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 September 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.
Balance Sheet
<CAPTION>
(UNAUDITED)
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current Assets
Cash $ 87,009 $ 248,648
Accounts receivable 367,164 165,779
Inventories 1,192,660 496,395
Due from affiliates 254,150 0
Deferred catalog expense 441,957 277,469
Prepaid expenses and other costs 39,351 169,789
--------- ----------
Total Current Assets 2,382,291 1,358,080
Property and Equipment
Furniture, fixtures, equipment
and leaseholds 412,315 277,702
Less accumulated depreciation 198,977 164,093
------- ----------
213,338 113,609
Other Assets, net
Customer list 500,853 0
Goodwill 1,011,355 0
--------- ----------
Total Other Assets 1,512,208 0
$4,107,837 $1,471,689
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,421,881 $1,102,311
Current portion long term
debt- related parties 100,000 266,858
Line of credit 650,000 650,000
Due to affiliates 0 137,070
Customer advances and other 53,580 5,630
--------- ---------
Total Current Liabilities 2,225,461 2,161,869
Long Term Debt, less current portion 450,000 300,000
Stockholders' Equity
Common stock, $.001 par value,
25,000,000 shares
authorized, 3,513,000 and
3,700,000 shares
issued and outstanding,
respectively. 3,513 3,700
Preferred stock, $.001 par value,
10,000,000 shares
authorized, 5,000,000 and
no shares issued and
outstanding, respectively. 5,000 0
Additional paid -in capital 2,971,804 458,800
Retained earnings (1,547,941) (1,452,680)
---------- ----------
Total Stockholders' Equity 1,432,376 (990,180)
---------- ----------
$4,107,837 $1,471,689
</TABLE>
The accompanying notes are an integral part of these financial
statements.<PAGE>
<TABLE>
Kids Stuff, Inc.
Statement of Operations
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $3,096,797 $1,633,032 $6,606,678 $4,816,949
Cost of Sales 1,832,964 925,321 3,851,136 3,036,063
--------- --------- ----------- ---------
Gross Profit 1,263,833 707,711 2,755,542 1,780,886
Selling Expenses 862,188 515,432 2,066,353 1,558,150
General and
Administrative
Expenses 304,434 211,208 686,954 537,513
--------- -------- --------- ---------
Income (Loss) From
Operations 97,211 (18,929) 2,235 (314,777)
Other Expense (66,693) (11,948) (97,496) (30,812)
------- ------- --------- ----------
Net Income (Loss) $ 30,518 $ (30,877) $ (95,261) $ (345,589)
======= ========= ========= ===========
Earnings (Loss)
Per Share $ 0.01 $ (0.01) $ (0.03) $ (0.09)
===== ====== ======= =======
Weighted Average
Shares
Outstanding 3,512,856 3,700,000 3,564,432 3,700,000
========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Kids Stuff, Inc.
Statements of Stockholders' Equity (Unaudited)
Nine months Ended September 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 - - - (345,589) (345,589)
----- ------ --------- --------- ---------
Balance - September 30, 1996 $2,400 $ 0 $ 297,600 $(1,276,629) $ (976,629)
===== ====== ========= =========== =========
Balance - December 31, 1996 $3,700 $ 0 $ 458,800 $(1,452,680) $ (990,180)
Addition
Sale of preferred stock - 5,000 - - 5,000
Sale of common stock (net
of offering
costs of $980,109) 600 - 2,619,291 - 2,619,891
Issuance of common stock 70 - - - 70
Deductions
Repurchase of common stock (857) - (106,287) - (107,144)
Net loss - - - (95,261) (95,261)
------ ------- --------- ---------- ---------
Balance - September 30, 1997 $3,513 $5,000 $2,971,804 $(1,547,941) $1,432,376
======= ======= =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Kids Stuff, Inc.
Statement of Cash Flows
<CAPTION>
(UNAUDITED)
Nine Months Ended September 30,
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) $ (95,261) $(345,589)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 34,884 92,776
(Increase) in accounts receivable (172,089) (77,841)
(Increase) decrease in inventories (221,495) 165,341
Decrease (increase) in deferred catalog expense 21,099 (319,902)
Decrease in prepaid expenses 52,311 0
Increase in accounts payable, customer advances
and other 71,309 298,700
-------- ---------
Net cash (used) by operating activities (309,242) (186,515)
Cash Flows From Investing Activities:
Investment in property and equipment (110,281) (33,433)
Acquisition of Natural Baby Catalog (1,494,965) 0
Prepaid amounts for acquisition of
Natural Baby Catalog Business 0 (23,799)
---------- --------
Net cash (used) by investing activities (1,605,246) (57,232)
Cash Flows From Financing Activities:
(Decrease) increase in due to affiliates (137,070) 16,911
(Increase) in due from affiliates (254,150) 0
Sale of common stock, net 2,513,071 0
Sale of preferred stock 5,000 0
Repurchase of Rule 504 common stock (107,144) 0
Payments on long-term debt - related parties (266,858) 0
Borrowings on line of credit 0 220,000
--------- -------
Net cash provided by financing activities 1,752,849 236,911
Net (Decrease) in Cash (161,639) (6,836)
Cash - Beginning 248,648 35,719
--------- -------
Cash - Ending $ 87,009 $ 28,883
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Interest $ 87,037 $ 33,132
</TABLE>
For information on non-cash financing activities, see Note 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 Amortization of Goodwill and Customer List.
The Company is using the straight line method of amortizing both
Goodwill and Customer Lists acquired in the purchase of the
Natural Baby Catalog. Goodwill is being amortized using a twenty
year period, and the Customer List is amortized using a seven year
life. As of September 30, 1997, accumulated amortization was
$4,147 and $12,024 for the Customer List and Goodwill,
respectively.
Note 3 Interest Expense
Interest expense for the year 1996 was $56,. Interest expense for
the nine months ended September 30, 1997 and 1996 was $92,697 and
$33,132, respectively.
Note 4 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 September 30, 1997, results of operations for the three months
and nine months ended September 30, 1997, and cash flows for the
nine months ended September 30, 1997 and 1996.
The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results to be expected
for the full year.
Note 5. 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
Note 5. Recent Sale of Unregistered Securities (continued)
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 was evidenced by five promissory notes issued
by it in the aggregate amount of $107,143. The notes were payable
on the earlier of the closing of the Company's public offering or
on July 31, 1997. The notes had borne interest at a rate of 8% per
annum commencing the date that the investor initially subscribed
for his Rule 504 Shares. The Company paid these notes along with
accrued interest on June 25, 1997.
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 6.
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 6. 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 7. 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
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7. Acquisition of the Natural Baby Catalog (continued)
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. Management has not yet determined the amount of
this note.
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. As of October
10,1997, the Company and the sellers of the Natural Baby Catalog
have not agreed on an actual adjustment amount. The terms of the
purchase agreement call for an arbitration process if both parties
can not agree on an acceptable adjustment amount. Management has
not determined an estimated adjustment amount, and has not
determined if arbitration will be necessary.
The table below summarizes the assets and liabilities relating to
the purchase of the Natural Baby catalog.
Receivables $29,297
Inventories 459,775
Deferred catalog costs 185,587
Other 3,544
Customer list 505,000
Goodwill 1,023,379
Accounts payable $ 270,564
Accrued expenses 25,647
-------
Sub-total 2,206,582 296,211
--------- -------
Net assets purchased $1,910,371
==========
Cash and prepaid expenses paid $1,365,706
Loans paid 294,665
Note payable 250,000
Total payments $1,910,371
==========
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 nine months ended September 30, 1997
and 1996 are as follows:
Nine Months Ended September 30,
1997 1996
Total Revenues $9,544,954 $9,162,140
Net Income (loss) 142,097 (112,126)
Earnings (loss) Per Share $.04 $(.03)
Note 8. Long-Term Debt - Related Parties
A. Long-term debt - related parties consisted of the following at
September 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 was for $66,858
(paid on July 2, 1997), and the three
remaining installments are for $100,000. $ 300,000
Convertible Note Payable Seller of the Natural
Baby Catalog, payable in five annual installments
commencing June 2001, interest payable annually
at 8% commencing June 1998. Convertible into
common stock at holders election at $5.00 per share.
This note is subject to adjustment as noted above
in Note 5. 250,000
-------
550,000
Less current portion 100,000
-------
$ 450,000
=======
B. Payments on long term.
The following principal payments on long term debt were made
during 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 107,144
Notes Payable - Bridge Lenders 200,000
-------
$374,002
=======
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 9 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.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share", which is effective 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 September 30, 1997, compared to three months
ended September 30, 1996
Total net sales for the three months ended September 30, 1997
increased $1,463,765, or 89.6%, to $3,096,797, compared with
$1,633,032 for the three months ended September 30, 1996. Net
sales include sales from merchandise, Jeannie's Kids Club
memberships, shipping and handling charges, and mailing list
rentals. This increase is mainly attributable to the acquisition
of Natural Baby Catalog on July 2, 1997, and the resulting net
sales of $1,530,111 for the three months ended September 30, 1997.
The net sales of the Perfectly Safe Catalog increased from
$678,994 for the quarter ended September 30, 1996 to $1,032,364
for the quarter ended September 30, 1997. This increase is
attributable to a 19.7% increase in catalog circulation from
469,950 catalogs mailed to 562,679 catalogs mailed in the third
quarters of 1996 and 1997, respectively, and also to an increase
in net revenue per book mailed of 27%, from $1.44 per book in the
third quarter of 1996 to $1.83 per book in the same quarter of
1997. This increase was offset by a decrease in net sales of
Jeannie's Kids Club, which decreased from $954,038 to $534,322 for
the three months ended September 30, 1996 and 1997, respectively.
The circulation of Jeannie's Kids Club was reduced from 691,519 to
332,966 for the three months ended September 30, 1996 and 1997,
respectively.
Cost of sales, as a percentage of net sales, increased 2.5% from
56.7% for the three months ended September 30, 1996 to 59.2% for
the three months ended September 30, 1997. The largest factor was
the increase in merchandise costs, which increased 1.7% as a
percentage of net sales, from 39.1% to 40.8% for the three months
ended September 30, 1996 and 1997, respectively.
Selling expenses, which consists of advertising and other
marketing related expenses, decreased as a percentage of net sales
3.8%, from 31.6% to 27.8% of net sales for the three month periods
ended September 30, 1996 and 1997, respectively. This decrease is
due to the Perfectly Safe net revenue per catalog increasing from
$1.44 to $1.83 for the three month periods ended September 30,
1996 and 1997, respectively, Jeannie's Kids Club net revenue per
catalog increasing from $1.38 to $1.60, for the same periods, and
the addition of Natural Baby Catalog.
General and administrative expenses were $304,434, or 9.8% of net
sales, for the three months ended September 30, 1997, and
$211,208, or 12.9% of net sales, for the same period of 1996. This
dollar increase is attributable to increased legal, accounting and
consulting fees relating to the Company becoming public, and
expenses for the relocation of the Natural Baby Catalog operations
from Trenton, NJ to the Company's Canton, OH facility. The Company
believes that its general and administrative functions will become
more efficient and cost effective once integration of the Natural
Baby Catalog operations and the learning curve relating to the new
product line is complete, 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. Effective January 1, 1997, the Company began handling
administrative functions for E. A. Carey of Ohio, Inc., a
subsidiary of the Company's parent, Duncan Hill. General and
administrative expenses incurred by the Company are allocated to
E. A. Carey, on a pro rata basis determined by the percentage of
total assets of the E. A. Carey and the operating divisions of
Kids Stuff, Inc. For the six months ended June 30, 1997, E. A
Carey's allocation was 33% of the Company's total general and
administrative expenses. For the three months ended September 30,
1997, E. A. Carey's allocation was 20% of the Company's total
general and administrative expenses, due to the acquisition of
Natural Baby.
Net income for the three months ended September 30, 1997 was
$30,518, or 1.0% of net sales, compared to a net loss of $30,877,
or 1.9% of net sales for the same period of 1996. The Company
attributes this increase to the increase in revenues, the
acquisition of the Natural Baby Catalog, and decreased selling
expenses as a percentage of net sales.
Nine months ended September 30, 1997, compared to nine months
ended September 30, 1996
Total net sales for the nine months ended September 30, 1997
increased $1,789,729, or 37.2%, to $6,606,678, compared with
$4,816,949 for the nine months ended September 30, 1996. Net sales
include sales from merchandise, Jeannie's Kids Club memberships,
shipping and handling charges, and mailing list rentals. This
increase is mainly attributable to the acquisition of Natural Baby
Catalog on July 2, 1997, and the resulting net sales of $1,530,111
for the three months ended September 30, 1997. The net sales of
the Perfectly Safe Catalog increased from $2,015,176 for the nine
months ended September 30, 1996 to $2,844,903 for the nine months
ended September 30, 1997. This increase is attributable largely to
a 32.4% increase in catalog circulation from 1,142,574 to
1,512,539 catalogs mailed in the first nine months of 1996 and
1997, respectively, and also to the increase of 6.8% in net
revenue per book. Net revenue per book increased from $1.76 to
$1.88 for the nine months ended September 1996 and 1997,
respectively. This increase was partially offset by a decrease in
net sales of Jeannie's Kids Club, which decreased $570,110 from
$2,801,774 to $2,231,664 for the nine months ended September 30,
1996 and 1997, respectively.
The Company's total catalog circulation increased to 3,306,685 for
the nine months ended September 30, 1997 from 3,047,479 for the
same period of 1996. Natural Baby accounted for 687,646 of this
increase. While the Perfectly Safe Catalog circulation was
increased, as noted above, circulation of Jeannie's Kids Club
decreased from 1,904,905 catalogs in the first nine months of 1996
to 1,106,500 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. This has increased Jeannie's Kids
Club net revenue per book from $1.47 to $2.02 for the nine months
ended September 30, 1996 and 1997, respectively.
Cost of sales, as a percentage of net sales, decreased 4.7% from
63.0% for the nine months ended September 30, 1996 to 58.3% for
the nine months ended September 30, 1997. The largest factor was
the decrease in merchandise costs, which decreased 3.8% as a
percentage of net sales, from 43.7% to 39.9% for the nine months
ended September 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 and the addition of
Natural Baby 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 nine months ended September 30,
1997, Perfectly Safe Catalog net sales were 43.1% of the total net
sales, while Kids Club net sales were 33.8% of total net sales and
Natural Baby Catalog sales were 23.1% of total net sales, compared
to 41.8% for Perfectly Safe and 58.2% for Kids Club 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
1.0%, from 32.3% to 31.3% of net sales for the nine month periods
ended September 30, 1996 and 1997, respectively. This decrease is
attributable to the higher net revenue per book mentioned above.
General and administrative expenses were $686,954, or 10.4% of net
sales, for the nine months ended September 30, 1997, and $537,513,
or 11.2% 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
becoming a public company and its acquisition of the Natural Baby
Catalog. The Company believes that its general and administrative
functions will become more efficient and cost effective once
integration of the Natural Baby Catalog operations and the
learning curve relating to the new product line is complete, 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. Effective January 1,
1997, the Company began handling certain administrative functions
for E. A. Carey of Ohio, Inc., a subsidiary of the Company's
parent, Duncan Hill. General and administrative expenses incurred
by the Company are allocated to E. A. Carey, on a pro rata basis
determined by the percentage of total assets of the E. A. Carey
and the operating divisions of Kids Stuff, Inc. For the six months
ended June 30, 1997, E. A Carey's allocation was 33% of the
Company's total general and administrative expenses. For the three
months ended September 30, 1997, E. A. Carey's allocation was 20%
of the Company's total general and administrative expenses, due to
the acquisition of Natural Baby.
Net losses for the nine months ended September 30, 1997 were
$95,261, or 1.4% of net sales, compared to net losses of $345,589,
or 7.2% 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
At September 30, 1997, the Company had a deficit in retained
earnings of $1,547,941, compared with a deficit of $1,452,680 at
December 31, 1996. This resulted from a net loss of $95,261 for
the nine months ended September 30, 1997 and $521,640 for the 1996
fiscal year.
For the nine months ended September 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 $393,584 in cash through
increases in accounts receivable and inventories, but provided
$144,719 in cash through a decrease in prepaid expense and
deferred catalog expense, and an increase in accounts payable,
customer advances and other. The net effect of these changes and
non cash charges of $34,884 relating to depreciation and
amortization was to increase the Company's net loss by $213,981,
so that net cash used by operating activities was $309,242.
For the nine months ended September 30, 1997, the Company's
financing activities provided $1,752,849 in cash, with $2,513,070
from the sale of common stock and $5,000 from the sale of
preferred stock, while using $391,220 from changes in current
obligations to/from affiliates, and $374,001 from the repayment of
debt, $66,858 which was paid to a related party.
For the nine months ended September 30, 1997, the combined effect
of net cash used by operating activities of $309,242, net cash
provided by financing activities of $1,752,849, and investments in
fixed assets and the acquisition of the Natural Baby Catalog
totaling $1,605,246, decreased cash from $248,648 to $87,009 at
September 30, 1997.
The Company's $800,000 bank line of credit had a balance of
$650,000 at September 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.
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 (the
Underwriter), 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 5. 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 6. Public
Offering."
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
7. 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
$9,544,954, net income of $142,097, and net income per share of
common stock of $.04, for the nine months ended September 30,
1997 and combined net sales of $9,162,140, net loss of $112,126,
and net loss per share of common stock of $.03, for the nine
months ended September 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 effective 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 as part of this report:
27. Financial Data Schedule
(b) No report on Form 8-K was filed during the third 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: November 12, 1997 /s/ William Miller
William Miller, CEO
Date: November 12, 1997 /s/ Christopher Weber
Christopher Weber, Controller
Mr. Miller has executed this quarterly report on Form 10-QSB both
on behalf of the Registrant and in his capacity as its chief
executive officer.
Mr. Weber has executed this quarterly report on Form 10-QSB both
on behalf of the Registrant and in his capacity as its principal
accounting officer.
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