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 March 31, 1999
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 000-29334
KIDS STUFF, INC.
(Exact name of registrant as specified in its charter)
Delaware 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 principle 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 [ X ] No [ ]
As of April 22, 1999, there were 3,512,856 shares of the Registrant's
Common Stock $.001 par value issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets - March 31, 1999 (Unaudited) and December 31, 1998 ................ 3
Statements of Operations - Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Statements of Cash Flows ......................................................... 6
Notes to Financial Statements .................................................... 8
Item 2 - Management's Discussion and Analysis or Plan of Operations .............. 15
Part II - Other Information ...................................................... 18
</TABLE>
2
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, December 31,
1999 1998
------------ -----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................... $1,557,610 $ 25,425
Accounts receivable .................... 330,803 251,545
Inventories ............................ 2,010,727 1,925,915
Deferred catalog expense ............... 697,558 415,027
Due from affiliates .................... 25,268 140,492
Prepaid expenses ....................... 42,860 166,497
---------- ----------
Total Current Assets ................ 4,748,398 2,924,901
PROPERTY and EQUIPMENT:
Data processing equipment .............. 281,557 262,474
Leasehold Improvements ................. 36,886 35,982
Machinery and equipment ................ 65,765 65,765
Furniture and fixtures ................. 101,030 94,411
---------- ----------
485,238 458,632
Less accumulated depreciation .......... 132,160 120,212
---------- ----------
353,078 338,420
OTHER ASSETS, net of accumulated amortization
Goodwill ............................... 1,058,630 1,072,905
Catalog Development and Other .......... 200,758 289,110
Customer List .......................... 384,762 402,798
---------- ----------
1,644,150 1,764,813
$6,745,626 $5,028,134
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, December 31,
1999 1998
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable ............ $ 1,963,428 $ 2,434,298
Line of credit .............. 762,000 762,000
Customer advances and other . 61,009 44,960
----------- -----------
Total Current Liabilities 2,786,437 3,241,258
STOCKHOLDERS' EQUITY:
Preferred stock ............. 5,000 5,000
Common stock ................ 3,513 3,513
Additional paid - in capital 5,177,291 3,216,734
Retained earnings (deficit) . (1,310,187) (1,438,371)
----------- -----------
Total Stockholders' Equity 3,959,189 1,786,876
----------- -----------
$ 6,745,626 $ 5,028,134
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Kids Stuff, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended March 31,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Sales ............................ $ 3,633,558 $ 3,204,877
Cost of Sales .................... 2,073,390 2,001,467
----------- -----------
Gross Profit ..................... 1,560,168 1,203,410
Selling Expenses ................. 1,013,567 769,728
General and Administrative
Expenses ................... 402,012 366,241
----------- -----------
Income From Operations ........... 144,589 67,441
Net Other (Expense) Income ....... (16,405) (8,381)
----------- -----------
Net Income ....................... $ 128,184 $ 59,060
----------- -----------
----------- -----------
Basic and Diluted Income Per Share 0.04 0.02
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended Mar 31,
-----------------------------
1999 1998
Cash Flows From Operating Activities:
<S> <C> <C>
Net income ............................................ $ 128,184 $ 59,060
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization ................... 132,612 39,859
(Increase) decrease in accounts receivable ...... (79,258) 22,526
(Increase) decrease in inventories .............. (84,811) 58,226
(Increase) in deferred catalog expense .......... (282,531) (245,112)
Decrease (increase) in prepaid expenses ......... 123,637 (18,562)
(Decrease) increase in accounts payable, customer
advances and other .............................. (454,821) 27,346
----------- -----------
Net cash (used) provided by operating activities ........... (516,989) (56,657)
Cash Flows From Investing Activities:
Investment in property and equipment .................. (26,606) (19,673)
Cash Flows From Financing Activities:
Borrowings on line of credit - net .................... 0 61,000
Sale of preferred stock ............................... 1,960,557 0
Decrease (Increase) in due from affiliates ............ 115,223 (7,072)
----------- -----------
Net cash provided (used) by financing activities ........... 2,075,780 53,928
Net Increase (decrease) in Cash ............................ 1,532,185 (22,402)
Cash - Beginning ........................................... 25,425 101,894
----------- -----------
Cash - Ending .............................................. $ 1,557,610 $ 79,490
---------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Business Description and Summary of Significant Accounting Policies
A. Business Description - Kids Stuff, Inc. ("Kids Stuff" or the "Company")
is in the mail order business and sells to customers throughout the United
States. Duncan Hill, Inc. owns 85% of the Company's outstanding voting capital
stock as of March 31, 1999. Perfectly Safe, a division of the Company, primarily
sells children's safety products for use up to age 3. Jeanne's Kids Club, a
division of the Company, sells hard good products for children primarily up to
the age of 3. Natural Baby, a division of the Company, sells clothing and toys
for children primarily up to the age of 3. Products are purchased from a variety
of vendors.
B. Reorganization - Kids Stuff was incorporated during 1996 as a
wholly-owned subsidiary of Duncan Hill, Inc. ("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 Jeanne's Kids Club Division of the Company.
C. 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 March 31, 1999, results
of operations and cash flows for the three month periods ended March 31, 1999
and 1998. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
D. Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the period for basic
earnings per share. Diluted earnings per share are calculated to include the
dilutive effect of stock options and warrants, if any. The number of shares
outstanding in computing basic and diluted earnings per share for the three
ended March 31, 1999 and March 31, 1998 is 3,512,856.
E. New Authoritative Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. The Company does not anticipate engaging in such transactions, but will
comply with requirements of SFAS 133 when adopted. This statement is effective
for all fiscal quarters beginning after June 15, 1999. The effect upon adoption
was not material.
In March 1998, Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, was issued. The SOP provides
guidance on accounting for costs of computer software based on the project stage
and other criteria and is effective for financial statements for fiscal years
beginning after December 15, 1998. The effect of adoption was not be material.
7
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2: Agreement with Affiliated Company
Duncan Hill, Inc. owns 89% of the outstanding voting capital stock of the
Havana Group, Inc. (Havana). In January 1998, the Company contracted with Havana
to provide administrative, executive, and accounting services at an annual cost
of approximately $206,100 as outlined below and $2.40 per order processed.
Havana is also obligated to pay 5% of its 1998 pre-tax profits to Kids Stuff in
connection with these administrative and fulfillment services. However, Havana
had no pre-tax profits for 1998. Total costs charged to Havana in 1998 amounted
to $293,432. This agreement has been extended on a month-to-month basis and is
subject to change as Havana assumes direct responsibility for certain functions.
However, management believes that this is substantially the same cost that it
would incur should it procure these services itself.
<TABLE>
<CAPTION>
<S> <C>
Accounting and Payroll Services $ 34,000
Administrative and Human Resource Management 51,600
Data Processing 34,900
Office Equipment and Facilities Use 32,200
Merchandising and Marketing Services 38,100
Purchasing Services 15,300
--------
Total $ 206,100
=======
</TABLE>
Note 3: Stockholders' Equity
A. Common Stock
In connection with a reorganization effective June 30, 1996, the Company
issued to its parent, Duncan Hill Co., Ltd. (the Predecessor of Duncan Hill,
Inc.), 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. These 3,700,000 shares of unregistered securities were issued by the
Company at its inception. There were no underwriting discounts and commissions
paid in connection with the issuance of any said securities.
In June 1997, the Company repurchased 857,144 of the shares sold to five of
the eight private investors at a repurchase price of $.125 per share. The
Company's repurchase payment was in the form of promissory notes totaling
$107,143. These notes were paid off in July 1997 with the proceeds of the public
offering.
In July 1997, the Company completed an initial public offering (see Note 6)
in which 600,000 common shares were issued.
In July 1997, the Company issued 70,000 unregistered restricted shares
which represented $245,000 of the $2,066,829 purchase cost of The Natural Baby
Company (see Note 5).
8
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series or the designation of such series.
Series A Preferred Stock
During January 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock, $.001 par value to Duncan Hill as part of the reorganization.
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 stockholders. 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.
Series 1 Preferred Stock
In March 1999, the Company completed a public offering of securities
through Fairchild Financial Group, Inc. in which 460,000 shares of Series 1
Preferred Stock were issued. The holders of the Series 1 Preferred Stock are
entitled to vote on matters submitted to a vote of the shareholders. Each Series
1 Preferred Share receives an annual dividend of $0.495, or 9.0% of the
liquidation preference per share, payable in cash or common stock at the option
of the Company. Each Series 1 Preferred Share is convertible into two shares of
common stock at the option of the holder, commencing September 3, 2000. Each
Series 1 Preferred Share is redeemable at the option of the Company at a price
of $7.20 per share commencing September 3, 2000.
C. Warrants
Class A Warrants
The Company issued 2,400,000 Class A warrants on June 26, 1997 in
conjunction with an offering of its common stock. 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 June 26,1998 and expiring June 26, 2002.. 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.
Preferred Warrants
The Company issued 920,000 Preferred Warrants in March 1999 in conjunction
with an offering of its preferred stock. Each warrant entitles the holder to
purchase one share of Series 1 Preferred Stock at an exercise price of $6.00 per
share commencing September 3, 2000 and expiring March 3, 2002. The Company shall
redeem Preferred Warrants at a price of $1.20 per warrant in the event it elects
to redeem its Series 1 Preferred Stock in accordance with the terms summarized
in Note B above.
9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 4. Line of Credit
Kids Stuff, Inc. has an $800,000 line of credit from United Bank with an
open term which is payable on demand, bearing interest payable monthly at the
bank's prime lending rate plus 1%, for an effective rate of 8.75% at March 31,
1999. The line of credit had a balance of $762,000 at March 31, 1999. The line
is secured by assets of the Company, as well as the assets of Duncan Hill and
another Duncan subsidiary, Havana Group, Inc., formerly E. A. Carey of Ohio,
Inc. The repayment of the facility is guaranteed by Mr. Miller, the Company's
Chief Executive Officer. The credit facility requires 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 waived the zero balance
requirement for 1998. The weighted average interest rate for the years ended
December 31, 1998 and 1997 was 9.3% and 9.4%, respectively. Due to the current
nature of the liability, the carrying amount of the line approximates fair
value. The line of credit expired June 30, 1998, and the Company is in the
process of renegotiating the agreement with the bank.
Note 5. Acquisition of The Natural Baby Company
In July 1997, the Company acquired the net assets and operations of The
Natural Baby Company, a mail order retailer of children's clothing and toys. The
purchase was funded with the net proceeds of an initial public offering. The
acquisition has been accounted for as a purchase and, accordingly, the operating
results of the acquired company have been included in the Company's financial
statements since the date of acquisition. The aggregate purchase price was
$2,066,829, and was allocated to the net assets acquired based on fair values as
follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable 29,297
Inventory 474,769
Deferred catalog costs 185,587
Prepaid expenses 3,544
Property and equipment 16,151
Customer list 505,000
Accounts payable assumed (296,211)
Net assets acquired 918,137
</TABLE>
The excess of the aggregate purchase price over the value allocated to the
specifically identifiable assets acquired of $1,148,692 was recorded as
goodwill.
10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 6. Public Offering
Common Stock
In July 1997, the Company completed an initial public offering in which
300,000 units were sold for $2,619,890, net of issuance costs of $980,110. Each
unit consisted of two common shares and eight redeemable Class A warrants, and
sold for $12 per unit. The common stock and warrants are separately
transferable.
The proceeds of the public offering were used to acquire net assets and
operations of The Natural Baby Catalog, to pay on accounts payable, to repay
indebtedness to bridge lenders, to repay indebtedness to the Company's parent,
Duncan Hill, to consolidate the operations of The Natural Baby Catalog, and for
general corporate purposes.
Preferred Stock
In March 1999, the Company completed a public offering of securities in
which 460,000 units were sold for $1,960,557, net of issuance costs of $569,443.
Each unit consisted of one share of Series 1 Preferred Stock and two Series 1
Preferred Stock Purchase Warrants, and sold for $5.50 per unit. The preferred
stock and warrants are separately transferable. Commencing September 3, 2000,
each share of Series 1 Preferred Stock is convertible into two shares of Common
Stock. Commencing September 3, 2000, each Preferred Warrant entitles the holder
to purchase one share of Series 1 Preferred Stock at an exercise price of $6.00
per share until the close of business on March 3, 2002.
The proceeds of the public offering are to be used for the purchase of
inventory, accounts payable reduction, establishment of a new operations center,
web site production and development, leasehold improvements for the "Kids
Catalog Outlet" retail store, and general corporate purposes.
Note 7. Employment Agreements
The Company has entered into separate five-year employment agreements with
William L. Miller and Jeanne E. Miller, effective January 1, 1997, pursuant to
which Mr. Miller is to serve as Chairman of the Board and Chief Executive
Officer of the Company and Mrs. Miller is to serve as its President. The
employment agreements provide for an annual base salary of $125,000 for Mr.
Miller and $105,000 for Mrs. Miller, subject to annual review for increase by
the Company. The employment agreements also provide for the eligibility of these
executives to receive annual cash bonuses under the Company's Incentive
Compensation Plan, and each of Mr. Miller and Mrs. Miller's respective
employment agreements grant an option to purchase 100,000 shares of the
Company's Common Stock, which vest 25% on each of the first four anniversary
dates commencing January 1, 1998,
Mrs. Miller also received the option to purchase 100,000 shares of the
Company's unregistered common stock as a signing bonus on October 16, 1998. The
exercise price of the options shall be $2.50 per share, and the options will
expire 10 years from the date of the grant.
11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 8. Incentive Plans
A. Incentive Compensation Plan
During 1997, the Company adopted an Incentive Compensation Plan (the
"Plan"). The Plan is designed to motivate employee participants to achieve the
Company's annual strategic goals. Eligibility for participation in the Plan is
limited to the Chief Executive Officer and the Executive Vice President of the
Company, and such other employees of the Company as may be designated by the
Board of Directors from time to time. For each fiscal year of the Company, the
Board will establish a bonus pool not to exceed 10% of the Company's operating
income. The amount of such pool with respect to any year shall be determined
subsequent to the end of that year upon the determination of the Company's
operating income for that year. Each participant in the Plan is eligible to
receive from the bonus pool an annual award of up to 50% of the participant's
base salary. There were no awards in the first quarter of 1999 or 1998.
B. Stock Incentive Plan
During 1997, the Company adopted a Stock Incentive Plan (Incentive Plan).
Under the Incentive Plan, the Compensation Committee of the Board of Directors
may grant stock incentives to key employees and the directors of the Company
pursuant to which a total of 400,000 shares of Common Stock may be issued;
provided, however, that the maximum amount of Common Stock with respect to which
stock incentives may be granted to any person during any calendar year shall be
20,000 shares, except for a grant made to a recipient upon the recipients
initial hiring by the Company, in which case the number shall be a maximum of
40,000 shares. These numbers are subject to adjustment in the event of a stock
split and similar events. Stock incentive grants may be in the form of options,
stock appreciation rights, stock awards or a combination thereof. No stock
incentives were granted under the Incentive Plan in the first quarter of 1999 or
1998.
Note 9. Non-Qualified Stock Option Agreement
During 1998, the Company entered into a non-qualified stock option
agreement with Clark D. Swisher and Alfred M. Schmidt, Jr., directors of the
Company. Each of Mr. Swisher and Mr. Schmidt were granted the option to purchase
30,000 shares of the Company's common stock, which vest 25% on August 1, 1998
and 25% on each January 1, 1999, January 1, 2000, and January 1, 2001. The
vested options will be immediately exercisable and will expire 10 years from the
date of the agreement. The exercise price of the options is $2.50 per share of
common stock.
12
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
Kids Stuff, Inc. is a catalog merchant selling quality children's products
to consumers throughout the United States. Our business emphasizes products for
children in the age group of prenatal to three years old, and consists of three
catalogs:
- Perfectly Safe specializes in children's safety products.
- Jeannie's Kids Club offers toys and other hardgoods at discount prices
in return for an annual membership fee.
- The Natural Baby Catalog emphasizes natural clothing, diapering and wood
toys.
We acquired Perfectly Safe during January 1990 and circulated approximately
900,000 catalogs during that first year, producing net sales of $1,473,000. By
the end of 1997, sales had increased to over $3.9 million, which resulted in an
annual compound growth rate of approximately 15%. In the first quarter of 1998
net sales were $1,186,012, an increase of 67.5% over the comparable 1997 period.
Jeannie's Kids Club was created and developed in-house, and the first
catalog was mailed during July 1995. The annual club membership is $18, and is
renewed automatically each year, subject to customer cancellation and other
limitations. In return for their membership fee, members are able to purchase
products at discount prices compared to other children's catalogs. During the
year1997, the second full year of Kids Club operations, net sales were $3.2
million. However, during the first quarter of 1998 net sales were 16% less than
the comparable 1997 period, reflecting the impact of a planned reduction of 52%
in catalog circulation.
We acquired The Natural Baby Catalog on July 2,1997, using the proceeds
from our initial public offering. The Natural Baby Catalog compliments our other
catalogs and offers alternative products to parents interested in natural
childbirth, nursing products and natural fiber clothing.
During the fourth quarter of 1998 the Company created "Kids Catalog
Outlet", a 3,300 square foot retail store located adjacent to the Company's
headquarters in Canton, Ohio. The retail store carries current products from all
the Company's catalogs, plus discontinued merchandise at special discount
prices.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to the three months ended March
31, 1998.
Sales for the quarter ended March 31, 1999 increased 13.4% to $3,633,558,
compared with $3,204,877 for the same period of 1998. Net profits for the first
quarter of 1998 improved to $128,184 compared with $59,060 for the same period
in 1998.
Approximately 68% of our increased sales were attributed to The Perfectly
Safe Catalog, with the remaining increase attributed to the Natural Baby
Catalog. The Company's "Kids Catalog Outlet" retail store generated revenues of
$50 thousand in its first full quarter of operations.
Cost of sales decreased from 62.5% of net sales in 1998 to 57.1% in 1999.
The change is attributable to improvements in cost of merchandise sold and costs
of outbound shipping expenses for product orders. Merchandise sold declined 3.2%
as a percentage of sales, and reflects improved pricing of catalog products.
Shipping costs were reduced 3.2% as a percentage of sales, reflecting the
Company's change in carriers to the lower cost U.S. Postal Service, along with
modest improvements in the Company's fulfillment efficiency. Fulfillment
efficiency is the ratio of number of shipments to number of orders.
13
<PAGE>
Selling expenses, consisting of advertising and marketing costs, were 27.9%
of net sales in the first quarter of 1999, compared with 24.0% in the first
quarter of 1998. This overall increase is attributable to the Natural Baby
Catalog, whose selling expenses increased from 16.5% of sales in 1998 to 25.1%
of sales in 1999. The Company conducted liquidation sales of selected Natural
Baby products in the first quarter of 1998, which had the effect of lowering
selling expenses due to the attractive prices offered. The Company did not
continue this sale in 1999, which resulted in somewhat higher selling costs. The
Natural Baby Catalog contributed 41% of the Company's sales in the first quarter
of 1999.
General and Administrative expenses increased by $35,771 but decreased as a
percentage of sales, from 11.4% of net sales in 1998 to 11.1% of net sales this
quarter. The increased level of costs primarily reflect the level of services we
provided to the Havana Group, Inc., an affiliated company, along with increased
administrative wages.
Since January 1, 1997, the Company has been providing administrative and
other support services to Havana. Beginning January 1, 1998, a contract was
established between Kids Stuff and Havana. The contract details specific fees to
be charged by Kids Stuff for providing administrative support and order
fulfillment services to Havana. The contract also provides an additional charge
of 5% of Havana's pretax annual profit. Effective January 1, 1999 the contract
was extended on a month-to-month basis, and provided for adjustments in levels
of services rendered as Havana incurred direct costs for its own operations.
During this quarter we've charged Havana $76,794, including order fulfillment
costs, as compared to approximately $73,569 allocated last year.
Net income improved by $69,124 this quarter as compared to the same quarter
last year. Last year's quarter net income was 1.8% of net sales, while net
income for the current quarter was 3.5% of sales. The earnings improvement is a
result of the increase in revenues and lower cost of sales ratios.
Liquidity and Capital Resources
At March 31, 1999, our accumulated deficit improved by $128,184 from
December 31, 1998 because of first quarter earnings performance.
In March 1999 the Company sold 460,000 units in a public offering, each
Unit consisting of one share of preferred stock and two preferred stock
warrants. The proceeds of the offering, net of expenses, were $1,960,557. The
proceeds are being used for working capital purposes, and to provide for
improved efficiency in our operations.
In addition to net earnings, cash provided by operating activities was
increased by non-cash charges of $132,612 for depreciation and goodwill
amortization, compared with non-cash charges of $39,859 during the first quarter
of 1998. Increased charges in 1999 are as a result of capitalizing certain art
and design revisions for our catalogs. Working capital changes used a net of
$777,785 of cash in 1999 compared with $56,659 during the first quarter of 1998.
During 1999 the Company increased deferred catalog expense of $282,531 and
reduced accounts payable and other liabilities of $454,821.
With respect to financing activities, our cash position improved from the
sale of preferred stock in the amount of $1,960,557 and the reduction in amounts
due from affiliates in the amount of $115,223.
The Company has an $800,000 line of credit facility provided by the united
National Bank and Trust Company ("Bank"). The line of credit is for an open
term, payable upon demand and is secured by the assets of the Company, Duncan
Hill, Inc. and The Havana Group, Inc. The repayment of the line of credit is
guaranteed by W. Miller and Havana. The amount outstanding at March 31, 1999 was
approximately $762,000. Interest is charged at the rate of 1% over prime. It is
the policy of the bank to review the credit facility annually, and to require
that the Company maintain a zero balance on the credit line for a period of 30
consecutive days sometime during the course of each year. The Bank agreed to
waive the "zero balance" required for fiscal 1997 and 1998. The line of credit
agreement expired June 30, 1998 and the Company is in the process of
renegotiating with the bank.
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Overall, we expect to be able to meet our cash needs through ongoing
operations, our working capital, and existing credit facilities.
Forward Looking Statements and Associated Risks
This Form 10-QSB contains forward looking statements which reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and financial results. These forward
looking statements are based largely on our expectations and are subject to a
number of risks and uncertainties, many of which are beyond our control, such as
competition or possible future changes to state sales tax laws. Actual results
could differ materially from these forward looking statements because of changes
in the children's mail order catalog industry, availability or prices of goods,
credit availability, printers' schedules or availability, and other factors. Any
changes in such assumptions or factors could produce significantly different
results.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Fork 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 first quarter of 1999.
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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: May 15, 1999 /s/ William Miller
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William Miller, CEO
Acting Chief Financial Officer
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 and acting
chief financial officer.
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