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, 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 August 1, 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 - June 30, 1999 (Unaudited) and December 31, 1998.................................................3
Statements of Operations (Unaudited) - Three Months and Six Months Ended June 30, 1999 and 1998..................4
Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 1999 and 1998 .......................5
Notes to Financial Statements....................................................................................6
Item 2 - Management's Discussion and Analysis or Plan of Operations..............................................9
Part II - Other Information......................................................................................11
Signature Page...................................................................................................12
</TABLE>
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
June 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................................................................................ $1,510,512 $ 25,426
Accounts receivable ................................................................................. 194,424 251,544
Inventories ......................................................................................... 2,049,806 1,925,915
Deferred catalog expense ............................................................................ 796,767 415,027
Due from affiliates ................................................................................. 60,270 140,492
Prepaid expenses .................................................................................... 67,328 166,497
---------- ----------
Total Current Assets ............................................................................. 4,679,107 2,924,901
PROPERTY AND EQUIPMENT
Data processing equipment ........................................................................... 296,744 262,474
Leasehold Improvements .............................................................................. 36,886 35,982
Web site development ................................................................................ 7,000 --
Machinery and equipment ............................................................................. 75,183 65,765
Furniture and fixtures .............................................................................. 110,330 94,411
---------- ----------
526,143 458,632
Less accumulated depreciation ....................................................................... 145,846 120,212
---------- ----------
380,297 338,420
OTHER ASSETS, net of accumulated amortization
Goodwill ............................................................................................ 1,044,355 1,072,905
Deposit on building purchase ........................................................................ 111,750 --
Catalog development and other ....................................................................... 141,497 289,110
Customer list ....................................................................................... 366,726 402,798
---------- ----------
1,664,328 1,764,813
---------- ----------
$6,723,732 $5,028,134
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
June 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable .................................................................... 1,830,685 2,434,298
Line of credit ...................................................................... 762,000 762,000
Customer advances and other ......................................................... 78,118 44,960
----------- -----------
Total Current Liabilities ........................................................ 2,670,803 3,241,258
STOCKHOLDERS' EQUITY:
Common stock ........................................................................ 3,513 3,513
Preferred stock ..................................................................... 5,000 5,000
Additional paid - in capital ........................................................ 5,171,841 3,216,734
Retained earnings (deficit) ......................................................... (1,127,425) (1,438,371)
----------- -----------
Total Stockholders' Equity ....................................................... 4,052,929 1,786,876
----------- -----------
$ 6,723,732 $ 5,028,134
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Kids Stuff, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Total sales ........................ $ 4,418,106 $ 3,408,744 $ 8,051,664 $ 6,613,621
Cost of sales ...................... 2,438,314 1,947,659 4,511,704 3,949,126
----------- ----------- ----------- -----------
Gross profit ....................... 1,979,792 1,461,085 3,539,960 2,664,495
Selling expenses ................... 1,154,231 991,074 2,167,798 1,760,802
General and administrative expenses 607,407 391,344 1,009,419 757,585
----------- ----------- ----------- -----------
Income from operations ............. 218,154 78,667 362,743 146,108
Other (expense) .................... (35,391) (16,170) (51,797) (24,551)
----------- ----------- ----------- -----------
Net income ......................... $ 182,763 $ 62,497 $ 310,946 $ 121,557
=========== =========== =========== ===========
Basic and diluted earnings per share $ 0.04 $ 0.02 $ 0.07 $ 0.03
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Six Months Ended June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income ................................................................................... $ 310,946 $ 121,557
Adjustments to reconcile net income to net
cash (used) by operating activities:
Depreciation and amortization .......................................................... 237,869 88,848
Decrease (increase) in accounts receivable ............................................. 57,120 (124,235)
(Increase) decrease in inventories ..................................................... (123,891) 120,758
(Increase) in deferred catalog expense ................................................. (381,740) (202,539)
Decrease (increase) in prepaid expenses ................................................ 99,169 (43,402)
(Decrease) in accounts payable, customer advances and other ............................ (570,455) (134,679)
----------- -----------
Net cash (used) by operating activities (370,982) (173,692)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment ......................................................... (67,511) (50,135)
Deposit on building purchase ................................................................. (111,750) --
----------- -----------
Net cash (used) by investing activities (179,261) (50,135)
CASH FLOWS FROM OPERATING ACTIVITIES
Sale of preferred stock ...................................................................... 1,955,107 --
Borrowings on line of credit, net ............................................................ -- 61,000
Decrease in due from affiliates .............................................................. 80,222 232,364
----------- -----------
Net cash (used) provided by financing activities 2,035,329 293,364
----------- -----------
Net increase in cash 1,485,086 69,537
Cash - beginning 25,426 101,894
Cash - ending $ 1,510,512 $ 171,431
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 33,708 $ 29,961
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 81% of the Company's outstanding voting capital
stock as of June 30, 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. 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, 1999, results
of operations for the three and six month periods ended June 30, 1999 and 1998,
and cash flows for the six month periods ended June 30, 1999 and 1998. The
results of operations for the three and six month periods are not necessarily
indicative of the results to be expected for the full year.
C. 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 and
six month periods ended June 30, 1999 and 1998 is 3,512,856.
D. New Authoritative Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133," which
postponed the effective date of SFAS No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities," to all fiscal years beginning
after June 15, 2000. The Company does not anticipate having these types of
hedges, and the effect of adoption is expected to be immaterial.
The Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which are effective for years beginning after Dec. 31, 1998. The
Company's adoption of SOP 98-1 and SOP 98-5 had no material effect on its
results of operations or financial position.
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.
At January 1, 1999 the agreement was modified and extended on a
month-to-month basis as Havana began to incur direct costs for its
administrative functions. Havana pays to Kids an accounting, data processing,
and administrative charge of $15,000 per year plus $1.75 per shipment for
warehouse services. Havana is also obliged to pay 5% of its 1999 pretax profits
to Kids in connection with these services.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2: Agreement with Affiliated Company (Continued)
Through June 30, 1999, Havana's accounts receivable and inventories are
pledged as collateral on Kids line of credit, and Havana also acted as a
guarantor. In July 1999 Havana's liability was released as a part of a general
restructuring of the Kids line of credit. At June 30, 1999 the balance on the
line of credit was $762,000.
Note 3: Stockholders' Equity
A. Common Stock
As of December 31, 1998 and June 30, 1999, the Company had common stock at
a par value of $.001 per share with 25,000,000 shares authorized and 3,512, 856
shares issued and outstanding.
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
As of December 31, 1998 and June 30, 1999, the Company had issued and
outstanding 5,000,000 shares of Series A Preferred Stock, $.001 par value. These
shares are held by Duncan Hill. The holder of the Series A Preferred Stock is
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 a liquidation preference of $5.50 per share and to vote on matters
submitted to a vote of the shareholders. Each Series 1 Preferred Share receives
an cumulative 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 in 1997 in conjunction with
an offering of its common stock. Each Class A 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 Class A 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. All 2,400,000 Class A Warrants are
outstanding as of December 31, 1998 and June 30, 1999.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. Warrants (Continued)
Preferred Warrants
The Company issued 920,000 Series 1 Preferred Stock Purchase Warrants
(Preferred Warrant) in March 1999 in conjunction with an offering of its
preferred stock. Each Preferred 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 the 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 3B above. All 920,000 Preferred Warrants are outstanding as
of June 30, 1999.
Note 4. Line of Credit
Kids Stuff had 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 June 30, 1999. The
line of credit had a balance of $762,000 at June 30, 1999. The line was secured
by assets of the Company, as well as the assets of Duncan Hill and another
Duncan subsidiary, Havana Group, Inc. The repayment of the facility was
guaranteed by Mr. Miller, the Company's Chief Executive Officer. The credit
facility required 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 year ended December 31, 1998 was 9.3%. Due to the current
nature of the liability, the carrying amount of the line approximated fair
value. This line of credit was paid off in July 1999 with the proceeds of the
new term loan/revolving line of credit facility with Bank One (see Note 10).
Note 5. Acquisition of The Natural Baby Company
In 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 was 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. 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, which is being amortized over 20 years on the straight line method.
Note 6. Public Offerings
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 Company, 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 Company, and for
general corporate purposes.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Series 1
Preferred Stock and Preferred Warrants are separately transferable. Commencing
September 3, 2000, each share of Series 1 Preferred Stock is convertible into
two shares of Kids Stuff 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, regardless of whether the executive is
employed on such dates by the Company. The vested options will be immediately
exercisable and will expire ten years from the date of the agreement. The
exercise price of the options is $5.00 per share, subject to downward
adjustments in the exercise price if the Company meets certain performance
goals.
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 is $2.50 per share, and the options will expire 10
years from the date of the grant.
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 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 1998 or the first half of 1999.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 8. Incentive Plans (Continued)
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 1998 or the first half of
1999.
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.
Note 10. Subsequent Event
In July 1999, the Company finalized an agreement to purchase a building
located in North Canton, Ohio, which will serve as the office and warehouse
facilities for the Company, Havana, and Duncan Hill. The purchase price of the
building is $2,200,000. The purchase is being financed through a commercial real
estate loan from Bank One. In addition to the commercial real estate loan, Bank
One has extended a 24 month revolving credit line for $500,000 and a 60 month
term loan to the Company for $300,000. The Company's previously outstanding
$800,000 line of credit was retired with the proceeds of the new borrowings. All
three loans carry unconditional and unlimited guarantees of Duncan Hill, Inc.,
Mr. William Miller and Mrs. Jeanne Miller.
<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 1998, sales had increased to over $4.9 million, which resulted in an
annual compound growth rate of approximately 15%. In the first six months of
1999 net sales were $3.4 million, an increase of 34% over the comparable 1998
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
year 1998, the third full year of Kids Club operations, net sales were $3.1
million. However, during the first six months of 1999 net sales were 8.8% less
than the comparable 1998 period, reflecting the impact of a planned reduction 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 1998, The
Natural Baby Catalog generated net sales of $6.2 million in sales, and
constituted 44% of our total sales.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to the three months ended June 30,
1998.
Sales for the quarter ended June 30, 1999 increased 29.6% to $4,418,106,
compared with $3,408,744 for the same period of 1998. Net income for the second
quarter of 1999 improved to $182,763, compared with $62,497 for the same period
in 1998.
Cost of sales decreased from 57.1% of net sales in 1998 to 55.2% in 1999.
The change is attributable to improved cost of merchandise sold, which declined
from 39.3% of sales in the first six months of 1998 to 35.3% of sales in the
comparable 1999 period. The gain was partially offset by increased fulfillment
costs.
Selling expenses, consisting of advertising and marketing costs, decreased
to 26.1% of net sales in the second quarter of 1999, compared with 29.1% in the
second quarter of 1998. This reduction is attributable to lower advertising
costs and reduced marketing department expense.
General and Administrative expenses were $607,407, an increase of $216,063
from the $391,344 recorded in the same period in 1998. Approximately 34% of the
increase was in depreciation and amortization expense, as we amortized the
expense of the redesign of all of our catalogs that began in the fall of 1998.
Other factors were increased wage expense, and reduced billings in our operating
agreement with Havana.
<PAGE>
Beginning January 1, 1998, we entered into a one-year contract to provide
administrative and other support services to 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 profit for 1998. The contract
extended on a monthly basis on January 1, 1999, and provided for reductions in
services from us as Havana established its own operations. As a result, billings
to Havana $56,736 for the three months ended June 30, 1999 were, compared with
$177,377 during the same period in 1998.
Net income improved to $182,763 or 4.1% of sales during this quarter,
compared with $62,497 or 1.8% of sales for the same period in 1998. The
principal reason for this is the 29.6% sales increase with improved gross
margins and slightly reduced selling expense as a percentage of sales.
Six months ended June 30, 1999 compared to the six months ended June 30, 1998.
Sales for the six months ended June 30, 1999 increased 21.7% to $8,051,664,
compared with $6,613,621 for the same period of 1998. Net income for the first
half of 1999 improved 156% to $310,947, compared with $121,557 for the same
period in 1998.
Our sales increase came from the Natural Baby and Perfectly Safe catalogs,
which recorded gains in merchandise sales of 34% and 23% respectively. These
gains were offset by the Kids Club catalog, whose sales were down 8.8% from the
same period last year due to reduced circulation of catalogs.
Cost of sales decreased from 59.7% of sales in 1998 to 56.0% of sales in
1999. The change is attributable to reductions in cost of merchandise sold,
which declined 3.7% as a percentage of sales during the period. Other costs of
fulfillment, such as shipping costs, packaging, direct labor, remained
consistent as a percentage of sales.
Selling expenses, consisting of advertising and marketing costs, were 26.9%
of total sales in the first half of 1999, compared with 26.6% in the first half
of 1998, as our growth in sales of 21.7% was achieved without significantly
increasing sales expense.
General and Administrative expenses increased by $251,834, from 11.5% of
sales in 1998 to 12.5% in 1999. The most significant reason for this is
increased depreciation and amortization expense, which increased $149,021
compared with the same period last year. In addition to this, wages increased
$106,576 during the first six months of 1999 compared with the first six months
of 1998.
Liquidity and Capital Resources
At June 30, 1999, our accumulated deficit was reduced by $310,946 from
December 31, 1998 because of first half earnings performance.
In addition to net earnings, cash provided by operating activities included
non-cash charges of $237,868 for depreciation and amortization. Working capital
changes used $919,797 of cash, primarily due to reductions in accounts payable
of $570,455 and increased deferred catalog expense of $381,740. This resulted in
net cash used by operation activities of $370,982 for the six months ended June
30, 1999.
For the six months ended June 30, 1999, cash was used in investing
activities of $179,261, which consisted of $67,511 to purchase property and
equipment and $111,750 as a deposit on a building purchase. Cash was provided by
financing activities of $2,035,329, due to the net proceeds received from our
March 1999 sale of Series 1 Preferred Stock and Series 1 Preferred Stock
Warrants, which resulted in net proceeds of $1,955,107 and reductions in amounts
due from affiliates of $80,222. Our cash position improved from the sale of
Series 1 Preferred Stock and at June 30, 1999, it was $1,510,512.
<PAGE>
In July 1999, we retired our previously outstanding $800,000 line of credit
through the proceeds received from Bank One. Bank One provided us with a 24
month revolving credit line for $500,000 and a 60 month term loan for $300,000.
It also provided the financing for us to purchase the building that currently
serves as our warehouse facilities at a purchase price of $2,200,000 through a
commercial real estate loan. Our office facilities will be moved to the building
in August 1999. All three loans are guaranteed by our principal stockholder,
Duncan Hill, Inc.; by our CEO, William Miller; and our President, Jeanne Miller.
In addition to our net earnings of $121,557, cash provided by operating
activities for the six months ended June 30, 1998 included non-cash charges of
$88,848 for depreciation and amortization. Working capital changes used $384,097
of cash primarily due to increases in accounts receivable of $124,235, increases
in deferred catalog expense of $202,539, and decreases in accounts payable and
customer advances of $134,679. This resulted in net cash used by operating
activities of $173,692 for the six months ended June 30, 1998. During this
period, we used cash in investing activities of $50,135 to purchase property and
equipment. We were provided with cash from financing activities of $239,364 due
to a decrease in the amounts due from affiliates of $232,364 and borrowing on
the line of credit of $61,000.
Overall, we expect to be able to meet our cash needs through ongoing
operations 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.
<PAGE>
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 second quarter of
1998.
<PAGE>
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: 8/14/98 /s/ William Miller
William Miller, CEO
Date: 8/14/98 /s/ Jeanne E. Miller
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND RELATED FOOTNOTES
THERETO, OF KIDS STUFF, INC.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> jun-30-1999
<CASH> 1,510,512
<SECURITIES> 0
<RECEIVABLES> 194,424
<ALLOWANCES> 0
<INVENTORY> 2,049,806
<CURRENT-ASSETS> 4,679,107
<PP&E> 526,143
<DEPRECIATION> 145,846
<TOTAL-ASSETS> 6,723,732
<CURRENT-LIABILITIES> 2,670,803
<BONDS> 0
0
5,000
<COMMON> 3,513
<OTHER-SE> 4,044,416
<TOTAL-LIABILITY-AND-EQUITY> 6,723,732
<SALES> 8,051,664
<TOTAL-REVENUES> 8,051,664
<CGS> 4,511,704
<TOTAL-COSTS> 6,679,502
<OTHER-EXPENSES> 1,009,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,797
<INCOME-PRETAX> 310,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 310,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310,946
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
