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, 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 INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
7835 FREEDOM AVENUE, N.W., NORTH CANTON, OHIO 44720
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES) (ZIP CODE)
(330) 492-8090
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
4450 BELDEN VILLAGE STREET, N.W., SUITE 406, CANTON, OHIO 44718
(REGISTRANT'S FORMER ADDRESS)
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 November 15, 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>
<TABLE>
<CAPTION>
INDEX
<S> <C> <C> <C> <C> <C>
Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998......................................3
Statements of Operations - Three Months and Nine Months Ended September 30, 1999 and 1998 (Unaudited)......5
Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 (Unaudited)......................6
Notes to Financial Statements..............................................................................7
Item 2 - Management's Discussion and Analysis or Plan of Operations........................................12
Other Information..........................................................................................15
Signature Page.............................................................................................16
</TABLE>
<PAGE>
KIDS STUFF, INC.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1998
ASSETS:
CURRENT ASSETS
<S> <C> <C>
Cash .................................. $1,089,466 $ 25,425
Accounts receivable ................... 259,536 251,545
Inventories ........................... 2,471,950 1,925,915
Deferred catalog expense .............. 1,169,357 415,027
Due from affiliates ................... 109,412 140,492
Prepaid expenses ...................... 121,030 166,497
Total Current Assets .............. 5,220,751 2,924,901
PROPERTY & EQUIPMENT:
Building and Land ..................... 2,294,710 0
Data processing equipment ............. 302,512 262,474
Leasehold Improvements ................ 29,776 35,982
Web Site .............................. 121,954 --
Machinery and equipment ............... 75,951 65,765
Furniture and fixtures ................ 112,769 94,411
2,937,672 458,632
Less accumulated depreciation ......... 171,106 120,212
2,766,566 338,420
OTHER ASSETS, net of accumulated amortization
Goodwill .............................. 1,030,080 1,072,905
Customer List ......................... 348,691 402,798
Other Assets .......................... 83,625 289,110
1,462,396 1,764,813
$9,449,713 $5,028,134
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KIDS STUFF, INC.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Current Portion of long-term debt $ 144,500
Accounts payable ................ 2,739,469 $ 2,434,298
Line of credit .................. 500,000 762,000
Customer advances and other ..... 83,729 44,960
Total Current Liabilities ... 3,467,698 3,241,258
LONG-TERM DEBT, NET OF CURRENT PORTION
Term Loan ....................... 235,616 0
Real Estate Mortgage ............ 1,605,500 0
1,841,116 0
STOCKHOLDERS' EQUITY:
Common stock .................... 3,513 3,513
Preferred stock ................. 5,000 5,000
Additional paid-in capital ...... 5,168,271 3,216,734
Retained earnings (deficit) ..... (1,035,885) (1,438,371)
Total Stockholders' Equity .. 4,140,899 1,786,876
$ 9,449,713 $ 5,028,134
=========== ===========
</TABLE>
<PAGE>
KIDS STUFF, INC.
Statement of Operations
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales $3,854,497 $3,220,741 $11,906,161 $9,834,362
Cost of Sales 2,145,312 1,857,552 6,657,016 5,806,678
Gross Profit 1,709,185 1,363,189 5,249,145 4,027,684
Selling Expenses 1,122,317 967,541 3,290,115 2,728,343
General and Administrative Expenses 481,936 394,271 1,491,355 1,151,856
Income From Operations 104,932 1,377 467,675 147,485
Other Income (Expense) - 18,020 (65,189) (6,531)
Net Income $104,932 $19,397 $402,486 $140,954
================ =============== =============== ===============
Basic and Diluted Earnings Per Share $0.01 $0.01 $0.08 $0.04
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
KIDS STUFF, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Nine Months Ended September 30,
1999 1998
Cash Flows From Operating Activities:
<S> <C> <C>
Net Income $402,486 $140,954
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 353,311 132,503
(Increase) in accounts receivable (7,991) (57,557)
(Increase) in inventories (546,035) (195,997)
(Increase) in deferred catalog expense (754,330) (282,511)
Decrease (Increase) in prepaid expenses 45,467 (31,741)
Increase in accounts payable, customer advances and other 343,940 374,568
Net cash provided (used) by operating activities (163,152) 80,219
Cash Flows From Investing Activities:
Investment in property and equipment (2,479,042) (50,135)
Investment in Catalog Artwork and Design - (126,535)
Net cash (used) by investing activities (2,479.042) (176,670)
Cash Flows From Financing Activities:
Borrowings on line of credit - net (262,000) 61,000
Sale of preferred stock 1,951,537 -
Payment on long-term debt - related parties (300,000)
Borrowing - Term Loan 295,617 -
Borrowing - Real Estate Mortgage 1,690,000 -
Increase in due to affiliates - 562,713
Decrease in due from affiliates 31,080 -
Net cash provided by financing activities 3,706,234 323,713
Net Increase in Cash 1,064,040 227,262
Cash - Beginning 25,426 101,894
Cash - Ending $1,089,466 $329,157
===================== ===================
</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
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 September 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. Healthy Feet, a division of the
Company, sells footwear and related products to infants and children. Products
are purchased from a variety of vendors.
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, 1999,
results of operations for the three and nine month periods ended September 30,
1999 and 1998, and cash flows for the nine month periods ended September 30,
1999 and 1998. The results of operations for the three and nine month periods
are not necessarily indicative of the results to be expected for the full year.
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 earnings per share for all periods presented was 3,512,856. The
effect of the convertible preferred stock and stock warrants outstanding was
antidilutive.
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 September 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 September 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 September 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 September 30, 1999.
Note 4. Borrowings
At June 30, 1999 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 and revolving line of credit facility.
In July 1999 Kids Stuff obtained a new credit facility from Bank One, N.A.
Bank One extended a 24 month revolving credit line in the amount of $500,000,
bearing interest at prime plus 1%. Additionally, Bank One extended a 60 month
term loan to the Company for $300,000, bearing interest at 8.78%. The Company's
previously outstanding $800,000 line of credit was retired with the proceeds of
the new borrowings. The new loans are secured by the assets of the Company, a
third mortgage on the Company's real estate, cross collateralization of life
insurance on the lives of Mr. And Mrs. Miller, and carry unconditional and
unlimited guarantees of Mr. William Miller and Mrs. Jeanne Miller.
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 was $2,200,000. The purchase was partially financed through a
commercial real estate loan from Bank One, N.A. in the amount of $1,690,000. The
loan has a 20 year amortization period with an expiration date of July 7, 2009,
and carries a variable interest rate based upon the 30 day LIBOR plus 2.75%. The
rate of interest at September 30, 1999 was 8.78%. The loan is secured by a first
mortgage on the Company's real estate, guaranteed by Duncan Hill, Inc., Mr.
William Miller, Mrs. Jeanne Miller, and is cross collateralized with assignment
of life insurance.
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.
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Preferred Stock
In March 1999, the Company completed a public offering of securities in
which 460,000 units were sold for $1,951,537, net of issuance costs of $578,463.
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 when granted was $5.00 per share, subject to
downward adjustments in the exercise price if the Company meets certain
performance goals. In September 1999, the Company's Board of Directors cancelled
the above mentioned options, and issued new options at a fixed exercise price of
$1.33, representing the market price of the Company's common stock for the week
ended September 17, 1999. Other terms and conditions of the option agreements
remained the same.
Mrs. Miller also received an 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 at the time of the grant was $2.50 per share, and
provided that the options expire 10 years from the date of the grant. In
September 1999, the Company's Board of Directors cancelled this option, and
issued Mrs. Miller a new option at an exercise price at $1.33, representing the
market price of the Company's common stock for the week ended September 17,
1999. Other terms and conditions of the previous option agreement remained the
same.
<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 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 nine months of 1999.
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; the Company approved
the issuance of 65,000 options at September 24, 1999. The exercise price of the
options are $1.33 per share, representing the market value of the Company's
common stock during the week ended September 17, 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 was $2.50 per share of
common stock. In September 1999, the Company's Board of Directors cancelled the
options, and issued new options at an exercise price at $1.33, representing the
market price of the Company's common stock for the week ended September 17,
1999.
In September 1999, the Company entered into a non-qualified stock option
agreement with Debra P. Gibbs upon her appointment as a Director of the Company.
Mrs. Gibbs was granted the option to purchase 30,000 shares of the Company's
common stock, which vest 25% on September 21, 1999, and 25% each on January 1,
2001, January 1, 2002, and January 1, 2003. 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 $1.33 per share of common stock.
Note 10. Purchase of Land and Building
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 was $2,200,000. The purchase was partially financed through a
commercial real estate loan in the amount of $1,690,000 (See Note 4). The
building is being depreciated over 40 years on a straight-line basis at $47,500
per year.
<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 over 15%.
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.
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 the fourth quarter of 1998 we opened "Kids Catalog Outlet", a retail
store in Canton, Ohio, for purposes of creating incremental sales and
liquidating excess and obsolete inventory. The store is 3,300 square feet, and
is located in a strip mall in the Belden Village area of Canton, Ohio. The store
design and fixture selection was based upon appeal to the generally upscale
consumer demographics that we attract in our catalogs, with prices and sales to
emphasizing value.
In the third quarter of 1999 we introduced our Healthy Feet Catalog, a
collection of footwear and related products for infants and toddlers. The
merchandise, creative design, and marketing planning were created by the
employees of Kids Stuff, and we plan to test and evaluate the performance of the
catalog in the third quarters and fourth quarters of 1999.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
Net Sales for the quarter ended September 30, 1999 increased 19.7% to $
3,854,497, compared with $3,220,741 for the same period of 1998. Net profits for
the third quarter increased 441.0% to $104,932, compared with net profits of
$19,397 for the same period in 1998.
Approximately 50% of our increased sales were attributed to The Perfectly
Safe Catalog, which recorded 27.7% growth in sales compared with the third
quarter of 1998. Our retail store and our new Healthy Feet catalog were not in
existence in the third quarter of 1998, and accounted for 29.4% of our sales
growth.
Cost of sales decreased to 55.7% in 1999, compared with 57.7% of net sales
in 1998. The improvement is attributable to improved gross profit margins on
products sold.
Selling expenses, consisting of advertising and marketing costs, were 29.1%
of net sales in the third quarter of 1999, compared with 30.0% in the third
quarter of 1998. This decrease is attributable to slightly lower telemarketing
expense.
General and Administrative expenses during the third quarter of 1999
increased by $87,665 to $481,936 to 12.5% of net sales, compared with $394,271,
or 12.2% of net sales, during the same period in 1998. The change reflects
increased wages, as we build our infrastructure to meet the requirements of
increased sales activity.
Income from operations increased to $104,932 during the third quarter of
1999, compared with $1,377 during the third quarter of 1998. The increase is due
to increased sales of $633,756, accomplished with a 2.0% improvement in gross
margins.
Net income increased by $85,535 this quarter as compared to the same
quarter last year. Last year's quarter net income amounted to 0.6% of net sales,
while net income for the current quarter amounted to 2.7% of net sales.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997.
Sales for the nine months ended September 30, 1999 increased 21.1% to
$11,906,161, compared with $9,834,362 for the same period of 1998. Net income
for the first nine months of 1999 improved to $402,486 compared with a net
income of $140,954 for the same period in 1998.
Approximately 55% of our increased sales were attributed to The Perfectly
Safe Catalog. Approximately 36% of increased sales was recorded by The Natural
Baby Catalog, with the remainder of our sales increase coming from the retail
store and the introduction of the Healthy Feet catalog.
Cost of sales declined to 55.9% in 1999, compared with 59.0% of net sales
in 1998. The change is attributable to improved product gross profit margins,
which accounted for 75% of the improvement in our cost of sales margins.
Selling expenses, consisting of advertising and marketing costs, remained
fairly constant at 27.6% of net sales in the first nine months of 1999, compared
with 27.7% for the same period in 1998.
General and Administrative expenses increased by $339,499 to 12.5% of net
sales in 1999, compared with 11.7% of net sales in 1998. Approximately 65% of
the increase was due to increased depreciation and amortization charges, which
increased to $353,311 for the nine months ended September 30, 1999, compared
with $132,505 for the same period in 1998. The increased charges are a result of
amortizing design and creative costs for the Company's catalogs incurred in the
fourth quarter of 1998, which are being amortized through the end of fiscal year
1999. Other increases in general and administrative expenses are a result of
increased costs, primarily in wage and personnel expense.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our accumulated deficit was reduced by $402,486 from
December 31, 1998 because of the first nine months earnings performance.
In addition to net earnings, cash was provided by non-cash charges of
$353,311 for depreciation and amortization, increases in accounts payable and
other liabilities of $343,940, and a reduction in prepaid expenses of $45,467.
Largest users of working capital were inventory increases of $546,035 and
increased deferred catalog expense of $754,330. Higher volume mailings of
catalogs resulted in increased sales, as compared to 1998, and account for the
increased deferred catalog expense and inventory requirements.
In July 1999 the Company purchased a building in North Canton, Ohio to
integrate its offices, warehouse, and distribution functions. The purchase price
of the property was $2,200,000, which accounts for 88.7% of cash used for
investing activities in the nine months ended September 30, 1999. Additionally,
the Company invested $121,954 in its Web site, kidsstuff.com, and invested
$40,038 in data processing improvements.
In March 1999 the Company obtained $1,951,537 from the sale of preferred
stock, net of offering costs. (See Note 6 - Stock Offerings.) The funds were
used for increased inventory investment and working capital purposes.
In the third quarter of 1999 Kids Stuff restructured its banking facility
with Bank One, N.A. As a result, Bank One provided commercial real estate
financing for the purchase of our building in the amount of $1,690,000, a
revolving line of credit in the amount of $500,000, and a five-year term loan in
the amount of $300,000. (See Note 4 - Borrowings). As a result of this
restructuring, Kids Stuff generated net cash from financing activities in the
amount of $3,706,234, after a pay-down of $31,080 in amounts due to affiliates.
At September 30, 1999, our credit line of $500,000 was fully borrowed at
$500,000. The line is a 24 month revolving line of credit, secured by the assets
of Kids Stuff and Duncan Hill, and is personally guaranteed by our President and
CEO. The interest rate is prime plus 1%.
At September 30, 1998, our accumulated deficit was reduced by $140,954 from
December 31, 1997 because of the first nine months earnings performance. In
addition to net earnings, cash provided by operating activities including
non-cash charges of $132,505 for depreciation and amortization. Largest users of
working capital were inventory increases and increased deferred catalog expense,
totaling $478,508. Higher volume mailings of catalogs, as compared to 1997,
accounts for the increased deferred expense and inventory needs.
Overall, we expect to meet our current cash needs through ongoing
operations and from our present working capital position.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. Their programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The company has updated its computers and tested them, although no
assurances can be given that problems will not occur. The Company purchases its
materials from numerous vendors. While the Company has not determined whether
all its vendors will be year 2000 compliant before the problem arises,
Management believes that since it is not dependent on any major vendor, its
operations will not be materially or adversely effected by the failure of a few
vendors to timely correct the problem. However, no assurances can be given that
Management will be correct in its belief.
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
Exhibits filed as part of this report:
27. Financial Data Schedule
No report on form 8-K was filed during the third quarter of 1999.
<PAGE>
KIDS STUFF, INC. FORM 10-QSB NOVEMBER 15, 1999
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: 11/15/99
/s/WILLIAM MILLER
William Miller, CEO and CFO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED FOOTNOTES THERETO, OF KIDS STUFF, INC.
Financial Data Schedule
Exhibit 27
</LEGEND>
<S> <C>
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<PERIOD-END> sep-30-1999
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