to 454,957 catalogs mailed
in the second quarters of 1996 and 1997, respectively. This increase
was slightly offset by a decrease in net sales of Jeannie's Kids
Club, which decreased $34,411 from $974,218 to $939,807 for the
three months ended June 30, 1996 and 1997, respectively.
The Company's total catalog circulation decreased to 672,265 for the
three months ended June 30, 1997 from 929,624 for the same period of
1996. While the Perfectly Safe Catalog circulation was increased, as
noted above, circulation of Jeannie's Kids Club decreased from
583,046 catalogs in the second quarter of 1996 to 217,308 catalogs
in the second quarter of 1997. This decrease is a result of
management's testing of new rental mail lists in the first quarter
of 1997 that did not produce profitable new lists. Management
decided to temporarily reduce the circulation of Jeannie's Kids Club
Catalog until new profitable rental lists can be acquired. While the
lower circulation for Jeannie's Kids Club resulted in lower
merchandise sales of $683,715 for the three months ended June 30,
1997 compared to $815,917 for the three months ended June 30, 1996,
membership revenue increased to $206,343 from $69,449 for the same
periods 1997 and 1996, respectively. This increase is due to
membership renewals of existing Jeannie's Kids Club members.
Cost of sales, as a percentage of net sales, decreased 8.2% from
67.1% for the three months ended June 30, 1996 to 58.9% for the
three months ended June 30, 1997. The largest factor was the
decrease in merchandise costs, which decreased 6.1% as a percentage
of net sales, from 45.9% to 39.8% for the three months ended June
30, 1996 and 1997, respectively. Merchandise costs decreased as a
result of the shift in catalog sales from Jeannie's Kids Club to the
Perfectly Safe Catalog. Jeannie's Kids Club sales have higher
merchandise costs as a percentage of sales because of the discounts
offered to members, which range from 30 - 60% off regular catalog
prices. For the three months ended June 30, 1997, Perfectly Safe
Catalog net sales were 54% of the total net sales, compared to 41.5%
of the total net sales for the same period in 1996.
Selling expenses, which consists of advertising and other marketing
related expenses, decreased as a percentage of net sales 5.9%, from
35.7% to 29.8% of net sales for the three month periods ended June
30, 1996 and 1997, respectively. This decrease is due to the gross
revenue per catalog increasing from $1.91 to $3.25 for the three
month periods ended June 30, 1996 and 1997, respectively.
General and administrative expenses were $193,077, or 9.4% of net
sales, for the three months ended June 30, 1997, and $155,891, or
9.4% of net sales, for the same period of 1996. This dollar increase
is attributable to increased wages due to additional staffing, and
increased professional and consulting fees relating to the Company's
public offering and its acquisition of the Natural Baby Catalog. The
Company believes that its general and administrative functions will
become more efficient and cost effective upon absorbing the revenue
base of the Natural Baby Catalog, which the Company believes can be
accomplished with significantly less than proportionate increases in
general and administrative expenses. General and administrative
expenses for the six months ended June 30, 1996 were incurred by the
Company's parent, Duncan Hill, and allocated to the Company
consistent with past practices, under which Duncan Hill allocated
its general and administrative expenses to its operating
subsidiaries on a pro rata basis determined by the percentage of
total assets of the various operating subsidiaries, exclusive of the
assets of Duncan Hill. For the first six months of 1996, the
Company's allocation was 69% of Duncan Hill's total general and
administrative expenses. Effective June 30, 1996, the Company began
to handle certain of its own administrative functions, directly.
Net income for the three months ended June 30, 1997 was $21,797, or
1.1% of net sales, compared to net losses of $215,075, or 12.9% of
net sales for the same period of 1996. The Company attributes this
increase to the increase in revenues and decreased cost of sales and
decreased selling expenses as a percentage of net sales.
Six months ended June 30, 1997, compared to six months ended June
30, 1996
Total net sales for the six months ended June 30, 1997 increased
$325,964, or 10.2%, to $3,509,881, compared with $3,183,917 for the
six months ended June 30, 1996. Net sales include sales from
merchandise, Jeannie's Kids Club memberships, shipping and handling
charges, and mailing list rentals. The net sales of the Perfectly
Safe Catalog increased from $1,336,182 for the six months ended June
30, 1996 to $1,812,539 for the six months ended June 30, 1997. This
increase is attributable largely to a 41.2% increase in catalog
circulation from 672,624 catalogs mailed to 949,860 catalogs mailed
in the first half of 1996 and 1997, respectively. This increase was
slightly offset by a decrease in net sales of Jeannie's Kids Club,
which decreased $150,393 from $1,847,735 to $1,697,342 for the six
months ended June 30, 1996 and 1997, respectively.
The Company's total catalog circulation decreased to 1,723,703 for
the six months ended June 30, 1997 from 1,886,010 for the same
period of 1996. While the Perfectly Safe Catalog circulation was
increased, as noted above, circulation of Jeannie's Kids Club
decreased from 1,213,386 catalogs in the first half of 1996 to
773,843 catalogs in the first half of 1997. This decrease is a
result of management's testing of new rental mail lists in the first
quarter of 1997 that did not produce any profitable new lists.
Management has decided to temporarily reduce the circulation of
Jeannie's Kids Club Catalog until new profitable rental lists can be
acquired. While the lower circulation for Jeannie's Kids Club
resulted in lower merchandise sales of $1,245,635 for the six months
ended June 30, 1997 compared to $1,529,094 for the six months ended
June 30, 1996, membership revenue increased to $356,029 from
$151,712 for the same periods 1997 and 1996, respectively. This
increase is due to membership renewals of existing Jeannie's Kids
Club members.
Cost of sales, as a percentage of net sales, decreased 8.5% from
66.3% for the six months ended June 30, 1996 to 57.8% for the six
months ended June 30, 1997. The largest factor was the decrease in
merchandise costs, which decreased 6.9% as a percentage of net
sales, from 46.1% to 39.2% for the six months ended June 30, 1996
and 1997, respectively. Merchandise costs decreased as a result of
the shift in catalog sales from Jeannie's Kids Club to the Perfectly
Safe Catalog. Jeannie's Kids Club sales have higher merchandise
costs as a percentage of sales because of the discounts offered to
members, which range from 30 - 60% off regular catalog prices. For
the six months ended June 30, 1997, Perfectly Safe Catalog net sales
were 51.6% of the total net sales, compared to 42.0% of the total
net sales for the same period in 1996.
Selling expenses, which consists of advertising and other marketing
related expenses, increased as a percentage of net sales 1.6%, from
32.7% to 34.3% of net sales for the six month periods ended June 30,
1996 and 1997, respectively.
General and administrative expenses were $382,520, or 10.9% of net
sales, for the six months ended June 30, 1997, and $326,305, or
10.2% of net sales, for the same period of 1996. This increase is
attributable to increased wages due to additional staffing, and
increased professional and consulting fees relating to the Company's
public offering and its acquisition of the Natural Baby Catalog. The
Company believes that its general and administrative functions will
become more efficient and cost effective upon absorbing the revenue
base of the Natural Baby Catalog, which the Company believes can be
accomplished with significantly less than proportionate increases in
general and administrative expenses. General and administrative
expenses for the six months ended June 30, 1996 were incurred by the
Company's parent, Duncan Hill, and allocated to the Company
consistent with past practices, under which Duncan Hill allocated
its general and administrative expenses to its operating
subsidiaries on a pro rata basis determined by the percentage of
total assets of the various operating subsidiaries, exclusive of the
assets of Duncan Hill. For the first six months of 1996, the
Company's allocation was 69% of Duncan Hill's total general and
administrative expenses. Effective June 30, 1996, the Company began
to handle certain of its own administrative functions, directly.
Net losses for the six months ended June 30, 1997 were $137,159, or
3.9% of net sales, compared to net losses of $314,712, or 9.9% of
net sales for the same period of 1996. The Company attributes this
increase to the increase in revenues, decreased cost of sales and
decreased selling expenses.
Liquidity and Capital Resources and Subsequent Acquisition
At June 30, 1997, the Company had a deficit in retained earnings of
$1,589,839, compared with a deficit of $1,452,680 at December 31,
1996. This resulted from a net loss of $137,159 for the six months
ended June 30, 1997 and $521,640 for the 1996 fiscal year.
For the six months ended June 30, 1997, the impact of the operating
loss on the Company's cash position was offset by changes in working
capital which effected operating activities. The operating
activities consumed $235,750 in cash through increases in accounts
receivable, inventories and prepaid expenses, but provided $561,561
in cash through a decrease in deferred catalog expense and an
increase in accounts payable. The net effect of these changes and
non cash charges of $26,863 relating to depreciation was to offset
the Company's net loss by $352,674, so that net cash provided by
operating activities was $215,515. The most significant provider of
cash was the increase in accounts payable, which increased $487,365.
For the six months ended June 30, 1997, the Company's financing
activities used $364,078 in cash, with $171,000 from changes in
obligations to the parent company, $198,078 from prepaid amounts
relating to the Company's public offering, and $5,000 from the sale
of preferred stock.
For the six months ended June 30, 1997, the combined effect of net
cash provided by operating activities of $215,515, net cash used by
financing activities of $364,078, and investments in fixed assets
and prepaid amounts for the acquisition of the Natural Baby Catalog
totaling $100,085, decreased cash from $248,648 to $0 at June 30,
1997.
The Company's $800,000 bank line of credit had a balance of $650,000
at June 30, 1997. The line of credit is for an open term, payable on
demand. The facility is secured by the assets of the Company, as
well as the assets of Duncan Hill and another Duncan subsidiary, E.
A. Carey of Ohio, Inc. The repayment of the facility is guaranteed
by the Company's CEO, William Miller. Interest is charged at the
rate of 1% over prime. It is the policy of the bank to review the
credit facility annually, commencing June 30, 1997, and to require
that the Company maintain a zero balance on the credit line for a
period of thirty consecutive days sometime during the course of each
year. The bank has agreed to waive the "zero balance" required for
the 1997 loan year ended June 30, 1997, because the Company's
current cash flow would not allow it to comply before then. The
Company is currently negotiating the renewal of its current line of
credit with the bank for the 1998 loan year. The Company anticipates
that, with the additional cash flow from the sales generated by the
Natural Baby Catalog, it will "zero balance" the credit line for the
1998 loan year in the fourth quarter of 1997.
Effective June 30, 1996, the Company was recapitalized as Kids
Stuff, Inc. by its parent, Duncan Hill, for the purpose of acquiring
the operating assets of Duncan Hill, as well as the children's
catalog business of Perfectly Safe, Inc. The Company paid for those
assets through the assumption of Perfectly Safe, Inc.'s liabilities
and Duncan Hill's bank line of credit, by a promissory note payable
to Duncan Hill and by preferred and common stock of the Company. See
"Notes To Financial Statements - Note 1B - Reorganization." Part 1.
The first installment of the promissory note to Duncan Hill in the
principal amount of $66,858, plus accrued interest, was paid on July
7, 1997 with the next installment in the amount of $100,000 due on
June 30, 1998, together with accrued interest.
In order to finance its most recent operations, the Company entered
into certain private financing agreements commencing in October,
1996. In that regard, the Company issued 8% promissory notes in the
amount of $125,000 to be repaid with a portion of the proceeds from
its public offering, 8% promissory notes in the amount of $75,000,
convertible upon the date of the Prospectus into Warrants to
purchase 1,500,000 shares of Common Stock (the "8% Convertible
Notes") and 1,300,000 shares of the Company's Common Stock for
$162,500. Subsequently, the holders of the 8% Convertible Notes, at
the request of the Representative, agreed to accept a cash payment
at the closing of the public offering in the face amount of $75,000,
plus accrued interest at 8% per annum, in lieu of the conversion of
their notes into 1,500,000 Warrants. Also, in June 1997, the Company
repurchased 857,144 shares of the Common Stock previously issued in
the private financings at a repurchase price of $.125 per share,
payable upon the earlier of the closing of the public offering or on
July 31, 1997. See "Notes To Financial Statements Note 3. Recent
Sale Of Unregistered Securities." Item 1. On July 2, 1997, the
Company repaid the 8% promissory notes in the principal amount of
$125,000, plus accrued interest, the 8% Convertible Notes in the
principal amount of $75,000, plus accrued interest, and the payment
of notes in the principal amount of $107,143, plus accrued interest
for the repurchase of the 857,144 shares of Common Stock of the
Company mentioned above, out of the proceeds of its public offering:
The Company filed a registration statement in January, 1997 as
amended, relating to the offering by the Company of 300,000 units at
an offering price of $12 per unit, each unit consisting of two
shares of common stock, $.001 par value, and eight Class A Warrants.
The public offering was declared effective by the SEC on June 26,
1997, and the proceeds were distributed to the Company on July 2,
1997. See "Notes To Financial Statements - Note 4. Public Offering."
Item 1.
On July 2, 1997, the Company completed its acquisition of The
Natural Baby Catalog ("Baby Co."). The Company paid a cash payment
of $1,225,000 to the seller; a cash payment in the amount of
$219,831 in payment of a note owed by Baby Co. in the principal
amount of $197,603 together with accrued interest in the amount of
$22,228 through July 2, 1997; and a cash payment of $50,134 to Core
States Bank to pay off Baby Co's line of credit in the principal
amount of $50,000 plus interest of $134; the assumption by the
Company of Baby Co.'s accounts payable incurred in the ordinary
course of business which is approximately $266,287 as of June 30,
1997; assumption of Baby Co.'s remaining lease obligations in the
approximate amount of $24,000 as of June 30, 1997; a convertible
promissory note issued by the Company to Baby Co. in the amount of
$250,000 (Convertible Note); a second promissory note in an amount
which reflects the pre-tax profits of Baby Co. in excess of $300,000
from the date of completion of the acquisition through December 31,
1997 (the "Excess Profit Note") as more fully discussed in "Notes To
Financial Statements - Note 5. Acquisition of The Natural Baby
Catalog" Item 1. 70,000 shares of the unregistered Common Stock of
the Company to be issued to Baby Co. which will be subject to a two
year lock-up from the date of the Prospectus; and, the agreement on
the part of the Company's Chief Executive Officer, William Miller,
to guarantee the payments to be made by the Company under the
convertible note on the first and second anniversary dates.
The unpaid balance of the Convertible Note is convertible at any
time into unregistered shares of the Company's Common Stock, at the
election of the holder, at a conversion price of $5.00 per share.
The Convertible Note will have an eight-year term and bear interest
at 8% per annum. Upon the first three anniversaries of the
execution of the Convertible Note, only accrued interest in arrears
will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth,
seventh and eighth anniversaries of the execution of the Convertible
Note.
The Company intends to pay the assumed accounts payable and assumed
lease obligations out of The Natural Baby Catalog's cash flow.
Further the purchase price is based upon Baby Co.'s tangible net
worth at December 31, 1995, and is subject to adjustment in the
event that Baby Co.'s tangible net worth at closing is higher or
lower than at year end 1995. Any adjustment in the purchase price
will be made as an adjustment to the Convertible Note.
Selected financial information relating to Natural Baby Catalog for
the six months ended June 30, 1997 and 1996 are as follows:
Six Months Ended June 30,
1997 1996
Total revenues $2,938,276 $2,735,506
Net income 248,738 11,368
Total assets $ 760,065 $ 798,384
On a pro forma basis, assuming the Company had acquired Natural Baby
Catalog at the beginning of fiscal year 1996, the combined
operations would have resulted in combined net sales of $6,448,157,
net income of $111,579, and net income per share of common stock of
$.03, for the six months ended June 30, 1997 and combined net sales
of $5,919,423, net loss of $303.344, and net loss per share of
common stock of $.08, for the six months ended June 30, 1996.
The Company believes that by consolidating the operations of Natural
Baby Catalog with the Company's, that substantial savings can be
realized in direct labor and general and administrative areas. The
Company estimates that $200,000 in direct labor savings and $450,000
in general and administrative savings can be realized, on an annual
basis, exclusive of additional expenses which the Company will incur
as a public entity, estimated to be $250,000 annually.
In July 1997, the operations of the Natural Baby Catalog were
relocated to the Company's Canton, Ohio facilities, including
inventories, telemarketing, customer service and fulfillment.
In June, 1997, the Company replaced its data processing hardware.
The Company is leasing the hardware at an annualized cost of
approximately $24,000. Lease payments will be paid for out of the
Company's cash flow or working capital.
In October 1995, Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, was issued which
establishes accounting and reporting standards for stock-based
compensation plans. This standard encourages the adoption of the
fair value-based method of accounting for employee stock options or
similar equity instruments, but continues to allow the Company to
measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Under the fair value-based method, compensation cost is
measured at the grant date based on the value of the award. Under
the intrinsic value-based method, compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to
acquire the stock. The Company uses the intrinsic value-based method
for stock-based compensation to employees. As a result, this
standard does not have any effect to the Company's financial
statements other than to require disclosure of the pro forma effect
on net income of using the fair value-based method of accounting.
Management believes this effect to currently be immaterial.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share", which is effect for fiscal years
ending after December 15, 1997. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share.
Management believes earnings per share computed in accordance with
SFAS 128 will not be materially different than earnings per share as
currently reported.
Forward Looking Statements and Associated Risks
Management's discussion and analysis contains forward looking
statements which reflect management's current views and estimates of
future economic circumstances, industry conditions, company
performance and the financial results. These forward-looking
statements are based largely on the Company's expectations and are
subject to a number of risks and uncertainties, many of which are
beyond the Company's control. Actual results could differ materially
from these forward looking statements as a result of changes in the
trends in the children's mail order catalog industry, competition,
availability and price of goods and other factors. Any changes in
such assumptions or factors could produce significantly different
results.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed aspart of this report:
27. Financial Data Schedule
(b) No report on Form 8-K was filed during the second quarter of
1997.
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KIDS STUFF, INC.
Date: August 14, 1997 /s/ Chris Weber
Chris Weber, Controller
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<PERIOD-END> JUN-30-1997
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<RECEIVABLES> 231,122
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