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, 2000
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)
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 September 30, 2000 there were
3,625,001 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 - September 30, 2000 (Unaudited) and December 31, 1999........................................... 3-4
Statements of Operations (Unaudited) - Three Months and Nine Months Ended September 30, 2000 and 1999........... 5
Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2000 and 1999............................ 6
Notes to Financial Statements................................................................................... 7
Item 2 - Management's Discussion and Analysis or Plan of Operations............................................. 12
Part II - Other Information..................................................................................... 16
Signature Page.................................................................................................. 17
</TABLE>
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................. $ 170,046 $ 859,431
Accounts receivable .................. 285,957 257,574
Inventories .......................... 2,041,003 2,045,005
Deferred catalog expense ............. 964,369 740,425
Due from affiliates .................. 185,687 234,390
Prepaid expenses ..................... 188,530 170,871
---------- ----------
Total Current Assets .............. 3,835,632 4,307,696
PROPERTY AND EQUIPMENT
Land ................................. 214,000 214,000
Building and improvements ............ 2,039,356 2,026,172
Data processing equipment and software 603,513 401,182
Leasehold improvements ............... 26,528 34,074
Web site development ................. 186,461 132,891
Machinery and equipment .............. 95,020 86,901
Furniture and fixtures ............... 137,856 126,211
---------- ----------
3,302,734 3,021,431
Less accumulated depreciation ........ 333,533 206,652
---------- ----------
2,969,201 2,814,779
Goodwill ............................. 972,980 1,015,805
Catalog development and other ........ 254,503 368,995
Customer list ........................ 276,548 330,655
Other Assets ......................... 81,982 82,055
---------- ----------
1,586,013 1,797,510
---------- ----------
$8,390,846 $8,919,985
========== ==========
</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,
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long-term debt $ 159,386 $ 157,000
Accounts payable ................ 2,675,407 2,352,318
Line of credit .................. 803,600 500,000
Customer advances and other ..... 10,005 15,302
Notes payable ................... 300,000 --
Accrued expenses ................ 59,654 111,393
----------- -----------
Total Current Liabilities .... 4,008,052 3,136,013
LONG-TERM DEBT, NET OF CURRENT PORTION 1,877,807 1,998,122
STOCKHOLDERS' EQUITY:
Common stock .................... 3,625 3,513
Preferred stock - Series A ...... 5,000 5,000
Preferred stock - Series 1 ...... 460 460
Additional paid - in capital .... 5,356,650 5,167,189
Retained earnings (deficit) .... (2,860,748) (1,390,312)
----------- -----------
Total Stockholders' Equity ... 2,504,987 3,785,850
----------- -----------
$ 8,390,846 $ 8,919,985
=========== ===========
</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 September 30, Nine Months Ended September 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Total sales $4,212,901 $3,854,649 $12,151,426 $11,906,161
Cost of sales 2,250,898 2,008,406 6,655,111 6,208,865
---------------- ----------------- --------------- ----------------
Gross profit 1,962,003 1,846,243 5,496,315 5,697,296
Selling expenses 1,509,125 1,145,608 4,303,451 3,444,553
General and administrative expenses 673,403 540,820 2,302,747 1,730,266
---------------- ----------------- --------------- ----------------
(Loss) income from operations (220,525) 159,815 (1,109,883) 522,477
Other (expense) (63,642) (54,883) (175,279) (119,991)
---------------- ----------------- --------------- ----------------
Net (loss) income $(284,167) 104,932 $(1,285,162) 402,486
================ ================= =============== ================
Basic and diluted (loss) earnings per share $(0.09) $0.01 $(0.41) $0.08
================ ================= =============== ================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Nine Months Ended September 30,
-----------------------------------------
2000 1999
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income ........................................................ $(1,285,162) $ 402,486
Adjustments to reconcile net (loss) income to net
cash (used) by operating activities:
Depreciation and amortization ...................................... 385,134 353,311
(Increase) in accounts receivable .................................. (28,383) (7,991)
Decrease (increase) in inventories ................................. 4,002 (546,035)
(Increase) in deferred catalog expense ............................. (223,944) (754,330)
(Increase) decrease in prepaid expenses ............................ (17,659) 45,467
Increase in accounts payable, customer advances and accrued expenses 266,053 343,940
----------- -----------
Net cash (used) by operating activities ...................................... (899,959) (163,152)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment and other assets .................... (328,060) (2,479,042)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayment) on line of credit - net ........................... 303,600 (262,000)
Borrowing on note payable - current ...................................... 300,000 --
Sale of preferred stock .................................................. -- 1,951,537
Sale of common stock ..................................................... 4,300 --
Payment on long-term debt ................................................ (117,929) --
Borrowings on long-term debt ............................................. -- 295,617
Borrowings - Real Estate Mortgage ........................................ -- 1,690,000
Decrease in due from affiliates .......................................... 48,703 31,080
----------- -----------
Net cash provided by financing activities ................................... 538,634 3,706,234
----------- -----------
Net (decrease) increase in cash .............................................. (689,385) 1,064,040
Cash - beginning ............................................................. 859,431 25,426
----------- -----------
Cash - ending ................................................................ $ 170,046 $ 1,089,466
=========== ===========
</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, 2000.
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. LittleFeet, 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,
2000, results of operations for the three month and nine month periods
ended September 30, 2000 and September 30, 1999, and cash flows for
the nine month periods ended September 30, 2000 and September 30,
1999. 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.
Reclassification - Certain amounts in the prior year financial
statements have been reclassified to conform to the current year
presentation.
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
the nine-month periods ended September 30, 2000 and 1999 was 3,575,159
and 3,512,856 and for the three month periods ended September 30, 2000
and 1999 was 3,625,001 and 3,512,856, respectively. 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. In June 2000, the FASB issued Statement 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133". The adoption of these statements
did not have a material impact on the Company's financial position or
overall trends in results of operations and did not result in
significant changes to the Company's financial risk management
practices.
In March 2000, the FASB issued Interpretation No.44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation
of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies the
definition of employee for purposes of applying Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998 or January 12, 2000.
The Company believes that the impact of FIN 44 will not have a
material effect on its financial position or results of operation.
<PAGE>
In December 1999, The Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements." SAB 101, as amended by SAB101A and SAB101B provides
guidance on applying accepted accounting principles to revenue
recognition issues in financial statements. This statement is
effective for all fiscal quarters beginning in the fourth quarter of
2000. The Company is evaluating the effect the adoption may have on
the Company's results of operations and financial position.
Note 2: Agreement with Affiliated Company
Duncan Hill, Inc. owns 87% 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 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 $30,000 per
year. Additionally, a $1.75 per shipment for warehouse services was
paid by Havana until March 8, 2000 when Havana assumed their own
warehousing facility and no longer required Kids Stuff Inc.'s
fulfillment services.
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.
Note 3: Stockholders' Equity
A. Common Stock
As of December 31, 1999 and September 30, 2000, the Company had
common stock at a par value of $.001 per share with 25,000,000 shares
authorized with 3,512,856 and 3,625,001 shares issued and outstanding,
respectively.
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, 1999 and September 30, 2000, the Company had
issued and outstanding 5,000,000 shares of Series A Preferred Stock,
$.001 par value. Duncan Hill holds these shares. 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 a 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.
<PAGE>
On April 30, 2000 Kids Stuff, Inc. paid out dividends earned on
the Series 1 preferred stock through December 31, 1999. The dividend
was paid in the form of 104,145 common shares with a market value of
$183,274.
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 June 30, 2000.
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, 2000.
Note 4. Borrowings
In April 2000, Kids Stuff, Inc. restructured both their line of
credit and bridge loan with Bank One in April of 2000. The Company
retired the 24-month $500,000 revolving line of credit by obtaining a
new 24-month line of credit that allows for a maximum of $1,000,000 to
be drawn on determined by an asset based financing calculation bearing
interest at prime plus 1%. At September 30, 2000, the amount that Kids
Stuff, Inc. was able to draw on the line was $812,054, of which
$803,600 was outstanding. In addition, the $300,000 bridge loan was
retired with the proceeds of a new short-term note of $300,000 bearing
interest of prime plus 1%, due on December 31, 2000.
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 June 30, 2000 was 8.71%. 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.
<PAGE>
On November 3, 1999, the Company received proceeds from a Small
Business Administration loan, which $550,000 was used to pay down the
Bank One, N.A. note. The interest on this note is 7.28% with a
maturity date of December 3, 2019.
Note 5. 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 1999 or
the first nine months of 2000.
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 6. 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.
Note 7. 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). On November 3, 1999, the Company received
proceeds from a Small Business Administration loan, which $550,000 was
used to pay down the Bank One, N.A. note. The interest on this note is
7.28% with a maturity date of December 3, 2019. 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 1999, sales had increased to over
$6.1 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 1999, the fourth full
year of Kids Club operations, net sales were $2.8 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 1999, The Natural Baby Catalog generated net
sales of $6.8 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.
On September 30, 1999, Kids Stuff, Inc. established kidsstuff.com
as a separate division of the Company. The website acts as an
interactive media between the Company's catalogs and its customers.
The Company anticipates approximately 20% of its sales to be web
based, half of the web based customers being redirection from the
catalogs, while the other half being acquired through solely Internet
related means.
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
Net sales for the quarter ended September 30, 2000 were
$4,212,901, an increase of $358,252 or 9.3% from the same quarter last
year. The increase is due to additional marketing efforts as discussed
below.
Cost of sales increased from 52.1% of net sales in 1999 to 53.4%
in 2000 due to a blend of products sold.
Selling expenses were 35.8% of sales for the third quarter of
2000 compared with 29.7% of sales in the third quarter of 1999. The
increased selling expense in 2000 resulted from the increased
circulation of catalogs from 2.4 million in the third quarter of 1999
to 2.6 million in the third quarter of 2000 and higher production
costs per catalog.
For the third quarter of 2000, general and administrative
expenses were $673,403 or 16.0% of sales, compared to $540,820 or
14.0% of sales during the same quarter in 1999. The increase of
$132,583 was due to increases in personnel and other infrastructure
costs in anticipation of sales increases. The response rate on
mailings was not as favorable as anticipated. Effective August 25,
2000, the Company reduced its general and administrative personnel by
ten and took action to reduce other general and administrative
expenses in order to reduce total general and administrative expenses
by approximately 25%.
Net loss for the third quarter of 2000 was $284,167 or 6.7% of
sales, as compared to net income of $104,932 or 2.7% of sales in the
third quarter of 1999. The increased losses were due to the increased
marketing and general and administrative expenses described above as
well as the lower than anticipated response rate on mailings.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Sales for the nine months ended September 30, 2000 increased 2.1%
to $12,151,426, compared with $11,906,161 for the same period of 1999.
Net loss for the first nine months of 2000 was $1,285,162 compared
with a net income of $402,486 for the same period in 1999.
Cost of sales increased to 54.8% in 2000, compared with 52.1% of
net sales in 1999. The change is attributable to both the blend of
products sold and increased purchase cost of inventory over prior year
levels.
Selling expenses, consisting of advertising and marketing costs,
increased to 35.4% of net sales in the first nine months of 2000,
compared with 28.9% for the same period in 1999. This increase is
attributable to increased circulation of catalogs from 6.7 million
catalogs in the first nine months of 1999 to 7.0 million catalogs in
the first nine months of 2000. Additionally, the costs incurred in the
purchase of outside mailing lists increased in 2000. The increase in
marketing costs as a percent of net sales also increased due to lower
response rates than anticipated.
General and Administrative expenses increased by $572,481 to
19.0% of net sales in 2000, compared with 14.5% of net sales in 1999.
The increase was due to increased personnel and other infrastructure
costs in anticipation of sales increases. The response rate on
mailings was not as favorable as anticipated.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our accumulated deficit was increased
by $1,285,162 from December 31, 1999 because of the loss for the
first nine months of 2000. In addition to the net loss, cash was
used by accounts receivable increases of $28,383 and increased
deferred catalog expense of $223,944 and increases in prepaid
expenses. These uses were partially offset by non-cash charges of
$385,134 for depreciation and amortization, decreases in inventory
and increases in accounts payable, customer advances and accrued
expenses. The Company invested $328,060 in property, equipment and
other assets, primarily for implementation of the new accounting
and operational software systems. Borrowings in excess of
repayments on debt provided $538,634 from financing activities.
At September 30, 1999, our accumulated deficit was reduced by
$402,486 from December 31, 1998 because of the first nine months
losses from operations. In addition to net earnings, cash provided
by operating activities including non-cash charges of $353,311 for
depreciation and amortization. Largest users of working capital
were inventory increases and increased deferred catalog expense,
totaling $1,300,365. Higher volume mailings of catalogs, as
compared to 1999, accounts for the increased deferred expense and
inventory needs.
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. 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. On November 3, 1999, the Company received proceeds from a
Small Business Administration loan, which $550,000 was used to pay
down the Bank One, N.A. note. The interest on this note is 7.28%
with a maturity date of December 3, 2019.
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, 2000, our credit line of $1,000,000 was
borrowed at $803,600. 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, 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 provided by
operating activities including non-cash charges of $353,311 for
depreciation and amortization. Largest users of working capital
were inventory increases and increased deferred catalog expense,
totaling $1,300,365. Higher volume mailings of catalogs, as
compared to 1999, 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.
<PAGE>
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>
KIDS STUFF, INC. FORM 10-QSB SEPTEMBER 30, 2000
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: _________
/s/STEPHEN A. MUSIN
Stephen A. Musin, Vice President and CFO
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS AND RELATED FOOTNOTES THERETO, OF KIDS STUFF,
INC.
