PROSPECTUS
KIDS STUFF, INC.
300,000 UNITS
EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK
AND EIGHT COMMON STOCK CLASS A PURCHASE WARRANTS
OFFERING PRICE PER UNIT-$12.00
---------------
Kids Stuff, Inc. (the "Company") is offering for sale 300,000 units (the
"Units"), each Unit consisting of two shares of common stock, $.001 par value
(the "Common Stock") and eight redeemable Class A warrants (the "Warrants"). The
Common Stock and the Warrants are immediately separately transferable as of the
date of this Prospectus. Each Warrant entitles the holder to purchase one share
of Common Stock at a price of $5.00 for a period of four years commencing one
year after the date of this Prospectus. The Company may redeem the Warrants at a
price of $.05 per Warrant, at any time after they become exercisable, upon not
less than 30 days' prior written notice, if the closing bid price of the Common
Stock has been at least $14.40 per share for 20 consecutive trading days ending
on the 5th day prior to the date on which the notice of redemption is given. See
"DESCRIPTION OF SECURITIES."
Prior to this Offering, there has been no public market for the Units and
there can be no assurance that any such market will develop. The initial public
offering price of $12.00 per Unit has been arbitrarily determined by the Company
and VTR Capital, Inc. ("VTR Capital" or the "Representative"), the
representative of the underwriters of the Offering (the "Underwriters"). For
information regarding the factors considered in determining the initial public
offering price of the Units and the exercise price of the Warrants, see
"UNDERWRITING." The Units, Common Stock and Warrants are expected to be approved
for quotation on the OTC Bulletin Board under the symbols "KDSTU," "KDST," and
"KDSTW," respectively. See "RISK FACTORS-Certain Implications of Trading
Over-The-Counter; Penny Stock' Regulations," on page 13. There is no assurance,
however, that the Company's securities will be approved for listing on the OTC
Bulletin Board or elsewhere. The Company anticipates that the securities offered
hereby will be qualified for sale by the Company in a limited number of states.
See "RISK FACTORS-Limits on Secondary Trading; Current Prospectus and State Sky
Registration Required to Exercise Warrants," on pages 14-15.
The Company currently has outstanding 442,856 unregistered shares of Common
Stock which it sold for $.125 per share to three private investors in order to
obtain equity bridge financing. Assuming that each of the two shares of Common
Stock comprising a $12 Unit is valued at $6.00 per share, and no value is
attributed to the Warrants included in a Unit, the 442,856 shares held by the
three private investors have a hypothetical value of $2,657,136 for which they
paid a total of $55,358. See "RISK FACTORS-Unregistered Shares Eligible for
Immediate and Future Sale," on pages 14-15.
Upon completion of this Offering, Duncan Hill Co., Ltd., the Company's
parent, will own approximately 87% of the Company's outstanding voting capital
stock. See "RISK FACTORS-Control by Parent and Parent's Controlling
Stockholders," on page 11.
---------------
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND
"DILUTION."
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- ---------------------------------------------------------------
Per Unit ...... $12.00 $1.20 $10.80
- ---------------------------------------------------------------
Total ......... $3,600,000 $360,000 $3,240,000
===============================================================
(1) Does not include additional compensation to be received by the Underwriters
in the form of a non-accountable expense allowance equal to 3% of the public
offering price of the Units, the value of a non-redeemable option granted to
the Underwriters to purchase up to 60,000 shares of Common Stock at an
exercise price of $9.90 per share, or a three-year financial consulting
agreement at a cost to the Company of $100,000 payable in advance at the
Closing of this Offering. The Company has also agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "UNDERWRITING."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $569,907, including the non-accountable expense allowance in the amount
of $108,000, and the financial consulting fee referenced in note (1).
---------------
The Units being offered for sale by the Company are being offered on a
"firm commitment" basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters. The Underwriters reserve the right to withdraw,
cancel or modify the offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Units will be made
against payment therefor on or about July 2, 1997.
VTR CAPITAL, INC.
THE DATE OF THIS PROSPECTUS IS JUNE 26, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS OF THE COMPANY , INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THE OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITERS. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS AND/OR THE SECURITIES
INCLUDED THEREIN WITH OR THROUGH THE UNDERWRITERS. NO AGREEMENTS OR
UNDERSTANDINGS, WRITTEN OR ORAL, EXIST WITH RESPECT TO THE PURCHASE OR RESALE OF
THE SECURITIES TO BE SOLD IN THE OFFERING THROUGH OR WITH THE UNDERWRITERS AND
THEIR AFFILIATES.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE ANY OFFER
OF SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER IS
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO THE
COMPANY INCLUDE THE COMPANY AND THIS PREDECESSOR, PERFECTLY SAFE, INC.
THE COMPANY
The Company is a specialty direct marketer which currently publishes two
catalogs with an emphasis on children's hardgood products (I.E., products not
primarily made from fabrics) from prenatal to age three. The Company believes
that its first catalog, "Perfectly Safe, The Catalog For Parents Who
Care/registered trademark/" is the nation's only catalog devoted to child
safety, child-proofing the home and safety-related products for the family. The
Company has published Perfectly Safe since 1990, and has circulated over 20
million catalogs and helped to childproof over 350,000 homes to date.
In 1995, the Company introduced its "Jeannie's Kids Club" catalog to
broaden its market and to introduce a new direct marketing concept in children's
products. Jeannie's Kids Club offers parents of young children who become
members the opportunity of saving up to 60% compared to the price charged for
the same products in other popular children's catalogs. The current annual
membership fee is $18.00 per year.
The Company incurred a net loss of $158,956 for the three months ended
March 31, 1997 and a net loss of $521,640 and $536,992 for fiscal year 1996 and
1995, respectively. Upon the completion of the Offering, the Company intends to
acquire The Natural Baby Catalog, which specializes in children's and products
made from natural fiber from prenatal to age three, and consolidate its
operations with the operations of the Company. On a pro forma basis, the
combined operations of the Company and The Natural Baby Catalog would have
resulted in revenues of $2,924,766 and a loss of $18,847 for the three months
ending March 31, 1997, revenues of $13,090,210 and pre-tax profit of $37,009 for
the year ended December 31, 1996, and revenues of $10,952,806 and a pre-tax loss
of $324,259 for the year ended December 31, 1995.
The Company believes that its expertise in the marketing and merchandising
of children's products, the recent introduction of its Jeannie's Kids Club
concept, and the intended acquisition of The Natural Baby Catalog will provide
the basis for future growth by the use of the following strategies:
CONSOLIDATION OF THE NATURAL BABY'S OPERATIONS. The Company plans to
consolidate the warehouse, telemarketing, data processing and administrative
functions of The Natural Baby Catalog into the operations of the Company. The
Company believes that such consolidations will result in approximately $200,000
in direct labor savings and $450,000 in general and administrative savings, on
an annualized basis, exclusive of additional annual expenses which the Company
will incur and as a public entity, estimated to be $200,000 and $50,000 of
additional annual payroll expense relating to the salaries of the Company's two
executive officers, as well as any additional compensation that may be awarded
under any incentive compensation plan.
EXPAND JEANNIE'S KIDS CLUB. Because Jeannie's Kids Club offers popular
children's products for up to 60% less than other children's catalogs, the
Company believes that there is substantial opportunity to increase the
membership of Jeannie's Kids Club, which went from inception in July 1995 to
over 35,000 current members.
MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG. Revenues of The Natural
Baby Catalog have increased from $1.7 million in 1992 to $6.5 million in 1996.
The Company is satisfied with the
3
<PAGE>
performance of The Natural Baby Catalog and will endeavor to maintain continuity
in the merchandising and marketing of the catalog.
NEW CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied
upon catalog circulation as the sole method to acquire new customers. Because of
the relatively short life of the acquired customer (prenatal to age three) and
the increasing costs of catalog mailings, the Company intends to pursue the
development of less costly alternative customer acquisition programs, such as
magazine solicitations, promotional inserts, and marketing joint ventures with
mass marketers of baby formula, baby food and health care products. The Company
has not yet entered into any agreements to commence any such new acquisition
program.
REFINE CATALOG MAILING STRATEGIES. The Company's catalog circulation is
determined by statistical models and analysis which targets prospective buyers
and timing of purchasers. The Company's statistical modeling system is outdated.
In February, 1997 the Company began to develop a statistical modeling system
with the assistance of a new outside vendor. The Company anticipates that this
system will be ready for testing in June 1997. The cost of developing this new
software should not exceed $10,000 and will be paid for from the Company's cash
flow or working capital. See "USE OF PROCEEDS."
REPLACE OUTDATED DATA PROCESSING SYSTEM. The Company intends to acquire
state-of-the-art computer hardware and upgrade its system software, at an
annualized cost of approximately $75,000 per year, on a leased basis, to improve
the efficiencies of its operations and financial reports. Lease payments will be
made monthly and will be paid for from the Company's cash flow or working
capital.
CATALOG ACQUISITIONS. Any catalog acquisitions subsequent to The Natural
Baby Catalog will depend upon the Company's ability to obtain suitable
financing. Although the Company believes that there may be additional
opportunities to acquire other children's niche catalogs, it does not intend to
pursue any other such opportunities in the near future unless it is able to
obtain suitable financing.
The Company is a subsidiary of Duncan Hill Co., Ltd. ("Duncan Hill").
Duncan Hill also operates a pipe, tobacco and cigar mail order catalog called
"Carey's Smoke Shop," through two other wholly owned subsidiaries, E.A. Carey of
Ohio, Inc. and Highland Pipe Company. The Company succeeded to the Jeannie's
Kids Club and Perfectly Safe Catalog business of Perfectly Safe, Inc., another
subsidiary of Duncan Hill, as a result of a reorganization in which The Company
acquired the assets and liabilities of Perfectly Safe, Inc. and Perfectly Safe,
Inc. was dissolved. This reorganization was effective June 30, 1996. See "THE
COMPANY AND ITS PARENT."
Prior to the reorganization, the telemarketing, order fulfillment, data
processing and administrative functions of Perfectly Safe, Inc. were provided by
Duncan Hill, which also provided those services as applicable, to its other
operating subsidiaries. As part of the reorganization, the Company also acquired
from Duncan Hill the assets used by Duncan to perform those functions itself.
The purchase price of the Perfectly Safe and Duncan Hill assets acquired by the
Company is $2,613,404 payable in the issuance of stock, a promissory note and
the assumption of liabilities. See "THE COMPANY AND ITS PARENT."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, OH 44718, and the Company's telephone number is
(330) 492-8090.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company ...... 300,000 Units, each Unit consisting of two shares of
Common Stock and eight Class A warrants (the
"Warrants"). The Common Stock and Warrants are
immediately separately transferable as of the date of
this Prospectus. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise
price of $5.00 for a period of four years commencing
one year after the date of this Prospectus. The
Company may redeem the Warrants at a price of $.05
per Warrant at any time after they become exercisable
upon not less than 30 days' prior written notice if the
closing bid price of the Common Stock has been at
least $14.40 per share for the 20 consecutive trading
days ending on the 5th day prior to the date on which
the notice of redemption is given. See
"DESCRIPTION OF SECURITIES."
Common Stock Outstanding Prior to
this Offering ........................ 2,842,856 Shares
Common Stock to be Outstanding after
this Offering(1)(2) .................. 3,512,856 Shares
Proposed OTC Symbols
Units ................................. KDSTU
Common Stock ........................ KDST
Warrants .............................. KDSTW
</TABLE>
- ----------------
(1) Does not include: up to 2,400,000 shares of Common Stock issuable upon the
exercise of the Warrants attributable to the 300,000 Units offered hereby;
and up to 60,000 shares of Common Stock subject to the non-redeemable option
granted to the Underwriters. See "UNDERWRITING." Also does not include up to
200,000 shares of Common Stock issuable upon the exercise of stock purchase
options granted under two executive employment agreements. See "MANAGEMENT-
Employment Agreements." Also does not include up to 50,000 shares of Common
Stock issuable upon the exercise of a convertible note to be issued to the
seller of The Natural Baby Catalog. See "CERTAIN TRANSACTIONS-Acquisition of
The Natural Baby Catalog."
(2) Does include 70,000 unregistered shares of Common Stock to be issued to the
seller of The Natural Baby Catalog upon the completion of this Offering and
the Company's acquisition of The Natural Baby Catalog. See "CERTAIN
TRANSACTIONS-Acquisition of The Natural Baby Catalog."
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering primarily
for the acquisition of The Natural Baby Catalog, accounts payable, the repayment
of debt, consolidation of the operations of The Natural Baby Catalog and for
working capital and general corporate purposes. See "USE OF PROCEEDS."
Approximately $300,000 of the debt to be repaid includes the repayment of a
Bridge Loan made to the Company and partial payment on the debt owed by the
Company to its parent, Duncan Hill. See "USE OF PROCEEDS."
RISK FACTORS
The securities offered hereby are speculative, involve a high degree of
risk and should not be purchased by investors who cannot afford the loss of
their investment. See "RISK FACTORS."
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data is derived from the historical financial
statements of the Company, and the pro forma combined financial statements of
the Company which assumes that the acquisition of The Natural Baby Catalog
occurred prior to the date of the Prospectus. The financial statements of the
Company include the financial statements of its predecessor, Perfectly Safe,
Inc. The summary financial data should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" as
well as the Company's historical financial tatements and the related notes
thereto, and the Company's pro forma combined financial statements and the
related notes thereto, included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------- ----------------------------------------------
PRO FORMA(1) PRO FORMA
1995 1996 1996 1996 1997 1997
------------- ------------- ------------------ ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONAL DATA:
Total Revenue ............... $ 5,724,337 $ 6,638,995 $13,090,210 $ 1,519,716 $ 1,465,541 $ 2,924,766
Income (Loss) from
Operations .................. (545,602) (527,125) 26,602 (93,233) (144,137) (1,267)
Net Income (Loss) ............ (536,992) (521,640) 37,009 (99,637) (158,956) (18,847)
Net Income (Loss) per
common share .................. $ (0.15) $ (0.14) $ 0.01 $ (.03) $ (.04) $ (.01)
Weighted average number of
common shares outstanding
during the period ............ 3,700,000 3,700,000 3,512,856(2) 3,700,000 3,700,000 3,512,856(2)
</TABLE>
MARCH 31, 1997
--------------------------------
ACTUAL PRO FORMA(3)
--------------- --------------
BALANCE SHEET DATA:
Total Assets ........................ $ 1,423,500 $3,526,760
Working Capital (deficit) ............ (962,401) 209,005
Total Liabilities .................. 2,567,636 2,328,188
Stockholder's Equity (deficit) ...... (1,144,136) 1,198,572
- ----------------
(1) Assumes that the Company acquired The Natural Baby Catalog as of January 1,
1996.
(2) Gives effect to the sale of 300,000 Units offered hereby. Also gives effect
to the Company's repurchase of 857,144 shares of Common Stock in June,
1997 from certain private investors. See "CERTAIN TRANSACTIONS--Rule 504
Shares." Also gives effect to the issuance of 70,000 unregistered shares
of Common Stock to the seller of The Natural Baby Catalog (see "CERTAIN
TRANSACTIONS--Acquisition of The Natural Baby Catalog").
(3) Gives effect to the sale of 300,000 Units offered hereby and the
application of the net proceeds therefrom in the amount $2,670,093. Also
assumes that the Company acquired The Natural Baby Catalog as of March 31,
1997. Also gives effect to the Company's repurchase of 857,144 shares of
Common Stock in June, 1997 from certain private investors. See "CERTAIN
TRANSACTIONS--Rule 504 Shares." Also gives effect to the issuance of
70,000 unregistered shares of Common Stock to the seller of The Natural
Baby Catalog (see "CERTAIN TRANSACTIONS--Acquisition of The Natural Baby
Catalog").
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES
A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE PURCHASED BY
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN, AND
AFFECTING THE BUSINESS OF, THE COMPANY AND THIS OFFERING, TOGETHER WITH THE
OTHER INFORMATION IN HIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION.
1. HISTORY OF OPERATING AND NET LOSSES. The Company experienced
significant losses for the three months ended March 31, 1997 and for the years
ended December 31, 1996 and 1995. For the three months ended March 31, 1997,
the Company incurred an operating loss of $144,137 and a net loss of $158,956.
For 1996 the Company incurred an operating loss of $527,125 and a net loss of
$521,640. For 1995 the Company incurred an operating loss of $545,602 and a net
loss of $536,992. A substantial portion of these losses is associated with the
establishment and development of the Jeannie's Kids Club Catalog beginning in
July, 1995. See "MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION." The Company believes that in order to achieve
profitability with respect to its two current children's catalogs, the
membership of Jeannie's Kids Club will need to reach a sustainable level of
45,000 members. Currently, there are approximately 35,000 members. There can be
no assurances that the Company will increase the membership of Jeannie's Kids
Club to profitable levels or that the Company will not continue to incur net
losses in the future.
2. DEPENDENCE ON OFFERING PROCEEDS TO PAY TRADE CREDITORS TO PAY DEBT AND
TO ACQUIRE THE NATURAL BABY CATALOG BUSINESS. As a result of its operating
losses and lack of capital, the Company is in arrears to many of its trade
creditors and also has incurred short term indebtedness. The Company had a
backlog of unshipped orders in excess of $210,000 at March 31, 1997
attributable largely to its inability to timely pay vendors and restock
inventory. Accordingly, the Company, needs the proceeds of this Offering to
continue its operations as well to as finance its planned acquisition of The
Natural Baby Catalog. Upon the closing of this Offering the Company intends to
pay all over due trade creditor balances (other than the printer of the
Company's catalogs) which, based upon 45 days sales, approximated $89,000 at
March 31, 1997. The Company owes the printer of its catalogs $507,000. The
Company intends to pay $332,000 of the outstanding balance to the printer from
the proceeds of this Offering. The Company intends to pay the balance of
$175,000 within sixty days of the date of this Prospectus from cash flow and/or
working capital. See "USE OF PROCEEDS." The Company also intends to use
$414,773 of the proceeds of this Offering to repay indebtedness.
3. POSSIBLE LACK OF SAVINGS FROM THE INTEGRATION AND CONSOLIDATION OF THE
NATURAL BABY CATALOG BUSINESS; ADEQUACY OF FINANCING. The Company believes that
the consolidation savings anticipated from the consolidation of the operations
of The Natural Baby Catalog, together with the working capital provided from
the Company's institutional credit facility and the net proceeds of this
Offering, will be sufficient to operate the Company on a profitable basis and
to enable the Company to pursue its short-term growth strategies. In the event,
however, that the Company is unable to achieve the anticipated consolidation
savings or is otherwise unable to operate the Company profitably, and/or the
Company's institutional credit facility is terminated, the Company may find it
necessary to seek additional financing. The Company's parent, Duncan Hill Co.,
Ltd. ("Duncan Hill"), does not have the financial resources to provide the
Company with additional financing if needed. Thus, there is no assurance that
the Company will be able to obtain additional financing, if needed, on terms
favorable to the Company, or at all.
Upon the acquisition of The Natural Baby Catalog, the Company intends to
consolidate the telemarketing, fulfillment, data processing and administrative
functions with the Company's current operations in Canton, Ohio. The Company
will endeavor to complete the integration and consolidation of The Natural Baby
Catalog within ninety days of the consummation of the acquisition. To the
extent, however, that the Company is unable to timely complete such integration
and consolidation or there is a competitive reaction to the Company's
acquisition of The Natural Baby Catalog (see "RISK
7
<PAGE>
FACTORS--Competition"), the Company's anticipated consolidation savings and
profitability will not be realized short-term, resulting in the possibility
that the Company may need additional financing (which there is no assurance
that it will be able to obtain) within twelve months from the date of the
Prospectus. See "BUSINESS."
4. REQUIREMENT TO COMPLETE THE ESCROW CLOSING OF THE ACQUISITION OF THE
NATURAL BABY CATALOG. On April 15, 1997, the Company closed, in escrow, its
acquisition of The Natural Baby Catalog. The only conditions upon the release
of the acquisition from escrow is the Company's payment of the purchase price
to the escrow agent and the escrow agent's delivery of the purchase price
payment to the seller within the earlier of fifteen business days from the date
of this Prospectus or five business days from the Underwriters' completion of
this Offering; but, in no event, later than July 9, 1997. See "CERTAIN
TRANSACTIONS--Acquisition of The Natural Baby Catalog." The Company is entirely
dependent upon the proceeds of this Offering to pay the purchase price to the
escrow agent for the release of the acquisition from escrow. Should the Company
be unable to obtain the release of the acquisition from escrow subsequent to
the Underwriters' completion of this Offering as a result of some unforeseen
action taken by others--such as a lawsuit to enjoin the purchase--a risk which
the Company believes is very remote, the Company will not be able to complete
its acquisition of The Natural Baby Catalog. Should that occur, the Company
will not be able to achieve profitability through the purchase of a profitable
mail order catalog business unless it was able to purchase another children's
mail order catalog with characteristics similar to that of The Natural Baby
Catalog. The Company has not identified any suitable potential acquisitions to
replace The Natural Baby Catalog should it become necessary to do so. Pending
its efforts to effect a replacement acquisition, should it become necessary to
do so, the Company would apply the proceeds of this Offering to pursuing its
other strategies to grow its business. See "BUSINESS--Strategies." There is no
assurance, however, that the Company will be able to become profitable without
acquiring a profitable children's mail order catalog with characteristics
similar to that of The Natural Baby Catalog.
5. IMMEDIATE AND SUBSTANTIAL DILUTION TO PUBLIC INVESTORS. Upon
completion of the sale of the Company's Units in this Offering, without giving
effect to the exercise of the Underwriters' Option, the net tangible book value
per Share of the Company's Common Stock will be $(0.23). At the initial public
offering price of $6.00 per share of Common Stock offered hereby (assuming no
value attributable to the Warrants), investors in this Offering will experience
an immediate dilution of approximately $6.23 or 104% in net tangible book value
per share and existing investors will experience an increase of approximately
$0.28 per share. See "DILUTION." The present stockholders of the Company have
acquired their respective equity interest at costs substantially below the
public offering price. Accordingly, to the extent that the Company incurs
losses, the public investors will bear a disproportionate risk of such losses.
6. UNCERTAINTY AS TO FUTURE OPERATING RESULTS. The Company's revenue
growth and future profitability will depend on its ability to increase catalog
sales, to expand the membership of Jeannie's Kids Club and to effectively
monitor and control costs. See "BUSINESS--Strategies; and Marketing."
Accordingly, there can be no assurance that the Company will operate profitably
in the future. Furthermore, future operating results depend upon many factors,
including general economic conditions, the level of competition and the ability
of the Company to continue to attract and retain customers successfully.
7. COSTS INCREASES IN POSTAGE AND PAPER. Postal rates and paper costs
affect the cost of the Company's order fulfillment and catalog and promotional
mailings. The Company relies heavily on the rate structure of the United States
Postal Service ("USPS") and strives for discounts for bulk mailings. Like
others in the catalog industry, the Company passes along a significant portion
of its shipping and handling expense, but does not pass along costs of
preparing and mailing catalogs and other promotional materials. In recent
years, the USPS has increased its rate for both the mailing of catalogs and
packages. In January 1995, the USPS increased the postage rate paid by the
Company by 14%. Although there has been no rate increase since then, there is a
belief, as reflected in a recent major mail order catalog trade publication,
that the USPS will raise its rates sometime in 1998. United Parcel
8
<PAGE>
Service has also increased its rates, with increases occurring in February of
1994, 1995, 1996 and 1997. The price of paper is dependent upon supply and
demand in the marketplace. From January 1993 through December 1995, the price
of paper available to the Company increased 95%, resulting in increased catalog
production costs and contributing to operating loses in 1995. Although paper
prices decreased in 1996, any future significant increases in postal rates or
paper costs could have a material adverse effect on the Company's business,
financial condition and results of operation, unless the Company is successful
in developing new methods for acquiring new customers so that it need not rely
upon catalog circulation as the sole method to acquire new customers.
8. NEED TO DEVELOP NEW METHODS FOR ACQUIRING NEW CUSTOMERS. Historically,
the Company has relied upon catalog circulation as the sole method to acquire
new customers. Because of the relatively short life of the acquired customer
(prenatal to age three) and the increasing costs of catalog mailings, the
Company believes that its future growth and profitability will be largely
dependent upon the Company's ability to develop alternative customer
acquisition programs. See "BUSINESS--Strategies."
9. FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may
vary from quarter-to-quarter depending on the number of catalogs mailed during
the quarter and the relative profitability of the mailing lists used for the
catalog mailings. The relative profitability of the mailing lists used for a
particular mailing is determined by the mailing list mix between the Company's
existing in-house lists and lists rented from outside sources. Some rental lists
turn-out to be profitable (or more profitable) and others do not. On occasion, a
rental list which has proven to be profitable in the past may experience an
inexplicable short-term unsatisfactory result. See "BUSINESS--Marketing." Since
1994, the Company has experienced a quarterly fluctuation of approximately 105%
on one occasion, quarterly fluctuations of between 45% and 65% on three
occasions, and fluctuations of between 10% and 30% on five occasions.
10. BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $160,869
or 6% of the net proceeds of this Offering has been allocated to working
capital of the Company, which funds will be utilized for general corporate
purposes. The allocation of proceeds described in "Use of Proceeds" represents
the Company's best estimate of its allocation based upon the current state of
its business, operations and plans, current business conditions and the
Company's evaluation of its industry. Future events, including problems,
delays, expenses and complications which may be encountered, changes in
economic or competitive conditions and the result of the Company's sales and
marketing activities may make shifts in the allocation of funds necessarily
desirable. Management of the Company will have broad discretion in the
application of substantially all of such proceeds. See "USE OF PROCEEDS."
11. COMPETITION. The mail order catalog business is highly competitive.
The Company's catalogs compete with other mail order catalogs and retail
stores, including department stores, specialty stores, discount stores and mass
merchants. Many of the Company's competitors have greater financial,
distribution and marketing resources than the Company. There can be no
assurance that the Company will be able to compete effectively with existing or
potential competitors. See "BUSINESS--Competition."
Upon its introduction of Jeannie's Kids Club Catalog in July, 1995, the
Company experienced a competitive reaction which resulted in three other
children's catalogs refusing to exchange with, or rent their mailing lists to,
the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION." There can be no assurance that such a competitive
reaction will not occur with respect to children's catalogs from which The
Natural Baby Catalog rents mailing lists, or that such an occurrence would not
have an adverse effect upon the profitability of The Natural Baby Catalog.
12. DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The
success of the Company is highly dependent upon the continued services of
William L. Miller, the Company's Chairman of the Board and Chief Executive
Officer, and Jeanne E. Miller, the Company's Executive Vice President. Mr.
Miller, one of the co-founders of the Company's parent, is principally
responsible
9
<PAGE>
for the strategic planning and development of the Company. Mr. Miller, however,
will not be required to devote his full time attention to managing the affairs
of the Company. See "RISK FACTORS--The Company's Chief Executive Officer Will
Not Be Required to Work Full Time; Potential Conflict of Interest." Mrs.
Miller, the other co-founder of the Company's parent, is primarily responsible
for the merchandise selection, design and production of the catalog. Both Mr.
and Mrs. Miller have entered into a five-year employment agreement with the
Company. However, if the employment by the Company of either Mr. or Mrs. Miller
is either terminated or not renewed, or if either of them is unable to perform
his or her duties, there could be a material adverse effect upon the business
of the Company until a suitable replacement was found. The Company will attempt
to obtain a $1 million key man life insurance policy on each of Mr. and Mrs.
Miller, who are husband and wife. See "MANAGEMENT."
The Natural Baby Catalog was founded by Jane Martin and reflects her
beliefs and philosophy. Mrs. Martin will continue to be primarily responsible
for the merchandise selection, design and production of The Natural Baby
Catalog pursuant to a two year consulting agreement with the Company. If her
consulting engagement with the Company is either terminated or not renewed, or
if she is unable to perform her duties, there could be a material adverse
effect upon the business of the Company until a suitable replacement was found.
See "MANAGEMENT--Employment Agreements."
The success of the Company's future growth and profitability will depend,
in part, on the Company's ability to recruit and retain additional qualified
personnel over time, including a suitable candidate to succeed Mr. Miller, who
is 60 years of age, as Chief Executive Officer. There can be no assurance,
however, that the Company will be able to retain such additional qualified
personnel, once recruited, or recruit other qualified personnel.
13. LACK OF INDEPENDENT APPRAISER. The Company did not engage an
independent appraiser in connection with its intended acquisition of The
Natural Baby Catalog. Since independent valuations of such business was not
conducted, the Company may pay upon the closing of the acquisition of The
Natural Baby Catalog a purchase price in excess of its fair value. See "CERTAIN
TRANSACTIONS--Acquisition of The Natural Baby Catalog."
14. POTENTIAL PRODUCT LIABILITY. While the Company endeavors to sell safe
products, there is a possibility that someone could claim personal injury or
property damage resulting from the use of products purchased from the Company.
Although the Company does not manufacture its products, as a seller of
products, the Company is exposed to potential liability. Since 1990, the
Company's parent, Duncan Hill, has maintained, for itself and its subsidiaries,
product liability insurance. Currently, the amount of coverage is $1 million
per occurrence, $2 million in the aggregate and an umbrella with identical
limits of coverage. The Company intends to attempt to procure the same
coverages in its name, alone, after the completion of this Offering. Although
the Company believes that its present insurance coverage is sufficient for its
current level of business operations, there is no assurance that such insurance
will be sufficient to cover potential claims, or that adequate, affordable
insurance coverage will be available to the Company in the future. A partially
or completely uninsured successful claim against the Company or a successful
claim in excess of the liability limits or relating to an injury excluded under
the policy could have a material adverse effect on the Company. See
"BUSINESS--Product Liability Insurance."
15. THE COMPANY'S CHIEF EXECUTIVE OFFICER WILL NOT BE REQUIRED TO WORK
FULL TIME; POTENTIAL CONFLICT OF INTEREST. William L. Miller, is a co-founder
of the Company's parent, Duncan Hill, which has other operating subsidiaries.
See "THE COMPANY AND ITS PARENT." Mr. Miller is currently the President of
Duncan and its other subsidiaries, as well as Chairman of the Board of
Directors and Chief Executive Officer of the Company. Mr. Miller's employment
agreement with the Company provides that he shall be permitted to devote such
time to managing the various other Duncan Hill entities as he deems
appropriate. Accordingly, Mr. Miller will not be devoting his full-time
attention to managing the operations of the Company Thus, a conflict of
interest could potentially develop to the extent that Mr. Miller is not able to
devote his full time attention to a matter that would otherwise require the
full time attention of a business' chief executive officer. Because the
businesses of Duncan Hill's other
10
<PAGE>
subsidiaries in no way relate to the children's catalog business of the
Company, the Company does not believe that there is a reasonable potential for
any other type of conflicts of interest, such as competition for business
opportunities. Thus the Company and Duncan Hill have not adopted any procedure
for dealing with conflicts of interest. See "MANAGEMENT--Employment
Agreements."
16. LIMITED NUMBER OF MANAGEMENT PERSONNEL. There are currently only two
executive officers of the Company, who are husband and wife. In addition, one
of those two officers, the Chief Executive Officer, will not be devoting his
full time attention to the management of the Company. Thus, following this
Offering, there can be no assurance that, if the Company grows, the current
management team will be able to continue to properly manage the Company's
affairs. Further, there can be no assurance that the Company will be able to
identify additional qualified managers on terms economically feasible to the
Company.
17. POTENTIAL ADVERSE EFFECT OF THE SEVERANCE COMPENSATION APPLICABLE TO
THE COMPANY'S TWO EXECUTIVE OFFICERS. Each of the employment agreements for the
Company's two executive officers provides for severance compensation to be paid
to them in all instances other than the executive's termination for cause. The
minimum amount of such severance will be equal to the sum of the executive's
salary and bonus paid in the year preceding the year when such severance is to
be paid ("base severance"). The maximum amount of such severance is equal to
the base severance multiplied by 2.99. See "MANAGEMENT--Employment Agreements."
The payment of any severance compensation under any of the two employment
agreements within the foreseeable future would likely have a materially adverse
impact upon the Company. Assuming that severance payments were due to each of
the executive officers as of the date of the Prospectus under the immediately
preceding sentence, the amount of the severance payment to each of Mr. Miller
and Mrs. Miller would be $299,000 and $194,350, respectively. There can be no
assurance that the payment of any such severance compensation at any time in
the future would not have a materially adverse impact upon the Company.
18. CONTROL BY PARENT AND PARENT'S CONTROLLING STOCKHOLDERS. Upon
completion of this Offering, Duncan Hill, the Company's parent, will own
approximately 68% of the Company's outstanding Common Stock and 100% of the
Company's outstanding Series A Preferred Stock (5,000,000 shares) which has the
same voting privileges as the Common Stock. Accordingly, while the new
investors in this Offering will have provided approximately 91% of the total
consideration paid for the Company's outstanding Common Stock, they will only
own approximately 7% of the Company's outstanding voting capital stock. Duncan
Hill, on the other hand, will own approximately 87% of the Company's
outstanding voting capital stock for which Duncan Hill will have provided
approximately 8% of the total consideration paid for the Company's outstanding
Common Stock. As a result, Duncan Hill will remain in a position to effectively
elect all of the directors of the Company and control its affairs and policies.
William L. Miller and Jeanne E. Miller, his wife, the Company's respective
Chief Executive Officer and Executive Vice President, each respectively own
53.9% and 9.7% of the shares of the outstanding common stock of Duncan Hill,
and thus are in a position to exercise effective control over the affairs of
the Company through their effective control over the affairs of Duncan Hill.
See "PRINCIPAL SHAREHOLDERS." Ultimate voting control by the Millers may
discourage certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the public
holders of the Common Stock might receive a premium for their shares over
prevailing market prices.
19. THE BOARD OF DIRECTORS CONSISTS OF ONE OUTSIDE DIRECTOR. The Board of
Directors consists of three members, two of whom (William L. Miller and Jeanne
E. Miller) are insiders and principal stockholders. Mr. and Mrs. Miller are
also husband and wife. Accordingly, such individuals will be in a position to
control the actions and decisions of the Board of Directors.
20. LIMITATION ON DIRECTOR LIABILITY. As permitted by Delaware law, the
Company's certificate of incorporation limits the liability of directors of the
Company from monetary damages from a breach of a director's fiduciary duty
except for liability in certain instances. As a result of the Company's charter
provision and Delaware law, stockholders may have limited rights to recover
against directors for breach of fiduciary duty. See "MANAGEMENT--Limitation of
Liability and Indemnification Matters."
11
<PAGE>
21. DATA PROCESSING AND/OR TELEPHONE SYSTEMS MAY ADVERSELY EFFECT THE
COMPANY'S BUSINESS. The Company's ability to effectively promote products,
manage inventory, efficiently purchase, sell and ship products, and maintain
cost-effective operations are each dependent upon the accuracy, capability and
proper utilization of the Company's data processing and telephone systems. The
Company will need to enhance the capacity and capabilities of these systems
from time to time to support its anticipated growth and remain competitive,
commencing with the intended replacement of the Company's current computer
hardware and system software. The Company's telemarketing, customer service and
management information systems functions are housed in a single facility
located at its headquarters. The Company has a disaster recovery program
through its computer and telephone systems vendors. The Company also creates a
back-up tape for off-site storage of its customer list and computer
information. However, a significant disruption or loss affecting the telephone
or computer systems or any significant damage to the Company's headquarters
could have a material adverse effect on the Company's business. See
"BUSINESS--Data Processing."
23. NEED TO KEEP CURRENT WITH TECHNOLOGICAL CHANGES. The direct marketing
industry may be affected by ongoing technological developments in distribution
and marketing methods such as on-line catalogs and Internet shopping. As a
result, the Company's future success will depend on its ability to keep pace
with technological developments and respond to new customer requirements. There
can be no assurance that the Company's current marketing methods will remain
competitive in light of future technological innovations.
23. ANTI-TAKEOVER MEASURES. The Company is subject to a Delaware statute
regulating business combinations that may serve to hinder or delay a change in
control of the Company, in addition to those matters relating to control of the
Company discussed immediately, above. Also, pursuant to the Company's
certificate of incorporation, the Company's Board of Directors may from time to
time authorize the issuance of up to an additional 5,000,000 shares preferred
stock in one or more series having such preferences, rights and other
provisions as the Board of Directors may decide. Any such issuances of
preferred stock could, under certain circumstances, have the effect of delaying
or preventing a change in control of the Company and may adversely affect the
rights of the holders of the Company's Common Stock and the market for those
shares. There are no other provisions, however, in the Company's certificate of
incorporation or bylaws which would serve to delay, defer, or prevent a
takeover of the Company.
24. NO CASH DIVIDENDS. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company intends to retain future earnings, if any, to finance its
growth. See "DIVIDEND POLICY."
25. POSSIBLE CHANGE OF STATE SALES TAX LAWS. Under current law, catalog
retailers are permitted to make sales in states where they do not have a
physical presence (e.g. offices) without collecting sales tax. Congress,
however, has the power to change these laws. Since 1987, legislation has been
introduced periodically in the U.S. Congress which would permit states to
require sales tax collection by mail order companies. To date, this proposed
legislation has not been passed. Should Congress, however, pass such
legislation in the future, most states could be expected to require sales tax
collection by out-of-state mail order companies. This would increase the cost
of purchasing the Company's products in those states and eliminate whatever
competitive advantage that the Company may currently enjoy with respect to
in-state competitors in terms of sales taxation, as well as increasing the
administrative and overhead costs to the company in connection with the
collection of such sales tax.
26. ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public
offering price of $12 per Unit (or $6.00 for each of the two shares of Common
Stock comprising a $12 Unit assuming no value is attributable to the Warrants
included in a Unit), as well as the exercise price and other terms of the
Warrants have been arbitrarily determined by the Company and the Underwriters
and do not necessarily bear any relationship to the assets, book value or net
worth of the Company or any other recognized criteria of value. Accordingly,
such prices should not be considered an indication of the Company's actual
value. See "UNDERWRITING." In that regard, prior to this Offering, the Company
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<PAGE>
issued a total of 3.7 million shares of its Common Stock at a value of $.125
per share. In June, 1997, the Company repurchased 857,144 of those shares at a
purchase price of $.125 per share. See "CERTAIN TRANSACTIONS--Rule 504 Shares."
27. NO PRIOR PUBLIC MARKET; MARKET VOLATILITY. Prior to this Offering,
there has been no public market for the Company's Units, Common Stock or
Warrants. There is no assurance that following the Offering an active public
trading market will develop or be sustained or that the Units, Common Stock or
Warrants will be resold at or above the initial public offering price.
Additionally, the market price of the Company's securities may trade below the
initial public offering price in response to changes in the general condition
of the economy or the retail and catalog business, as a whole, as well as the
Company's periodic financial results which may fluctuate quarterly as a result
of several factors, including the timing of catalog mailings and changes in the
selection of merchandise offered and sold.
28. CERTAIN IMPLICATIONS OF TRADING OVER-THE-COUNTER; "PENNY STOCK"
REGULATIONS. The Company expects to receive approval for the quotation of its
Units, Common Stock and Warrants over-the-counter on the NASD OTC Electronic
Bulletin Board. An investor may find it more difficult to dispose of, or to
obtain quotations as to the price of, the Company's securities trading
over-the-counter than had the Company sought approval for its securities to be
listed for quotation on a national securities exchange, such as the Nasdaq
SmallCap market. The Company did not apply for listing on the Nasdaq SmallCap
market because of the Representative's belief that the Company would not meet
the listing requirements.
The Securities and Exchange Commission has adopted "penny stock"
regulations which applies to securities traded over-the-counter. These
regulations generally define "penny stock" to be any equity security that has a
market price of less than $5.00 per share or a warrant that has an exercise
price of less than $5.00 per share. Subject to certain limited exceptions, the
rules for any transaction involving a "penny stock" require the delivery, prior
to the transaction, of a risk disclosure document prepared by the Commission
that contains certain information describing the nature and level of risk
associated with investments in the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
account statements must be sent by the broker-dealer disclosing the estimated
market value of each penny stock held in the account or indicating that the
estimated market value cannot be determined because of the unavailability of
firm quotes. In addition, the rules impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and institutional accredited investors (generally
institutions with assets in excess of $5,000,000). These practices require
that, prior to the purchase, the broker-dealer determined that transactions in
penny stocks were suitable for the purchaser and obtained the purchaser's
written consent to the transaction. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in the Offering to sell the Company's
securities in the secondary market.
29. UNDERWRITERS' INFLUENCE ON THE MARKET; RESTRICTIONS ON MARKET MAKING
ACTIVITIES DURING WARRANT SOLICITATION. The Underwriters intend to make a
market in the Company's Units, Common Stock and Warrants following this
Offering, although it is not obligated to do so. The Representative has advised
the Company that it anticipates that other securities dealers also will make a
market in the Company's securities, although no assurance can be given that
this will be the case. To the extent that the Underwriters act as market maker
in the Company's securities there may be dominating influences in that market.
The price and liquidity of the securities may be affected by the degree, if
any, of the Underwriters' participation in the market, because a significant
portion of those securities may be sold to customers of the Underwriters. Such
customers may subsequently engage in transactions for the sale or purchase of
the Company's securities through or with the Underwriters. In the event that
market making activities are commenced by the Underwriters, there is no
obligation for them to continue those activities.
The Underwriters' Representative, VTR Capital, Inc. (the "Representative")
has the right to act as the Company's sole agent in connection with any future
solicitation of warrantholders to exercise their
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<PAGE>
Warrants. Unless granted an exemption by the Securities and Exchange Commission
from Regulation M (formerly Rule 10b-6) promulgated under the Securities
Exchange Act of 1934, as amended, the Representative will be prohibited from
engaging in any market-making activities with regard to the Company's
securities until the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Representative
may have to receive a fee for soliciting the exercise of the Warrants. Such
limitation could impair the liquidity and market prices of the Common Stock and
Warrants. See "UNDERWRITING."
30. LIMITS ON SECONDARY TRADING. The Company will make application to
register or has or will seek to obtain an exception from registration to offer
the Units and intends to conduct its selling efforts in Colorado, Connecticut,
Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana,
Maryland, New York, Rhode Island, Utah and Virginia (the "Primary Distribution
States"). Purchasers of the Units in this Offering must be residents of such
jurisdictions. In addition, the Units, Common Stock and Warrants will be
immediately eligible for resale in the secondary market in each of the Primary
Distribution States and in Pennsylvania. Purchasers of any of these securities
in any secondary trading market which may develop must be residents of such
jurisdictions. Several additional states will permit secondary market sales of
these securities (i) once or after certain financial and other information with
respect to the Company is published in a recognized securities manual such as
Standard & Poor's Corporation Records; (ii) after a certain period has elapsed
from the date hereof; or (iii) pursuant to exemptions applicable to certain
institutional investors. The Company intends to apply for listing in a
recognized securities manual on or about the date of this Prospectus. Purchasers
in this Offering and future purchasers of the Company's securities in the
secondary market may be restricted or prohibited from re-selling the securities
in particular states as a result of applicable blue sky laws. These restrictions
may reduce the liquidity of the securities and including their market price.
31. UNDERWRITERS' PURCHASE OPTION. In connection with this Offering, the
Company will sell the Underwriters an option to purchase an aggregate of up to
60,000 shares of Common Stock (the "Underwriters' Purchase Option"). The
Underwriters' Purchase Option will be exercisable commencing one year from the
date of this Prospectus and for four years thereafter at an exercise price of
$9.90 per share. For the life of the Underwriters' Purchase Option, the holders
thereof will have the opportunity to profit from a rise in the market price of
the Common Stock without assuming the risk of ownership. The Company may find
it more difficult to raise additional capital if it should be needed for the
business of the Company while the Underwriters' Purchase Option is outstanding.
At any time when the holders thereof might be expected to exercise them, the
Company would probably be able to obtain additional capital on terms more
favorable than those provided by the Underwriters' Purchase Option. See
"UNDERWRITING."
The Company has also agreed to register the Underwriters' Purchase Option
and/or the underlying securities covered thereunder in any future registration
statement that the Company may file during the life of the Underwriters'
Purchase Option. This obligation could interfere with the Company's ability to
obtain financing under any future registration statement filing. See
"UNDERWRITING."
32. POTENTIAL ADVERSE EFFECT OF REDEMPTION OR EXERCISE OF WARRANTS. The
Warrants may be redeemed by the Company under certain circumstances. Should the
Company provide a notice of redemption of the Warrants, the holders thereof
would be forced to either exercise the Warrants at a time when it may be
disadvantageous for them to do so, sell the Warrants at the then current market
price, or accept the redemption price, which will likely be substantially less
than the market value of the Warrants. In addition, the exercise of the
Warrants, may have an adverse effect on the market price of the Company's
securities should a public trading market develop. Also, while the Warrants are
outstanding, the Company may find it more difficult to raise additional capital
upon favorable terms because of the potential for the exercise of the Warrants
to be dilutive to future investors. See "DESCRIPTION OF SECURITIES--Warrants."
33. UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FOR FUTURE SALE. In
connection with obtaining equity bridge financing, the Company has outstanding
442,856 shares of Common Stock under Rule 504
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(the "Rule 504 Shares") of the Securities Act of 1933, as amended (the "1933
Act"). 100,000 of the Rule 504 Shares are subject to "lock-up" by the
Representative and cannot be sold or transferred within 24 months of the date
of the Prospectus, unless otherwise permitted by the Representative, at which
time these shares will be freely tradeable without any necessity for their
registration under the 1933 Act. The balance of the Rule 504 Shares, I.E.,
342,856 shares, are not subject to a Representative's "lock-up" and are freely
tradeable without any necessity for their registration under the 1933 Act. The
sale of the Rule 504 Shares by each of the holders thereof may be effected in
one or more transactions that may take place over-the-counter, including
ordinary broker's transactions, previously negotiated transactions or through
sales to one or more dealers for resale of such shares as principals at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Rule 504
Stockholders in connection with sales of such securities. The holders of the
Rule 504 Shares have paid significantly less for their shares of Common Stock
($.125 per share) than the offering price of each of the two shares of Common
Stock comprising a $12 Unit and may elect to sell their Rule 504 Stock at
prices below the market value of the Common Stock on the date of sale. Such
sales (or the potential therefor) may have an adverse effect on the market
price of the Company's securities.
In addition, the Company's parent, Duncan Hill, holds 2,400,000
unregistered shares of the Company's Common Stock and 5,000,000 unregistered
shares of the Company's Series A Preferred Stock (collectively the "Restricted
Securities"). Upon the completion of the Offering, the Company will issue
70,000 unregistered shares of Common Stock to the seller of The Natural Baby
Catalog. These shares of Common and Preferred Stock held by Duncan Hill, and
the shares of Common Stock to be issued to the seller of The Natural Baby
Catalog, are "restricted securities" as that term is defined by Rule 144 of the
1933 Act, and may only be sold in compliance with the provision of Rule 144
unless otherwise registered by the Company. Furthermore, Duncan Hill has agreed
with the Representative not to sell or transfer the Restricted Securities
within 24 months of the date of this Prospectus unless earlier permitted by the
Representative. There are no agreements, arrangements or understandings with
any of the Company's Securityholders with respect to the early release of the
lock up. In previous offerings, the Representative has released the lock-up
prior to the end of the lock-up period. In making its decision to release the
lock-up, the Representative evaluates the totality of the facts and
circumstances that exist at the time the decision is made, including, without
limitation, market demand for the securities and trading volume. The possible or
actual future sales of the Restricted Securities under Rule 144 may have an
adverse effect on the market price of the Company's Common Stock should a public
trading market develop for such shares. See "SHARES ELIGIBLE FOR FUTURE SALE."
34. CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO
EXERCISE WARRANTS. The Company will be able to issue shares of its Common
Stock upon exercise of the Warrants only if there is then a current prospectus
relating to the shares of Common Stock issuable upon the exercise of the
Warrants under an effective registration statement filed with the Securities
and Exchange Commission, and only if such shares of Common Stock are qualified
for sale or exempt from qualification under applicable state securities laws of
the jurisdiction in which the various holders of the Warrants reside. Although
the Company has agreed to use its best efforts to meet such regulatory
requirements, there can be no assurance that the Company will be able to do so.
The Warrants may be deprived of any value if a prospectus covering the shares
of Common Stock issuable upon their exercise is not kept effective or replaced
or if such shares of Common Stock are not or cannot be qualified or exempt from
qualification in the jurisdictions in which the holders of the Warrants reside.
See "DESCRIPTION OF SECURITIES--Warrants." As of the date of this Prospectus,
the Company anticipates that its securities will be qualified for sale or
exempt from qualification only in a limited number of states. See "RISK
FACTORS--Limits on Secondary Trading."
35. INEXPERIENCE OF REPRESENTATIVE. This is the tenth public offering
underwritten by VTR Capital, Inc. There can be no assurance that the
Representative's limited experience as an underwriter of public offerings will
not adversely affect the proposed public offering of the Company's securities.
Therefore, purchasers of the securities offered hereby may suffer a lack of
liquidity in their investment or a material diminution of the value of their
investment.
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<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the 300,000 Units offered
by the Company (after deducting underwriting discounts, a 3% non-accountable
expense allowance and other estimated offering expenses) will be approximately
$2,670,093. The Company intends to use the net proceeds of this Offering
approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
--------------- ---------------
<S> <C> <C>
Acquisition of The Natural Baby Catalog(1) ........................... $1,462,451 54%
Accounts Payable(2) ................................................ 532,000 20%
Repayment of Indebtedness(3) ....................................... 414,773 16%
Consolidation of the Operations of The Natural Baby Catalog(4) ...... 100,000 4%
Working Capital(5) ................................................... 160,869 6%
----------- -----
TOTAL ............................................................ $2,670,093 100%
=========== =====
</TABLE>
- ----------------
(1) Represents the remaining cash portion of the purchase price in the amount of
$1,225,000 to be paid to the Seller of The Natural Baby Catalog, I.E., The
Natural Baby Company, Inc. (the "Seller"), a cash payment in the amount of
$212,451 in payment of a note owed by the Seller and the repayment to Duncan
Hill of a down payment on the purchase price in the amount of $25,000 made
by Duncan Hill to the Seller. In addition to the cash payment referenced
above, the Company will: issue to the Seller a Promissory Note in the amount
of $250,000 convertible at any time at the election of the holder into
unregistered shares of the Company's Common Stock at a conversion rate of
$5.00 per share; assume the obligation to pay certain liabilities of the
Seller, which is approximately $320,000 as of March 31, 1997; issue to the
Seller a second promissory note in an amount which reflects the pre-tax
profits of the Seller in excess of $300,000 from the date of the completion
of the acquisition through December 31, 1997; and issue to the Seller 70,000
shares of the Company's unregistered Common Stock. The purchase price of The
Natural Baby Catalog is subject to adjustment. See "CERTAIN TRANSACTIONS-
Acquisition of The Natural Baby Catalog."
(2) Includes the payment of $89,000 owed to all suppliers of merchandise
purchased by the Company, which is overdue at March 31, 1997 based upon the
Company's 45 days sales, as well as an additional $26,000 to be paid to
other creditors in the Company's discretion. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION-Liquidity and
Capital Resources." Also includes the payment of approximately $85,000 in
professional fees incurred in connection with: the reorganization involving
the Company, its parent and Perfectly Safe, Inc.; and, the Company's
intended acquisition of The Natural Baby Catalog. Also includes the payment
of $332,000 to the printer of the Company's catalogs, which will reduce the
balance outstanding owed to the printer to $175,000. The Company intends to
pay the $175,000 balance within sixty days of the date of the Prospectus
from cash flow and/or working capital.
(3) Includes the repayment of a Bridge Loan in the aggregate principal amount of
$200,000, which bears interest at the rate of 8% per annum and is payable
upon the earlier of October 16, 1996 and the closing of the Offering. Also
includes the payment of accrued interest on the Bridge Loan through June 30,
1997 in the amount of $11,422. See "CERTAIN TRANSACTIONS-Bridge Loan." Also
includes the payment of the first installment payment due June 30, 1997 to
the Company's parent, Duncan Hill, in the amount of $96,207, of which
$66,858 constitutes the repayment of principal and $29,349 constitutes
accrued interest through June 30, 1997. See "THE COMPANY AND ITS PARENT-The
Reorganization." Also includes the payment of notes payable incurred in
connection with the Company's repurchase of 857,144 shares of Common Stock
from certain private investors. See "CERTAIN TRANSACTIONS-Rule 504 Shares."
(4) Estimated costs associated with the consolidation of the warehouse,
telemarketing and data processing functions of The Natural Baby Catalog into
the operations of the Company. See "CERTAIN TRANSACTIONS-Acquisition of The
Natural Baby Catalog."
(5) The Company intends to use such funds, as well as the consolidation savings
anticipated from the consolidation of the operations of The Natural Baby
Catalog, for general working capital purposes. In that regard, the Company
intends to replace its outdated data processing system hardware and upgrade
its current software at an annualized cost of approximately $75,000 per
year, on a leased basis. Lease payments will be made monthly and paid for
from the Company's cash flow or working capital. The Company also
anticipates spending no more than $10,000 to develop new statistical
modeling software, which will be paid for by the Company's cash flow or
working capital. The Company also intends to spend up to $150,000 per year
to develop new customer acquisition and other marketing programs. See
"BUSINESS-Strategies." In the event that the Company is unable to achieve
the anticipated consolidation savings from the consolidation of the
operation of The Natural Baby Catalog on a timely basis, the Company may
need additional financing within twelve months from the date of the
Prospectus. See "RISK FACTORS-Possible Lack of Savings from the Integration
and Consolidation of The Natural Baby Catalog Business; Adequacy of
Financing." There is no assurance that the Company will be able to obtain
additional financing, if needed, on terms favorable to the Company or at
all.
16
<PAGE>
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion. Although
the Company does not intend to utilize any portion of the proceeds for payment
of officers' salaries, it is possible that portions of working capital may be
utilized for that purpose dependent upon revenues.
To the extent that the Company's expenditures are less than projected, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions, although there can be no assurance that such additional financing,
if available, will be on terms acceptable to the Company. See "RISK
FACTORS-Dependence on Offering Proceeds to Pay Trade Creditors and to Acquire
The Natural Baby Catalog Business." The net proceeds of this Offering which are
not expended immediately may be deposited in interest-bearing accounts or
invested in government obligations or certificates of deposit.
DIVIDEND POLICY
The Company currently intends to retain any earnings to finance the
development and expansion of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends by the Company are subject to the discretion of the Board of
Directors of the Company. Any future determination to pay dividends will depend
on the Company's results of operations, financial condition, capital
requirements, contractual restrictions and other factors deemed relevant at the
time by the Board of Directors. The Company is not subject to any contractual
arrangements which restrict its ability to pay dividends.
17
<PAGE>
DILUTION
The adjusted net tangible book value of the Company as of March 31, 1997
was ($1,484,785) or ($0.51) per share of Common Stock, after giving effect to
the Company's repurchase of 857,144 shares of Common Stock from certain private
investors (see "CERTAIN TRANSACTIONS--Rule 504 Shares") and the issuance of
70,000 unregistered shares of Common Stock to the Seller of The Natural Baby
Catalog. Net tangible book value per share is determined by dividing the
tangible net worth of the Company (tangible assets less all liabilities) by the
total number of outstanding shares of Common Stock (2,912,856 shares as
adjusted as of March 31, 1997). (See "CERTAIN TRANSACTIONS--Acquisition of The
Natural Baby Catalog"). The Company's tangible assets consists of all of its
balance sheet assets less deferred catalog expense. After giving effect to the
sale by the Company of 300,000 Units and the receipt and the use of the net
proceeds therefrom (see "USE OF PROCEEDS"), the adjusted net tangible book value
of the Company as of March 31, 1997 would have been $(809,141) or $(0.23) per
share of Common Stock. This represents an immediate increase in the adjusted net
tangible book value of $0.28 per share of Common Stock to existing stockholders
and an immediate dilution (the difference between the price to the public per
share of Common Stock and the adjusted net tangible book value per share of
Common Stock after the Offering) in the adjusted tangible book value of $6.23
per share (104%) of Common Stock to new investors (assuming for this discussion
that each of the two shares of Common Stock comprising a $12.00 Unit is valued
at $6.00 per share, and no value is attributed to the Warrants included in a
Unit).
The following table illustrates this per share of Common Stock dilution:
<TABLE>
<S> <C> <C>
The initial price of a share of Common Stock paid by new investors ...... $ 6.00
Adjusted net tangible book value per share of Common Stock
before this Offering ................................................ $(.51)
Increase in adjusted net tangible book value per share of Common Stock
attributable to new investors ....................................... $ .28
-------
Adjusted net tangible book value per share of Common Stock
after this Offering ................................................... $ (0.23)
--------
Dilution in adjusted net tangible book value per share of Common Stock
to new investors ...................................................... $ 6.23
========
</TABLE>
The following table summarizes, as of the completion of this Offering, the
differences between existing stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company and the total and
average consideration paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 2,912,856 83% $ 355,427 9% $.122
New Investors(1) ............ 600,000 17% $3,600,000 91% $6.00
---------- ---- ----------- ----
Totals .................. 3,512,856 100% $3,955,427 100% $1.13
========== ==== =========== ====
</TABLE>
- ----------------
(1) Based upon the sale of 300,000 Units.
The foregoing discussions do not give effect to the issuance of any
additional shares of Common Stock upon the exercise of the Underwriters'
Purchase Option, the Warrants underlying the sale of 300,000 Units in this
Offering, the convertible note to be issued to the seller of The Natural Baby
Catalog and the 200,000 stock purchase options granted under two executive
employment agreements. If shares of Common Stock are issued by the Company
pursuant to any or all of the foregoing when the Company's net tangible book
value per share exceeds the applicable price, then the net tangible book value
per share of the then outstanding shares of Common Stock will be further
diluted.
18
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1997, (i) the actual
capitalization of the Company; (ii) the capitalization of the Company, as
adjusted to reflect the Company's repurchase of 857,144 shares of Common Stock
in June, 1997 (see "CERTAIN TRANSACTIONS--Rule 504 Shares"); and, (iii) the pro
forma capitalization of the Company, as adjusted to reflect the sale of 300,000
Units offered hereby, the receipt of the estimated net proceeds therefrom, and
the issuance of 70,000 unregistered shares of Common Stock to the seller of The
Natural Baby Catalog (see "CERTAIN TRANSACTIONS--Acquisition of The Natural Baby
Catalog"). The table below should be read in conjunction with the financial
statements of the Company and notes thereto included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------------
ACTUAL AS ADJUSTED PRO FORMA(1)
------------------ ---------------- ------------------
<S> <C> <C> <C>
Long Term Debt obligations, less current maturities ...... $ 300,000(2) $ 300,000 $ 550,000(3)
Stockholders' Equity:
Common Stock, $.001 par value, 5,000,000 shares
authorized, 3,700,000 shares issued and outstanding
actual; 2,842,856 issued and outstanding as adjusted;
and 3,512,856 issued and outstanding pro forma ......... 3,700 2,843 3,513
Series A Preferred Stock, $.001 par value, 10,000,000
shares authorized, 5,000,000 shares issued and
outstanding as adjusted ................................. 5,000 5,000 5,000
Additional Paid-in-capital .............................. 458,800 352,513 2,801,695
Retained Earnings (Accumulated Deficit) .................. (1,611,636) (1,611,636) (1,611,636)
------------- ------------ -------------
Total stockholders' equity (deficit) .................. (1,144,136) (1,251,280) 1,198,572
------------- ------------ -------------
Total Capitalization .................................... $ (844,136) $ (951,280) $ 1,748,572
============= ============ =============
</TABLE>
- ----------------
(1) Does not include: any Common Stock underlying either the Warrants included
in the Units, stock options granted under two executive employment
agreements, or the convertible note to be issued to the seller of the
Natural Baby Catalog.
(2) Includes the promissory note issued by the Company to its parent, Duncan
Hill, as part of the reorganization effective June 30, 1996 in the
principal amount of $366,858 less $66,858 of current maturities. See "THE
COMPANY AND ITS PARENT--The Reorganization."
(3) Includes the issuance of a $250,000 convertible promissory note to the
seller of The Natural Baby Catalog. See "CERTAIN TRANSACTIONS--Acqusition
of The Natural Baby Catalog."
19
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are the selected financial data of the Company for the
years ended December 31, 1995 and 1996 and as of and for the three month periods
ended March 31, 1997 and 1996. This selected financial data as of and for the
years ended December 31, 1996 and 1995 has been derived from the historical
financial statements of the Company, which include the financial statements of
its predecessor, Perfectly Safe, Inc., and which have been audited by Hausser +
Taylor, whose report with respect to such financial statements appears elsewhere
in the Prospectus. The selected financial data as of and for the three months
ended March 31, 1997 and 1996 have been derived from the unaudited books and
records of the Company and includes in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position and results of operations of the Company for such
periods. The results of operations for the three month periods are not
necessarily an indication of results for a full fiscal year. Also set forth
below are pro forma selected financial data for the year ended December 31, 1996
and as of and for the three month period ended March 31, 1997, which data has
been derived from the Company's pro forma combined financial statements
(unaudited), included elsewhere in the Prospectus. The pro forma combined
financial statements assume that the Company acquired The Natural Baby Catalog
at the beginning of the fiscal year ended December 31, 1996 for the unaudited
pro forma combined statements of operations and as of March 31, 1997 for the
unaudited pro forma combined balance sheet, and include, in the opinion of
management, all adjustments necessary to present fairly the combined results of
the operations of the Company and The Natural Baby Catalog for the periods
contained therein. The pro forma results of operations are not intended to be
indicative of the results which would have occurred on the dates indicated or
which may be realized in the future. The selected financial data should be read
in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" as well as the Company's historical financial
statements and the related notes thereto and the Company's pro forma combined
financial statements and the related notes thereto, included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
PRO FORMA(1)
1995 1996 1996
------------- ------------- ------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Sales ................................. $ 5,724,337 $ 6,638,995 $13,090,210
Cost of Sales .............................. 3,540,487 4,204,321 7,801,286
----------- ----------- -------------
Gross Profit .............................. 2,183,850 2,434,674 5,288,924
Selling Expenses ........................... 1,998,502 2,193,219 3,891,965
General and Administration Expenses ......... 730,950 768,580 1,370,357
----------- ----------- -------------
Income (Loss) from Operations ............ (545,602) (527,125) 26,602
Other Income (Expense) ..................... 8,610 5,485 10,407
----------- ----------- -------------
Net Income (Loss) ........................... $ (536,992) $ (521,640) $ 37,009
=========== =========== =============
Net Income (Loss) per common share ......... $ (0.15) $ (0.14) $ 0.01
Weighted average number of common
shares outstanding during the period .... 3,700,000 3,700,000 3,512,856(1)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
PRO FORMA
1996 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Sales ................................. $ 1,519,716 $ 1,465,541 $ 2,924,766
Cost of Sales .............................. 994,142 825,394 1,771,004
---------- ---------- -----------
Gross Profit .............................. 525,574 640,147 1,153,762
Selling Expenses ........................... 448,393 594,841 870,459
General and Administration Expenses ......... 170,414 189,443 284,570
---------- ---------- -----------
Income (Loss) from Operations ............ (93,233) (144,137) (1,267)
Other Income (Expense) ..................... (6,404) (14,819) (17,580)
---------- ---------- -----------
Net Income (Loss) ........................... $ (99,637) $ (158,956) $ (18,847)
========== ========== ===========
Net Income (Loss) per common share ......... $ (0.03) $ (0.04) $ (0.01)
Weighted average number of common
shares outstanding during the period .... 3,700,000 3,700,000 3,512,856
</TABLE>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------------------
ACTUAL PRO FORMA(2)
--------------- -------------
BALANCE SHEET DATA:
Total Assets ........................ $ 1,423,500 $3,526,760
Working Capital (deficit) ............ (962,401) 209,005
Total Liabilities .................. 2,567,636 2,328,188
Stockholder's Equity (deficit) ...... (1,144,136) 1,198,572
- ----------------
(1) Gives effect to the sale of 300,000 Units offered hereto. Also gives effect
to the Company's repurchase of 857,144 shares of Common Stock in June,
1997 from certain private investors. See "CERTAIN TRANSACTIONS--Rule 504
Shares." Also gives effect to the issuance of 70,000 unregistered shares
of Common Stock to the seller of The Natural Baby Catalog. See "CERTAIN
TRANSACTIONS--Acquisition of The Natural Baby Catalog."
(2) Gives effect to the sale of 300,000 Units offered hereby and the
application of the net proceeds therefrom in the amount of $2,670,093.
Also gives effect to the Company's repurchase of 857,144 shares of Common
Stock in June, 1997 from certain private investors. See "CERTAIN
TRANSACTIONS--Rule 504 Shares." Also gives effect to the issuance of
70,000 unregistered shares of Common Stock to the seller of The Natural
Baby Catalog. See "CERTAIN TRANSACTIONS--Acquisition of The Natural Baby
Catalog."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion should be read in conjunction with the information
contained in the financial statements of the Company and notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company acquired its first catalog, Perfectly Safe in January, 1990.
From that point on the Perfectly Safe Catalog has relied upon catalog
circulation to acquire new customers and to provide its revenue base. During the
year 1990 the Perfectly Safe Catalog generated $1,473,000 in net sales from
catalog circulation of approximately 900,000 catalogs. Catalog circulation was
increased each year through 1994, when the Company mailed 3.7 million catalogs
and generated $5.0 million in net sales.
During the first quarter of 1995 the Company created its Jeannie's Kids
Club's Catalog, which offers popular children's products at discounts of up to
60% of the price charged by other children's catalogs for the same product. To
make a purchase at the discounted price, the customer must become a member of
Jeannie's Kids Club which costs $18 per year. Subject to cancellation, expired
credit card or change of address, a renewal is automatically billed to a club
member's credit card prior to the membership's expiration. The Company believes
that its cost of generating a renewal is less than 10% of the renewal fee of $18
and thus will favorably impact the potential profitability of Jeannie's Kids
Club operation.
The first Jeannie's Kids Club Catalog was mailed in July, 1995. In its
first six months of operation (six months ended December 31, 1995), Jeannie's
Kids Club generated just over $1 million in net sales, or 18% of the Company's
net sales for the year 1995. The Perfectly Safe Catalog on the other hand,
experienced a reduction in sales from $5.0 million in 1994 to $4.7 million in
1995. The Company believes that the decrease in sales was attributable to a
competitive reaction caused by the introduction of Jeannie's Kids Club Catalog.
Prior to the introduction of Jeannie's Kids Club Catalog, the Company exchanged
mailing lists with three other children's catalogs, which provided approximately
17% of the catalog circulation and resulting sales for the Perfectly Safe
Catalog. When the Company introduced Jeannie's Kids Club Catalog, the three
children's catalogs referenced above refused to rent or exchange mailing lists
with the Company for competitive reasons, which reduced Perfectly Safe's Catalog
circulation and revenues in this segment of the business. Although the Company
uses statistical modeling and database techniques for identifying potential
customers, the business from these mailing lists cannot be replaced at past
levels of profitability. Accordingly, the Company decided to devote more of its
available resources to building the mailing list and membership base of
Jeannie's Kids Club Catalog, which the Company believes will be the more
profitable segment of its children's catalog business, and began to reduce the
catalog circulation of Perfectly Safe.
RESULT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.
Total net sales for the three months ended March 31, 1997 decreased
$54,175, or 3.5%, to $1,465,541, compared with $1,519,716 during the three
months ended March 31, 1996. Net sales include sales from merchandise, Jeannie's
Kids Club membership, shipping and handling charges, and mailing list rentals.
The net sales of Jeannie's Kids Club decreased from $873,517 for the first
quarter of 1996 to $757,533 for the same period in 1997. This decrease of 13% is
attributable to a 14% reduction in catalog circulation from 630,040 during the
first quarter of 1996 to 543,443 during the first quarter of 1997. This decrease
was partially offset by an increase in net sales of the Perfectly Safe Catalog,
which increased from $646,199 to $708,008 for the three months ended March 31,
1996 and 1997, respectively.
The Company's total catalog circulation was approximately 1,038,346 for the
three months ended March 31, 1997 compared with 956,386 for the three months
ended March 31, 1996. This overall
21
<PAGE>
increase was due to the circulation of the Perfectly Safe Catalog, which
increased from 326,046 for the first quarter of 1996 to 494,903 for first
quarter of 1997. This increase was partially offset by Jeannie's Kids Club
Catalog, which decreased catalog circulation from 630,040 for the three months
ended March 31, 1996, to 543,443 for the three months ended March 31, 1997. The
Company elected to reduce its overall catalog circulation, and use its available
resources for the testing of new Jeannie's Kids Club rental mail lists. In the
first quarter of 1997, Jeannie's Kids Club tested 203,726 catalogs, 37.4% of
total circulation, compared with 97,729 catalogs, 15.5% of total circulation,
during the same period in 1996. Because testing activity is generally less
profitable than other mailings, gross revenue per catalog mailed during the
three months ended March 31, 1997 decreased 18.2% to $1.48 per book versus $1.81
for the same period of 1996.
At March 31, 1997, the Company had 178,787 total households available for
purposes of list rental to other non-competitive catalogs. Total households are
defined as those households purchasing from the Company in the past 24 months,
and rental selections may be made on the basis of 24, 12, 6, or three month
recency of purchase. List rental rates charged by the Company are $85.00 per
thousand households for 24 months buyers, and increase to $100.00 per thousand
households for three month "hotline" buyers. The Company pays a 30% brokerage
commission on published rates. For the three months ended March 31, 1997 and
1996, the net list rental income was $13,804 and $5,658 respectively. The
increase in revenue is attributed to the change in list brokerage firms in the
second half of 1996.
Cost of sales, as a percentage of net sales, decreased from 65.4% for the
three months ended March 31, 1996 to 56.3% for the three months ended March 31,
1997. Cost of sales consists of cost of merchandise and fulfillment. The
decrease in cost was primarily due to decreased costs of merchandise, which fell
from 46.2% of net sales for the three months ended March 31, 1996, to 38.5% of
net sales for the same period in 1997. This decrease is a result of a change in
pricing strategy adopted in the second half of 1996 for Jeannie's Kids Club
Catalog. As a result, merchandise costs, as a percentage of net sales, decreased
from 52.5% to 42.2% for the three months ended March 31, 1996 and 1997,
respectively. The Company determined that, while Jeannie's Kids Club members
receive savings of up to 60% on certain purchases, other selected products can
be offered with more aggressive product pricing.
Selling expenses, consisting of advertising and other marketing related
expenses, increased as a percentage of net sales, from 29.5% for the three
months ended March 31, 1996, to 40.6% during the same period in 1997. This was
due primarily to Jeannie's Kids Club Catalog, which experienced an increase in
advertising expense, as a percentage of net sales, from 24.5% to 46.0% for the
three months ended March 31, 1996 and 1997, respectively. Advertising expenses
consist of the cost of producing the catalogs, postage, mailing preparation and
outside mailing lists rented by the Company. During the three months ended March
31, 1997, the Kids Club catalog tested 203,726 catalog mailings, or 37.4% of its
overall circulation; in the three months ended March 31, 1996, the Company
tested 97,729 catalog mailings, or 15.5% of its total circulation. While the
Company believes in testing mailing lists for its future use, advertising costs
in the current period are adversely affected because not all mail lists for its
future use, advertising costs in the current period are adversely affected
because not all mail list tests are successful. During the period ended March
31, 1997 the Company tested 41 mailing lists for Kids Club, and believes that
10% to 15% will ultimately be approved for future use.
The Company believes that its general and administrative expenses are high,
relative to its revenue base. General and administrative expenses were $189,443,
or 12.9% of net sales, for the three months ended March 31, 1997, and $170,414,
or 11.2% of net sales, for the same period of 1996. This increase is
attributable to increased wages due to additional staffing, increased accounting
fees and additional travel expense. The Company believes that its general and
administrative functions will become more efficient and cost effective upon
absorbing the revenue base of The Natural Baby Catalog, which the Company
believes can be accomplished with significantly less than proportionate
increases in general and administrative expenses. General and administrative
expenses for the year ended December 31, 1995 and for the six month period ended
June 30, 1996 were incurred by the Company's parent, Duncan Hill, and allocated
to the Company consistent with past practices, under which Duncan Hill allocated
its general and administrative expenses to its operating subsidiaries on a pro
rata basis determined by the percentage of total assets of the various operating
subsidiaries, exclusive of the assets of Duncan Hill.
22
<PAGE>
See "THE COMPANY AND ITS PARENT." As a result of the reorganization in which the
Company succeeded to the operations of Perfectly Safe, Inc., the Company began
to handle certain of its own administrative functions, directly, effective June
30, 1996. See "THE COMPANY AND ITS PARENT." In 1995 and for the first six months
of 1996 the Company's allocation was 69% of Duncan Hill's total general and
administrative expense.
Net losses for the three months ended March 31, 1997 were $158,956, or
10.8% of net sales, compared with net losses of $99,637, or 6.6% of net sales
for the same period of 1996. The Company attributes this decrease to the
decrease in revenues, increased selling expenses, and increases in general and
administrative expenses. The Company believes that in order to achieve
profitability with respect to its two current catalogs, it must expand its
revenue base, and increase the membership of Jeannie's Kids Club to a
sustainable level of 45,000 members. Currently, there are approximately 35,000
members.
Deferred catalog expense at March 31, 1997 was $340,649 compared to
$277,469 at December 31, 1996. Deferred catalog expenses are costs of catalogs
mailed to customers that are deferred and amortized over periods ranging from
four to six months. This increase in deferred expense is attributable to the
timing of mailings and an increase in the Company's catalog circulation.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
Total net sales for the year ended December 31, 1996 increased $914,356, or
16%, to $6,638,995, compared with $5,724,337 during the year 1995. Net sales
include sales from merchandise, Jeannie's Kids Club membership, shipping and
handling charges, and mailing list rentals. The net sales of Jeannie's Kids Club
increased from $1,033,806 in 1995 to $3,921,939 in 1996. That increase in net
sales of Jeannie's Kids Club in 1996 was partially offset by a decrease in sales
of the Perfectly Safe Catalog, which declined $1,973,476 or 42.1%, to
$2,717,056, compared with $4,690,532 in 1995.
The Company's total catalog circulation was approximately 3.8 million in
each of 1995 and 1996. The Company introduced Jeannie's Kids Club Catalog in
July 1995 and mailed 708,804 catalogs in the second half of 1995 and 2,372,891
catalogs in 1996, which accounted for 18% and 59.8% of its total catalog
mailings in 1995 and 1996, respectively. The Company reduced the circulation of
its Perfectly Safe Catalog 51.2% from 3.2 million in 1995 to 1.6 million in 1996
consistent with its plan to allocate more of its available resources to building
Jeannie's Kids Club, as discussed above. Gross revenue per catalog mailed in
1996 increased 11.9% to $1.79 per book, versus $1.60 for 1995. The Company
attributes the higher revenue per catalog mailed to the relatively higher
Jeannie's Kids Club average order and percentage response rates.
At December 31, 1996 the Company had 180,124 total households available for
purposes of list rental to other catalogs, which are non-competitive or compete
with the Company to a lesser extent. Total households are defined as those
households purchasing from the Company in the past 24 months, and rental
selections may be made on the basis of 24, 12, 6, or three month recency of
purchase. List rental rates charged by the Company are $85.00 per thousand
households for 24 months buyers, and increase to $100.00 per thousand households
for three month "hotline" buyers. The Company pays a 30% brokerage commission on
published rates. For the years ended December 31, 1996 and 1995, the net list
rental income was $79,240 and $84,093 respectively. The decrease in revenue of
5.8% is attributable to the Company changing list brokerage firms in 1996, with
a resulting 30 day period of inactivity during the cross over phase.
Cost of sales, as a percentage of net sales, was 63.3% and 61.8% for 1996
and 1995, respectively. Cost of sales consists of cost of merchandise and
fulfillment. The increase was primarily due to increased costs of merchandise,
which rose from 40.2% of net sales to 42.9% in 1996. Merchandise costs of the
Company's Jeannie's Kids Club Catalog are a relatively higher percentage of net
sales, as merchandise is sold on a discounted basis, while Perfectly Safe's
generally is not. Accordingly, the increase of Jeannie's Kids Club net sales
from 18% of the Company's total net sales in 1995 to 59% in 1996 resulted in the
Company's increased costs of merchandise in 1996, as a percentage of net sales.
The
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merchandise cost increases were partially offset by a decrease in the Company's
cost of fulfillment equal to 1.2% of net sales, as fulfillment expenses fell
from 21.6% of net sales in 1995 to 20.4% of net sales in 1996. Fulfillment
expense consists of costs of shipping, direct labor, packaging, order entry and
800 line telephone costs. The Company experienced cost reductions in this area
primarily from a decrease in shipping costs, which fell .6% from 1995 to 1996.
While outbound shipping costs fluctuate with the package size, number of
shipments per order, etc., the decrease was affected by the reduction of the
Company's number of shipments per order which fell from 1.6 in 1995 to 1.4 in
1996.
Selling expenses increased 9.7% from $1,998,502 in 1995 to $2,193,219 in
1996. Selling expenses consist of advertising and other marketing related
expenses. The increase in 1996 is primarily attributable to the Company's
revenue increase of 16% from 1995 to 1996. Selling expenses, as a percentage of
net sales, were 33% and 34.9% for 1996 and 1995, respectively. The Company's
Perfectly Safe Catalog experienced an increase, on a percentage basis, in
advertising expense of 2.5% of net sales from 29.7% of net sales in 1995 to
32.2% in 1996. This increase was primarily attributable to the less profitable
mix of mailing lists in 1996 than 1995. Advertising expense consists of the cost
of producing the catalogs, postage, mailing preparation and outside mailing
lists rented by the Company. Jeannie's Kids Club Catalog recorded advertising
expenses of 28.9% of net sales in 1996 compared with 46.8% in 1995. This
decrease is attributable to the fact that 1995 was the initial inception year of
Jeannie's Kids Club Catalog and the Company incurred initial non recurring costs
of developing Jeannie's Kids Club Catalog, such as research and development,
market testing and design of the catalogs in the amount of $392,495.
The Company believes that its general and administrative expenses are high
relative to its revenue base. General and administrative expenses were $730,950,
or 12.8% of net sales, in fiscal 1995 and $768,580, or 11.6% of net sales, in
fiscal 1996. This decrease is attributable to the increase in revenues in 1996
from 1995. The Company believes that its general and administrative functions
will become more efficient and cost effective upon absorbing the revenue base of
The Natural Baby Catalog, which the Company believes can be accomplished with
significantly less than proportionate increases in general and administrative
expenses. General and administrative expenses for the year ended December 31,
1995 and for the six month period ended June 30, 1996 were incurred by the
Company's parent, Duncan Hill, and allocated to the Company consistent with past
practices, under which Duncan Hill allocated its general and administrative
expenses to its operating subsidiaries on a pro rata basis determined by the
percentage of total assets of the various operating subsidiaries, exclusive of
the assets of Duncan Hill. See "THE COMPANY AND ITS PARENT." As a result of the
reorganization in which the Company succeeded to the operations of Perfectly
Safe, Inc., the Company began to handle certain of its own administrative
functions, directly, effective June 30, 1996. See "THE COMPANY AND ITS PARENT."
In 1995 and for the first six months of 1996 the Company's allocation was 69% of
Duncan Hill's total general and administrative expense.
Net losses for the year ended December 31, 1996 were $521,640, or 7.9% of
sales, compared with net losses of $536,992, or 9.4% of sales for the year ended
December 31, 1995. The Company attributes this slight decrease to the growth in
1996 of Jeannie's Kids Club membership base and the increase in revenues
associated therewith. The Company believes that in order to achieve
profitability with respect to its two current catalogs, the membership of
Jeannie's Kids Club will have to reach a sustainable level of 45,000 members.
Currently, there are approximately 34,000 members.
During 1996, the Company changed its accounting principle utilized
regarding internally generated customer lists and development costs. Prior to
the change, the Company capitalized and amortized these costs over their
estimated useful life. The Company now expenses these costs as incurred. As a
result, the Company has restated the January 1, 1995 retained earnings and the
1995 Statement of Income. The effect on net losses, as previously reported for
1995 in the amount of $163,232, was additional expenses in the amount of
$373,760, for a net loss of $536,992. The effect on 1995 net loss through
September 30, 1996, was additional expenses of $219,684. See Note 8 to the
Company's financial statements included elsewhere in the Prospectus.
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Deferred catalog expenses at December 31, 1996, were $277,469 compared to
$171,525 at December 31, 1995. Deferred catalog expenses are costs of catalogs
mailed to customers that are deferred and amortized over periods ranging from
four to six months. $70,000 of the increase in deferred catalog expenses from
1995 to 1996 is attributable to an increase in late December catalog mailings in
1996 from 1995. $35,000 of the increase is attributable to deferred catalog
expenses in 1996 associated with the Company's unshipped order backlog at
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997 the Company had a deficit in retained earnings of
$1,611,636, compared with a deficit of $1,452,680 at December 31, 1996 and a
deficit of $739,790 at December 31, 1995. This resulted, in part, from a net
loss of $158,956 for the three months ended March 31, 1997 and $521,640 for the
1996 fiscal year.
For the three months ended March 31, 1997, the impact of the operating
loss on the Company's cash position was offset by changes in working capital
which effected operating activities. The operating activities consumed $106,988
in cash through increases in accounts receivable and deferred catalog expense,
but provided $351,246 in cash through decreases in inventory and increases in
accounts payable. The net impact of these changes and non cash charges of
$8,841 relating to depreciation and amortization was to offset the Company's
net loss by $253,099, so that net cash provided by operating activities was
$94,143. The most significant provider of cash was the increase in accounts
payable, which increased $226,918 during the period. For 1996, the operating
activities consumed $198,090 in cash through increases in accounts receivable
and deferred catalog expense, but provided $459,642 in cash through decreases
in inventory and increases in accounts payable. The net impact of these changes
and non cash charges of $47,455 relating to depreciation and amortization and
loss on disposal of assets, was to offset the Company's net loss by $309,007,
so that net cash used by operating activities was $212,633. The most
significant provider of cash was the increase in accounts payable, which
increased $354,020 during the period.
For the three months ended March 31, 1997, the Company's financing
activities used $267,829 in cash, with $137,070 from changes in obligations to
the parent company and $135,759 from prepaid amounts for the public offering
and $5,000 from the sale of preferred stock. During 1996, the Company's
financing activities provided $590,490 in cash, with $582,500 provided from
external sources of financing and $7,990 from changes in obligations to the
parent company and prepaid amounts for the public offering. The Company
increased its borrowings on its line of credit by $220,000, issued $200,000 in
promissory notes described herein, and sold $162,500 in common stock, for an
aggregate of $582,500.
For the three months ended March 31, 1997, the combined effect of net cash
provided by operating activities of $94,143, net cash used by financing
activities of $267,829, and investments in fixed assets and prepaid amounts for
the acquisition of The Natural Baby Catalog totaling $33,030, decreased cash by
$206,716, from $248,648 at December 31, 1996, to $41,932 at March 31, 1997. For
1996, the combined effect of net cash used by operating activities of $212,633,
net cash provided by financing activities of $590,490, and investments in fixed
assets and prepaid amounts for the acquisition of The Natural Baby Catalog
totaling $164,928, increased cash by $212,929, from $35,719 at December 31,
1995, to $248,648 at December 31, 1996.
The Company's bank line of credit had a balance of $650,000 at March 31,
1997. The line of credit is for an open term, payable upon demand. The facility
is secured by the assets of the Company, as well as the assets of Duncan Hill
and another Duncan subsidiary, E.A. Carey of Ohio, Inc. The repayment of the
facility is guaranteed by Mr. Miller. The amount outstanding under the facility
at the date of this Prospectus is $650,000, with interest charged at the rate
of 1% over prime. It is the policy of the bank to review the credit facility,
annually, commencing June 30, 1997, and to require that the Company maintain a
zero balance on the credit line for a period of thirty consecutive days
sometime during the course of each year. The bank has agreed to waive the "zero
balance" required for the 1997 loan year ending June 30, 1997, because the
Company's current cash flow would not allow it to comply before then. The
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Company anticipates that, with the additional cash flow from the sales
generated by The Natural Baby Catalog, it will "zero balance" the credit line
for the 1998 loan year in the fourth quarter of 1997.
Additionally, the Company used extensions of trade credit to finance its
operations during this period. Accounts payable at March 31, 1997 were
$1,329,229, and the Company estimates that approximately $89,000 of this
balance was overdue to trade creditors (other than the printers of the
Company's catalogs), based upon the Company's historical experience with
accounts payable, whose normal working balances have been equivalent to 45 days
sales. The amount due to the printer at March 31, 1997 was $507,000. At March
31, 1997, the Company had cash of $41,932.
Effective June 30, 1996, the Company was recapitalized as Kids Stuff, Inc.
by its parent, Duncan Hill, for the purpose of acquiring the operating assets
of Duncan Hill, as well as the children's catalog business of Perfectly Safe,
Inc. The Company paid for those assets through the assumption of Perfectly
Safe, Inc.'s liabilities and Duncan Hill's bank line of credit, by a promissory
note payable to Duncan Hill and by preferred and common stock of the Company.
See "THE COMPANY AND ITS PARENT--The Reorganization."
In order to finance its most recent operations, the Company entered into
certain private financing agreements commencing in October, 1996. In that
regard, the Company issued 8% promissory notes in the amount of $125,000 to be
repaid with a portion of the proceeds of this Offering, 8% promissory notes in
the amount of $75,000, convertible upon the date of the Prospectus into
Warrants to purchase 1,500,000 shares of Common Stock (the "8% Convertible
Notes") and 1,300,000 shares of the Company's Common Stock for $162,500.
Subsequently, the holders of the 8% Convertible Notes, at the request of the
Representative, agreed to accept a cash payment at the closing of the Offering
in face amount of $75,000, plus accrued interest at 8% per annum, in lieu of
the conversion of their notes into 1,500,000 Warrants. Also, in June, 1997, the
Company repurchased 857,144 shares of the Common Stock previously issued in the
private financings at a repurchase price of $.125 per share, payable upon the
earlier of the closing of this Offering or on July 31, 1997. See "CERTAIN
TRANSACTIONS--Bridge Loan--Rule 504 Shares." Pending the completion of this
Offering, the Company continues to rely upon its trade creditors for short-term
financing, and may be required to seek additional bridge financing should the
policies of its trade creditors change.
For the fiscal year 1997, the Company intends to incur certain capital
expenditures in connection with upgrading its computer technology. See
"BUSINESS--Data Processing." Specifically, the Company intends to replace its
outdated data processing hardware and upgrade its current software, at an
annualized cost of approximately $75,000 per year, on a leased basis. Lease
payments will be made monthly and will be paid for from cash flow or working
capital. Additionally, the Company intends to spend no more than $10,000 to
develop new statistical modeling software which will also be paid for from cash
flow or working capital. See "USE OF PROCEEDS."
The Company has contracted to purchase the catalog business of The Natural
Baby Company, Inc. ("Baby Co."). The purchase price to be paid by the Company
consists of: a cash payment in the aggregate amount of $1,462,451 (less a
$25,000 down payment previously paid to Baby Co. by Duncan Hill) to be paid
with a portion of the proceeds of this Offering; the assumption of Baby Co.'s
accounts payable incurred in the ordinary course of business, which is $336,238
(unaudited) as of April 30, 1997; the assumption of Baby Co.'s remaining lease
obligations in the approximate amount of $26,600 at June 1, 1997; a long-term
convertible note to be issued by the Company to Baby Co. in the amount of
$250,000 (the "Convertible Note"), the terms of which are more fully discussed
below; a second promissory note in an amount which reflects the pre-tax profits
of Baby Co. in excess of $300,000 from the date of the completion of the
acquisition through December 31, 1997 (the "Excess Profit Note"), the terms of
which are more fully discussed below; and, 70,000 shares of the Company's
unregistered Common Stock, which shares will be subject to a two year lock-up
from the date of this Prospectus.
The unpaid balance of the Convertible Note is convertible at any time into
unregistered shares of the Company's Common Stock, at the election of the
holder, at a conversion price of $5.00 per share.
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The Convertible Note will have an eight year term and bear interest at 8% per
annum. Upon the first three anniversaries of the execution of the Convertible
Note, only accrued interest in arrears will be payable. Thereafter, five annual
payments of $50,000, plus accrued interest, will be payable on the fourth,
fifth, sixth, seventh and eight anniversaries of the execution of the
Convertible Note.
The amount of the Excess Profit Note will be equal to the pre-tax profits
of Baby Co. in excess of $300,000 from the date of the completion of the
acquisition through December 31, 1997 (the "Excess Profit Period"). The pre-tax
profits of Baby Co. will be determined by the amount of its merchandise sales
(net of returns and allowances) during the Excess Profit Period, multiplied by a
percentage equal to the pre-tax profits of Baby Co. for the twelve months
preceding the acquisition closing date divided by the amount of Baby Co.'s
merchandise sales (net of returns and allowances) during that twelve month
period. The principal amount of the Excess Profit Note will be payable over four
equal, annual installments, together with accrued interest at 8% per annum,
commencing April 14, 1998.
The Company intends to pay the foregoing notes and assumed accounts payable
and lease obligations from The Natural Baby Catalog's cash flow. The purchase
price to be paid by the Company to purchase the catalog business of Baby Co. is
also subject to certain adjustments. See "CERTAIN TRANSACTIONS-Acquisition of
The Natural Baby Catalog." The Company will also repay to Duncan Hill with a
portion of the proceeds of this Offering the $25,000 down payment referenced
above.
The Natural Baby Catalog had net sales of $1,459,225 and an operating
profit of $142,870 for the three months ended March 31, 1997 and 1996 net sales
of $6,451,215 and operating pre-tax profits of $558,649. On a pro forma basis,
assuming the Company had acquired The Natural Baby Catalog at the beginning of
the fiscal year ended December 31, 1996, the combined operations would have
resulted in net sales of $13,090,210, income from operations of $26,602, net
income of $37,009, and net income per share of Common Stock of $.01, for the
year ended December 31, 1996, and combined net sales of $2,924,766, operating
loss of $1,267, a net loss of $18,847 and a net loss per common share of $.005
for the three months ended March 31, 1997. See the Company's pro forma combined
financial statements (unaudited) and the related notes thereto, included
elsewhere in the Prospectus.
The Company believes that by consolidating the operations of The Natural
Baby Catalog with the Company's, that substantial savings can be realized in
direct labor and general and administrative areas. The Company estimates that
$200,000 in direct labor savings and $450,000 in general and administrative
savings can be realized, on an annual basis, exclusive of additional expenses
which the Company will incur as a public entity, estimated to be $200,000 and
$50,000 of additional payroll expense in 1997 related to the salaries of the
Company's two executive officers, as well as any additional compensation that
may be awarded under any incentive compensation plan.
In the event that the Company is unable to achieve the anticipated
consolidated savings from the consolidation of the operations of The Natural
Baby Catalog on a timely basis, the Company may need additional financing within
twelve months of the date of the Prospectus. See "RISK FACTORS-Possible Lack of
Savings from the Integration and Consolidation of The Natural Baby Catalog
Business; Adequacy of Financing."
In October 1995, Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not have any effect
to the Company's
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financial statement other than to require disclosure of the pro forma effect on
net income of using the fair value-based method of accounting. Management
believes this effect to currently be immaterial.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including statements
regarding, among other things, the Company's growth strategies and anticipated
consolidation savings from the consolidation of the operations of The Natural
Baby Catalog. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
many of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of changes in the
trends in the children's mail order catalog industry and the factors discussed
in "RISK FACTORS." In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Prospectus will
in fact occur.
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THE COMPANY AND ITS PARENT
HISTORY OF DUNCAN HILL
The Company's parent, Duncan Hill, was organized under Ohio law in 1977 for
the purpose of developing and marketing a designer line of smoking pipes,
tobacco and accessories. In 1980, a Duncan Hill subsidiary, Highland Pipe
Company, acquired the pipe manufacturing business of the Monarch Pipe Co., of
Bristow, Oklahoma. In 1984, the business of E.A. Carey Co. of Chicago, the
dominant mail order supplier of smoking products, was purchased by Duncan Hill
through its subsidiary, E.A. Carey of Ohio, Inc.
Perfectly Safe, Inc. was formed by Duncan in 1990 under Ohio law for the
purpose of publishing The Perfectly Safe Catalog, which was acquired from Jeanne
E. Miller in January, 1990. Mrs. Miller purchased the Perfectly Safe Catalog in
1988 from the catalog's creator. In July, 1995, Perfectly Safe, Inc. began to
publish its second catalog, Jeannie's Kids Club.
Prior to June 30, 1996, the telemarketing, order fulfillment, data
processing and administrative function of Perfectly Safe, Inc. were provided by
Duncan Hill, which also provided those services as applicable, to its other
operating subsidiaries. Duncan Hill allocated the cost of its services to its
operating subsidiaries on a direct cost basis, as applicable, or on a pro rata
basis determined by the percentage of total assets of the various operating
subsidiaries, exclusive of the assets of Duncan Hill.
THE REORGANIZATION
Effective June 30, 1996, the Company succeeded to the catalog business of
Jeannie's Kids Club and Perfectly Safe as a result of a reorganization in which
the Company acquired from Duncan Hill the assets and liabilities of Perfectly
Safe, Inc., which was dissolved. The Company was incorporated by Duncan Hill
under Delaware law and had no operations prior the reorganization.
Effective June 30, 1996, the Company also acquired from Duncan Hill the
assets used by Duncan to perform the telemarketing, order fulfillment, data
processing and administrative functions, so that the Company could perform those
functions itself. The Company then entered into a transition period in which
telemarketing, data processing, order fulfillment, and administrative functions
were transferred from Duncan Hill to the Company in a manner consistent with the
operational requirements of the various subsidiaries of Duncan Hill. During this
period certain costs were allocated by Duncan Hill to the Company, and in
return, certain costs were allocated by the Company to Duncan Hill and its other
subsidiaries, depending upon the transition status of the cost area involved. In
either case, the costs were allocated pro rata in a manner consistent with
Duncan Hill's practices in existence prior to June 30, 1996. The Company has
completed the transition period as of December 31, 1996.
Subsequent to December 31, 1996, the Company will provide services to
Duncan Hill and Duncan Hill's other subsidiaries, as requested, on an actual
cost basis. Actual costs are those direct costs that can be charged on a per
order or per hour basis, plus fixed costs allocated on a pro rata basis by
dividing the total assets of the operating entity requesting services by the sum
of the total assets of all operating entities of Duncan Hill and the operating
entity requesting services.
The purchase price of the Perfectly Safe and Duncan Hill assets acquired by
the Company is $2,613,404, payable as follows: The Company has issued Duncan
Hill a Promissory Note in the principal amount of $366,858 payable in four
annual installments commencing June 30, 1997 and bearing interest at the rate of
8% per annum. The principal amount of the first installment is $66,858 and is
$100,000 for each ensuing installment. In addition, the Company issued Duncan
2,400,000 shares of Common Stock valued at $.125 per share and 5,000,000 shares
of Series A Preferred Stock valued at $.001 per share. Further, the Company
agreed to assume all of the liabilities of Perfectly Safe, Inc. as of June 30,
1996 in the amount of $1,291,546, as well as Duncan's outstanding obligations
under its credit facility in the amount of $650,000 as of June 30, 1996. Almost
the entirety of the borrowings under the credit facility were used to support
the Company's operations. See "BUSINESS-Institutional Credit Facility."
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BUSINESS
GENERAL
The Company is a specialty direct marketer which currently publishes two
catalogs with an emphasis on children's hardgood products (I.E., products not
primarily made from fabrics) from prenatal to age three. Based upon the
Company's review of a mail order catalog trade publication called "SRDS Direct
Marketing List Service," the Company believes that its first catalog, "Perfectly
Safe, The Catalog For Parents Who Care/registered trademark/" is the nation's
only catalog devoted to child safety, child-proofing the home, and
safety-related products for the family. The Company has published Perfectly Safe
since 1990, during which time it has circulated over 20 million catalogs and
helped to childproof over 350,000 homes. One of the Company's founders authored
"The Perfectly Safe Home" published by Simon & Schuster, and appeared on
national television, radio, and magazines in the name of child safety.
In July, 1995 the Company introduced its "Jeannie's Kids Club" catalog to
broaden its market and to introduce a new direct marketing concept in children's
products. Jeannie's Kids Club offers parents of young children who become
members the opportunity of saving up to 60% compared with the same products in
other popular children's catalogs. The current annual membership fee is $18.00
per year. Upon the completion of the Offering, the Company intends to acquire
its third catalog, The Natural Baby Catalog, which specializes in products made
of natural fiber for children from prenatal to age three. The Natural Baby
Catalog carries both hardgood products and softgood products (I.E., products
primarily made from fabrics).
With the addition of The Natural Baby Catalog, the Company believes that it
will be one of the leading direct marketers of quality children's products from
prenatal to age three, a market which is determined by the overall birth rate in
the United States. The birth rate peaked in the United States in 1989 at 4.1
million births per year, and is estimated by the U.S. Census Bureau to be 3.8
million births in 1997, which is 100,000 less than its estimate for 1996.
The Company's market for children's goods is also affected by the
historical rise of women in the work force, which has risen to 48% of all
households today compared with 27% in 1960. Current estimates indicate that a
family earning $45,000 today will spend $7,610 or 17% of their income on their
baby during the first year of its life. The Company believes that a birth rate
of 3.8 million births per year and the high percentage of women in the work
force will place a continued emphasis on the convenience and value of shopping
by catalog.
The Company is aware of sixteen other children's hardgood-catalog
businesses which the Company estimates each having a revenue base of less that
$10 million per year. Because of increasing overhead requirements, the Company
believes that it will become more difficult for a consumer catalog business with
revenues of less than $10 million to operate profitably and should result in a
consolidation of some of these businesses in the future.
The Company intends to consolidate the operations of The Natural Baby
Catalog with the operations of the Company and anticipates a consolidation
savings, on an annualized basis, in direct labor expenses in the approximate
amount of $200,000 and in general and administrative expense in the approximate
amount of $450,000, exclusive of additional annual expenses which the Company
will incur as a public entity estimated to be $200,000 and $50,000 of additional
annual payroll expense commencing in 1997 relating to the salaries of the
Company's two executive officers, as well as any additional compensation that
may be awarded under any incentive plan. The combined revenues of the Company
and The Natural Baby Catalog were $2,924,766 for the three months ended March
31, 1997 and $13,090,210 for the year ended December 31, 1996. Thus, the Company
believes that its acquisition and consolidation of The Natural Baby Catalog will
provide the necessary critical mass to operate the Company profitably in the
future, although for the past two years the Company's operations have not been
profitable. The Company incurred a net loss of $158,956 for the three months
ended March 31, 1997 and a net loss of $521,640 and $536,992 for the years ended
December 31, 1996 and 1995, respectively.
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STRATEGIES
The Company believes that its expertise in the marketing and merchandising
of children's products, the recent introduction of its Jeannie's Kids Club
concept, and the intended acquisition of The Natural Baby catalog will provide
the basis for future growth by the use of the following strategies:
CONSOLIDATION OF THE NATURAL BABY'S CATALOG INTO THE OPERATIONS OF THE
COMPANY. The Company plans to consolidate the warehouse, telemarketing, data
processing and administrative functions of The Natural Baby Catalog into the
operations of the Company. The Company will endeavor to complete the
consolidation within ninety days of its acquisition of The Natural Baby Catalog.
EXPAND THE MEMBERSHIP OF JEANNIE'S KIDS CLUB. Because Jeannie's Kids Club
offers popular children's products for up to 60% less than other children's
catalogs, the Company believes that there is a substantial market for this type
of home shopping service and an opportunity to substantially increase the
membership of Jeannie's Kids Club, which went from inception in July 1995 to
over 35,000 current members. Although there are costs associated with acquiring
the initial $18 membership fee, the $18 annual renewal of such membership is
approximately 90% profit to the Company. Under the terms of the Jeannie's Kids
Club membership, renewals are automatically billed to a member's credit card
prior to the expiration of the membership. Because of its potential
profitability, the Company intends to embark upon vigorous marketing efforts to
expand the Jeannie's Kids Club membership. See "BUSINESS-Marketing."
MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG. Revenues of The Natural
Baby Catalog have increased from $1.7 million in 1992 to $6.5 million in 1996.
The Company is satisfied with the performance of The Natural Baby Catalog and
will endeavor to maintain continuity in the merchandising and marketing of the
catalog.
CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied upon
catalog circulation as the sole method to acquire new customers. Because of the
relatively short life of the acquired customer (prenatal to age three) and the
increasing costs of catalog mailings, the Company intends to test and develop
new methods of new customer acquisition. See "BUSINESS-Marketing." The Company
believes that its future growth and profitability (apart from the addition of
The Natural Baby Catalog) will be largely dependent upon the Company's ability
to develop alternative customer acquisition programs.
REFINE CATALOG MAILING STRATEGIES. The Company's catalog circulation is
determined by statistical models and analysis which targets prospective buyers
and timing of purchasers. The Company's statistical modeling system, which was
originally purchased and developed between 1990 and 1993, is outdated. In
February, 1997, the Company began to develop a statistical modeling system with
the assistance of an outside vendor for the purposes of increasing its catalog
response rates and lower its cost per catalog mailed. The Company anticipates
that this system will be ready for testing in June 1997. The cost of developing
this new software should not exceed $10,000 and will be paid for from the
Company's cash flow or working capital. See "USE OF PROCEEDS."
REPLACE OUTDATED DATA PROCESSING SYSTEM. The Company intends to acquire
state-of-the-art computer hardware and upgrade its current system software, at
an annualized cost of approximately $75,000 per year, on a leased basis, to
improve the efficiencies of its operations and financial reports. Lease payments
will be made monthly and will be paid for from the Company's cash flow or
working capital.
CATALOG ACQUISITIONS. The Company believes that, because of the cost
driven pressures to consolidate, there may be opportunities to acquire other
children's niche catalogs. The Company, however, has no short term plans to make
any such acquisitions other than The Natural Baby Catalog unless it is able to
obtain suitable financing.
STABILIZE THE PERFORMANCE OF PERFECTLY SAFE. In the past, many of the
safety products carried by the Perfectly Safe Catalog were generally hard to
find and were not well stocked by retail stores. That is
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no longer the case. See "BUSINESS-Competition." As a consequence of this
competitive impact, the inability of the Company to access certain profitable
mailing lists following the Company's introduction of Jeannie's Kids Club, and
the decision of the Company to devote more of its available resources to
building the mailing list and membership base of Jeannie's Kids Club, the future
performance of the Perfectly Safe Catalog will be highly dependent upon the
Company's ability to more efficiently obtain new customers through substantially
reduced catalog mailings in the immediate short term and alternative acquisition
programs on a long-range basis. In addition, the Company may consider expanding
the product age range by including more general home safety products, if the
Company has sufficient funds to test market this concept.
MERCHANDISING
Through its Perfectly Safe Catalog, the Company emphasizes quality and
safety and provides full price merchandise tested by the Company and backed by a
full satisfaction warranty. The Perfectly Safe Catalog currently consists of 48
pages containing 252 products, principally hardgoods, approximately 52% of which
directly relates to child safety and child proofing the home, with the balance
consisting of safety tested convenience products and toys. Unlike fashion
catalogs which change their mix of products offered based upon trends and
seasonality, Perfectly Safe retains proven products. The merchandising function
for Perfectly Safe is handled by one of the Company's founders, Jeanne E.
Miller, the author of "The Perfectly Safe Home."
During the year 1995 the Company used its merchandise expertise in
children's products to launch its Jeannie's Kids Club Catalog. The target market
selected by the Company is upper income parents who want quality, value and
convenience in products for their children. The Jeannie's Kids Club Catalog
selects popular quality hardgoods products from other children's catalogs and
then offers them at discounts of up to 60%. The Jeannie's Kids Club Catalog
currently consists of 48 pages containing 293 products.
The Natural Baby Catalog emphasizes alternative hard and softgood products
for babies and their parents. The catalog is eighty pages and contains
approximately 410 products, all of which are natural fiber, non-toxic and
environmentally safe. Approximately 28% of The Natural Baby Catalog product line
is exclusive or private label products. The merchandising function for The
Natural Baby Catalog has been done by the catalog's founder, Jane Martin, since
inception, and is a reflection of her beliefs and philosophy. Mrs. Martin will
continue to handle this function for the Company under a two-year consulting
agreement. See "MANAGEMENT-Employment Agreements."
Inclusive of The Natural Baby Catalog, the ratio between hardgoods to
softgoods contained in the Company's catalogs is approximately 3:1. Exclusive of
The Natural Baby Catalog, over 95% of the products contained in The Perfectly
Safe and Jeannie's Kids Club Catalogs are hardgoods. The Company continually
identifies and tests new product categories that are natural extensions of the
core business of its catalogs. Each product and product category is measured for
its revenue and profitability, with advertising costs allocated to the product
based upon the number of square inches of paper consumed in its presentation.
Products are then rated by performance in profitability, with weaker products
either removed or altered in their presentation. Test products are selected
based upon the data contained in the analysis of similar or related products, or
sales and feature benefits that the Company's merchandising team feels will
appeal to the demographics of the intended catalog customer.
MARKETING
The Company serves the children's market at an age where the child changes
rapidly and many of the products become functionally obsolete within months of
the date of purchase. The Company's market for its catalog is primarily from
prenatal to age three. The Company maintains proprietary mailing lists of
households with an average income in excess of $50,000 per year, a proven
history of mail order purchases and a newborn in the house. The number of
customers who purchased in 1996 were 53,780 for Perfectly Safe, and 42,744
member and non-member buyers for Jeannie's Kids Club
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(non-member buyers are not entitled to purchase Jeannie's Kids Club merchandise
at a discount). The Company also rents mailing lists which meet the Company's
criteria from outside sources, which consist of independent list compilers, as
well as directly from other children's catalogs. The Company's present cost of
renting mailing lists is $.09 per household per use. The Company believes that
The Natural Baby Catalog's mailing list rentals are primarily from certain other
children's catalogs based upon a proven history of recent mail order purchases.
In order to select those households most likely to purchase, the Company
uses a statistical modeling system developed in-house, called REZIP. REZIP is a
compilation of zip codes derived from the zip codes of prior customers, and has
a database of approximately five million names. The REZIP database is used as a
filter to select specific households for catalog mailings. The Company believes
that its REZIP statistical modeling system which it developed between 1990 and
1993 is outdated and needs to be replaced with state-of-the-art data bases
containing various additional demographic information, which would enable the
Company to more accurately predict profitable zip codes. As discussed
previously, the Company is in the process of developing that software. At the
present time, The Natural Baby Catalog does not use a statistical modeling
system. The Company believes that the application of a statistical modeling
systems will increase the rate of percentage response and profitability of The
Natural Baby Catalog.
The Company uses a selling strategy built around two basic selling seasons:
fall/winter and spring/summer. Each season requires changes of products
appropriate to the time period for the life of the catalog. Catalogs are mailed
on a monthly basis in approximately equal quantities, with clearance sales
advertised on wrappers of selected catalog mailings. Monthly mailing quantities,
however, are subject to significant variations due to changes in timing and
availability of rental mailing lists. In 1996, the catalog mailings for
Perfectly Safe and Jeannie's Kids Club were 1,595,890 and 2,372,891
respectively.
The Company believes that The Natural Baby Catalog uses a selling strategy
based upon three basic selling seasons: spring, summer and fall/winter. While
catalogs are mailed monthly, lessor quantities are mailed monthly in the period
February-June, with quantities increasing to the fall/winter season. The Natural
Baby Catalog mailed approximately 2.1 million catalogs in 1996.
Because of a continuing increase in catalog advertising costs and the
relatively short customer life, the Company believes that it can no longer
afford to use catalog mailings as the sole method of customer name acquisition.
Accordingly, the Company intends to pursue a balanced customer acquisition
program, which will include magazine solicitations, promotional inserts, and
marketing joint ventures with mass marketers of baby formula, baby food and
health care, as alternative marketing methods for the acquisition of customer
names. The Company has not yet entered into any agreements to commence any such
new acquisitions program.
CUSTOMER SERVICE AND TELEMARKETING
The Company derives approximately 80% of its revenue through orders placed
over the telephone and emphasizes superior customer service and friendliness in
its sales representatives. The Company's payment terms have been major credit
cards or checks. The Company's return policy is unconditional, and provides that
if a customer is not satisfied with his or her purchase for any reason, it may
be returned within 30 days for a full refund or exchange. If a shipping error
has occurred the Company will issue call tags to pick up merchandise shipped in
error and will send a corrected shipment.
The Company's telemarketing facilities are open seven days a week from 8:00
am to 11:00 p.m. and employ the equivalent of approximately 14 full time
telemarketing and customer service representatives. During the year 1996 the
Company handled over 200,000 telephonic customer orders, catalog requests and
service requirements.
The Company is developing a new order taking and customer service system to
improve its efficiency in processing customer requirements. During October 1996
the Company installed an
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advanced telephone system for the monitoring and distribution of telephone calls
to its sales representatives. Additionally, the Company expects to automate its
routine catalog requests, and lower its cost per call in this segment of its
telemarketing business.
Upon the Company's acquisition of The Natural Baby Catalog, the Company
anticipates the need to add the equivalent of approximately 10 additional full
time telemarketing and customer service representatives to its current staff.
The Company believes that the Natural Baby Catalog employed approximately 18
full time equivalents to handle its telemarketing and customer service at
December 31, 1996.
FULFILLMENT AND DELIVERY
The Company's fulfillment and delivery objective is to provide excellent
customer service within a low cost structure. Its fulfillment operations consist
of 12,000 square feet of leased facilities in North Canton, Ohio. The facility
is designed to process incoming shipments on a palletized or boxed basis, and to
process outgoing shipments on an individualized cost effective basis. Orders
shipped are individually recorded and posted through the use of barcode
scanners, so that sales records and credit card deposits are electronically
posted. The Company's fulfillment center processed over 230,000 shipments in
1996. Upon the acquisition of The Natural Baby Catalog, the Company intends to
lease approximately 5,800 square feet of additional warehouse space adjacent to
the Company's current warehouse facility and to move The Natural Baby Catalog
from its current location in Trenton, NJ to the Company's additional warehouse
facility. See "BUSINESS-Properties."
INVENTORY/PURCHASING
The Company conducts its purchasing operations at its general offices in
Canton, Ohio. Each catalog contains approximately 300 products or stock keeping
units (SKU's). Each product is reviewed weekly through the use of computerized
reports that provide detailed information regarding inventory value, unit sales,
and purchasing delivery times. Products are ordered as required for "just in
time" arrival into the Company's inventory.
The Company believes that its inventory and purchasing efficiency can be
improved through the use of improved systems and working capital management to
minimize out-of-stock conditions. At December 31, 1996, the Company had a
backlog of unshipped orders in excess of $115,000 ($210,000 at March 31, 1997)
attributable largely to its inability to timely pay vendors and re-stock
inventory. The Company intends to use a portion of the proceeds of this Offering
to resolve this problem. See "USE OF PROCEEDS."
PRODUCT SOURCING
The Company acquires products for resale in its catalogs from numerous
domestic vendors. No single source supplied more than 10% of the Company's
products in 1996. The Company believes that no single source likewise supplied
more than 10% of The Natural Baby Catalog products in 1996.
SEASONALITY
Perfectly Safe's revenues are not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The
Perfectly Safe customer is believed to be generally the end user of the product
so purchases are spread throughout the year, rather than being concentrated
between October and December, as are traditional gift purchases. The Company's
limited experience does not indicate that Jeannie's Kids Club's revenues are
subject to significant seasonal fluctuation. The Natural Baby Catalog, however,
appears to the Company to have a seasonal increase in the fourth quarter. During
the year 1996, The Natural Baby Catalog sales in the fourth quarter were 32.6%
of total 1996 sales.
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INSTITUTIONAL CREDIT FACILITY
Effective June 30, 1996, the Company assumed Duncan Hill's liability under
Duncan Hill's $800,000 working line of credit facility provided by the United
National Bank and Trust Company to the Company (the "Bank"). The Bank opened a
$800,000 line of credit in the Company's name effective December 31, 1996, and
simultaneously terminated Duncan Hill's line of credit. The $650,000 amount
outstanding under Duncan Hill's line of credit was transferred upon termination
to the line of credit opened in the Company's name. Almost the entirety of those
borrowings were used to finance the Company's operations. The line of credit is
for an open term, payable upon demand. The facility is secured by the assets of
the Company, as well as the assets of Duncan Hill and another Duncan subsidiary,
E.A. Carey of Ohio, Inc. The repayment of the facility is guaranteed by Mr.
Miller. The amount outstanding under the facility at the date of this Prospectus
is $650,000, with interest charged at the rate of 1% over prime.
It is the policy of the Bank to review the credit facility, annually,
commencing June 30, 1997, and to require that the Company maintain a zero
balance on the credit line for a period of thirty consecutive days sometime
during the course of each year. The Bank has agreed to waive the "zero balance"
required for the 1997 loan year ending June 30, 1997, because the Company's
current cash flow would not allow it to comply before then. The Company
anticipates that, with the additional cash flow from the sales generated by The
Natural Baby Catalog, it will "zero balance" the credit line for the 1998 loan
year in the fourth quarter of 1997.
DATA PROCESSING
The Company's data processing facilities were installed in June 1991. The
software system is marginally adequate with respect to processing, inventory,
shipping, and financial records. However, the Company believes that the
management information which can be generated from the system software is
inadequate and should be upgraded to current state-of-the-art technology.
Although the Company believes that its hardware system is marginally adequate,
the hardware is outdated and costly to maintain. It is the intent of the Company
to upgrade its system software, as well as replace the hardware, during the year
1997.
COMPETITION
The mail order catalog is highly competitive. The Company's catalogs
compete generally with other mail order catalogs and retail stores, including
department stores, specialty stores, discount stores and mass merchants. Many
general and specialty catalog competitors, as well as retail stores, have
substantially greater financial, distribution and marketing resources than the
Company. There are numerous general and specialty catalogs selling infants' and
children's items. However, based upon type of goods offered, the Company
considers its primary hardgood catalog competition, to be "The Right Start
Catalog," "One Step Ahead," "Sensational Beginnings," and "Hand in Hand," of
which "The Right Start" and "One Step Ahead" have substantially larger revenues
than the Company, even with the inclusion of the revenues of The Natural Baby
Catalog with the revenues of the Company.
Other mail order catalogs for children's hardgood products which the
Company believes are competitors to a lesser extent are "Current Children's
Products," "Troll Learn and Play," "Just for Kids," "Childcraft," "Toys to Grow
On," "Hearthsong," "Constructive Playthings," "Music for Little People," "Great
Kids," "The Great Kids Company," "Ultimate Baby Catalog," "San Francisco Music
Box," "Stork Kit/Bundle of Joy," "Play Fair Toys," "Animal Town," "Alvin and the
Chipmunks," "Livonia Catalog," "Plus and Company," "Disney Catalog," "Storybook
Heirlooms," and "F.A.O. Schwartz." Ten of those catalogs have substantially
higher revenues than the Company, even with the inclusion of the revenues of The
Natural Baby with the revenues of the Company.
While competitive catalogs may offer certain items contained in the
Company's catalogs, the Company believes that it is unique at the present time
in having the only catalog devoted to child safety,
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and the only catalog of children's quality merchandise discounted on a club
membership basis. The Company also believes that The Natural Baby Catalog is the
leading catalog offering alternative products for children and their parents.
Certain other catalogs, such as "Hanna Andersson" and "Biobottoms," compete
with The Natural Baby Catalog in selected product areas, but do not compete
across the entire product line. Other mail order catalogs for children's
softgoods products which the Company believes are competitors of The Natural
Baby Catalog to a lessor extent are "Playclothes," "After the Stork," "Talbot's
Kids," "Spiegel Children's Clothing," "Brights Creek," "Gymboree," "Eddie Bauer
Children's Fashions," and "Spiegel Kids." The Company believes that six of these
catalogs have substantially higher revenues than The Natural Baby Catalog.
In the past, many of the safety products carried by the Perfectly Safe
Catalog were generally hard-to-find, lower price items, such as electrical
outlet guards, appliance cord shorteners and appliance door latches. Many of
these items are now stocked by retail stores, discount stores and mass
merchants.
The Company experienced a competitive reaction to its introduction of
Jeannie's Kids Club Catalog which resulted in three other children's catalogs
refusing to exchange with, or rent their mailing lists to, the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION." The Company does not anticipate such a reaction from its acquisition
of The Natural Baby Catalog because the Company does not believe that Jeannie's
Kids Club Catalog is a substantial competitor of the children's catalogs from
which The Natural Baby Catalog rents mailing lists. There can be no assurance,
however, that such a competitive reaction will not occur, or that such an
occurrence would not have an adverse effect upon the profitability of The
Natural Baby Catalog.
TRADEMARKS AND TRADE NAMES
The Company owns four federally registered trademarks: "Perfectly Safe";
"Perfectly Safe, The Catalog For Parents Who Care" with logo; "Perfectly Safe
Guarantee" with logo; and, logo. The Company plans to register its mark,
"Jeannie's Kids Club," as a unique identification of its Jeannie's Kids Club
Catalog. With the acquisition of The Natural Baby Catalog, the Company will
acquire the ownership of the trademark "The Natural Baby Co., Inc." with logo,
which is a federally registered trademark.
EMPLOYEES
As of May 31, 1997, the Company had 37 full time employees and 16 part time
employees. Of this total, nine employees or 16% of total, hold positions of
managers; 44 employees or 83% of the total, hold hourly paid positions. The
largest single segment of the Company's employment is in direct labor involving
order entry, customer service, and distribution, where 34 employees or 64% of
total Company employment is involved. The work force is non-union, and the
Company does not anticipate a union presence in the foreseeable future.
At the conclusion of the Offering, the Company anticipates that its
acquisition of The Natural Baby Catalog will require an immediate increase in
direct hourly labor with minimal increases in indirect labor. The Company does
not anticipate difficulties in local labor supply for its requirements in this
area.
PROPERTIES
The Company's principal offices and telemarketing center are located in
Canton, Ohio. The facility consist of 5,600 square feet and is leased through
September 30, 1998 with options to renew for a period of two years. The
Company's warehouse and distribution center is located in North Canton, Ohio and
consists of approximately 12,000 square feet, which is leased for a one year
term expiring September 30,
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1997, and subject to earlier termination without penalty at the option of the
lessee upon sixty days written notice to the landlord. Commencing June 15, 1997,
the Company leased through September 30, 1997, approximately 5,800 square feet
of additional warehouse space adjacent to the Company's current warehouse
facility to house The Natural Baby Catalog's product line. The Company has not
determined whether it will seek to renew its warehouse lease which expires
September 30, 1997 or to relocate within the Canton, Ohio area. All leases are
in the name of Duncan Hill and the rent is charged to its subsidiaries
consistent with past practices. See "THE COMPANY AND ITS PARENT."
REGULATORY MATTERS
The Company's business, and the catalog industry in general, is subject to
regulation by a variety of state and federal laws relating to, among other
things, advertising and sales taxes. The Federal Trade Commission regulates the
Company's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which the
Company sells in its catalogs. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
without collecting sales tax. The Company believes that it collects sales in
states where it is required to do so. The Company has no claims or regulatory
matters in process or pending as of the date of this Prospectus. See "RISK
FACTORS-State Sales Tax."
PRODUCT LIABILITY INSURANCE
Since 1990, the Company's parent, Duncan Hill, has carried product
liability insurance. The current coverage is $1 million per occurrence with an
aggregate limit of $2 million. The policy is supplemented by an umbrella
liability policy providing coverage of an additional $1 million per occurrence,
$2 million aggregate. The policies are carried by Duncan Hill, with the Company
and Duncan Hill's other subsidiaries as named insureds. The policies are issued
for a period of one year and are currently in effect through September 17, 1997.
The Company intends to attempt to procure the same coverage in its name, alone,
after the completion of this Offering. See "RISK FACTORS-Potential Product
Liability."
LEGAL PROCEEDINGS
In the normal course of business, the Company may be involved in various
legal proceedings from time to time. Presently, however, the Company is not a
party to any litigation, whether routine or incidental to its business, or
otherwise.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the Company
are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ------ ------------------------------------------------------
<S> <C> <C>
William L. Miller ...... 60 Chairman of the Board of Directors, Chief Executive
Officer and Principal Financial Officer
Jeanne E. Miller ...... 49 Executive Vice President and Director
Clark D. Swisher ...... 45 Director
</TABLE>
The term of office for each of the Company's directors and executive
officers is one year. William L. Miller and Jeanne E. Miller are husband and
wife.
WILLIAM L. MILLER has been Chairman of the Board of Directors of the
Company, and its Chief Executive Officer, since its recent formation. Prior to
the Reorganization, Mr. Miller had been a director of Perfectly Safe, Inc., and
its Vice President since it was formed by Duncan Hill in 1990. Mr. Miller
founded Duncan Hill in 1977 and has been a director and its President and Chief
Executive Officer since then. He holds a Bachelor's Degree in Mechanical
Engineering from Perdue University and a Master's Degree in Business
Administration from Indiana University. Mr. Miller is also the President and a
director of E.A. Carey of Ohio, and Highland Pipe Company, both of which are
wholly owned subsidiaries of Duncan Hill.
JEANNE E. MILLER has been a director of the Company, and its Executive Vice
President since its recent formation. Prior to the reorganization, Mrs. Miller
had been a director of Perfectly Safe, Inc., and its President since its
formation in 1990. Mrs. Miller co-founded Duncan Hill in 1977 and has been a
director and its Vice President ever since. Between 1974 and 1978, Mrs. Miller
was the owner/operator of Jeanne Eggers, Ltd., an advertising and public
relations firm with offices in Chicago and London. Mrs. Miller is the author of
the child safety book THE PERFECTLY SAFE HOME, published by Simon and Schuster
in 1991 and has appeared on network television to speak on that subject. Mrs.
Miller is also the Vice President and a director of E.A. Carey of Ohio and
Highland Pipe Company, both of which are wholly owned subsidiaries of Duncan
Hill.
CLARK D. SWISHER is a director of the Company since its recent formation.
Mr. Swisher has been Vice President of the Employee Benefits Division of the
Leonard-McCormick Agency, a general insurance agency, since 1984. Mr. Swisher's
professional background includes membership in the National Association of Life
Underwriters and the University of Akron Business Advisory Council. Mr. Swisher
has been a director of Duncan Hill since 1995.
Following the completion of this Offering, the Company will attempt to
identify and appoint two individuals who are not affiliated with the Company or
the Underwriters as the fourth and fifth directors. There is no assurance,
however, that the Company will be able to attract suitable candidates at this
stage of its development.
Upon the appointment of two additional unaffiliated directors, the Board of
Directors intends to establish a Compensation Committee and an Audit Committee.
The Audit Committee, which will consist of at least a majority of directors who
are not affiliated with the Company, will among other things, make
recommendations to the Board of Directors regarding the independent auditors for
the Company, approve the scope of the annual audit activities of the independent
auditors and review audit results and have general responsibility for all
auditing related matters. The Compensation Committee will consist entirely of
directors who are not affiliated with the Company. The Compensation Committee
will review and recommend to the Board of Directors the compensation structure
for the Company's officers and other management personnel, including salary
rates, participation in incentive
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compensation and benefit plans, fringe benefits, non-cash perquisites and other
forms of compensation. The Committee will also administer the Company's 1997
Long-Term Stock Incentive Plan.
The Company pays its directors who are not also employees of the Company
$100 for each meeting attended and reimburses such directors for travel and
other expenses incurred by them in connection with attending Board of Directors
meetings. Directors will be eligible to participate in 1997 Stock Incentive
Plan.
The Representative has been granted by the Company the right to designate
one director to serve on the Company's Board of Directors for a period of three
years from the date of this Prospectus. As of the date hereof, no such person
has been designated.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to the named
Executive Officers for the fiscal years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
AWARDS(1) COMPENSATION
----------------------------- -------------------------------
(A) (B) (C) (D) (E) (F)
OTHER ANNUAL RESTRICTED STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION AWARD OPTION GRANTS
- -------------------------------- ------- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
William L. Miller, Chief 1996 $100,000 - - -
Executive Officer and 1995 $100,000 - - -
Principal Financial Officer(2) 1994 $100,000 - - -
Jeanne E. Miller, Executive 1996 $ 65,000 - - -
Vice President(3) 1995 $ 65,000 - - -
1994 $ 65,000 - - -
</TABLE>
- ----------------
(1) Compensation was paid by Duncan Hill which, prior to the reorganization,
provided management and general and administrative services to the Company,
and which after the reorganization continued to maintain the named Executive
Officers on its payroll through December 31, 1996. Approximately 69%, 69%
and 49% of the compensation paid by Duncan Hill to the named Executive
Officers were expensed to the Company in 1996, 1995 and 1994, respectively.
See "THE COMPANY AND ITS PARENT."
(2) Mr. Miller served as the Vice President of Perfectly Safe, Inc. until the
reorganization effective June 30, 1996 when he became Chief Executive
Officer and Principal Financial Officer of the Company.
(3) Mrs. Miller served as the President of Perfectly Safe, Inc. until the
reorganization effective June 30, 1996 when she became Executive Vice
President of the Company.
INCENTIVE COMPENSATION PLAN. The Company's Incentive Compensation Plan
(the "Plan") is designed to motivate employee participants to achieve the
Company's annual strategic goals. Eligibility for participation in the Plan is
limited to the Chief Executive Officer and the Executive Vice President of the
Company, and such other employees of the Company as may be designated by the
Board of Directors from time to time. For each fiscal year of the Company, the
Board will establish a bonus pool not to exceed 10% of the Company's operating
income. The amount of such pool with respect to any year shall be determined
subsequent to the end of that year upon the determination of the Company's
operating income for that year. Each participant in the Plan is eligible to
receive from the bonus pool an annual award of up to 50% of the participant's
base salary. Upon its establishment, the Compensation Committee shall be
responsible for recommending to the Board of Directors performance objectives
and awards for participants. Until the Compensation Committee is established,
these determinations will be made solely by the Board of Directors. The Board of
Directors is currently controlled by Mr. and Mrs. Miller, the Company's
respective Chief Executive Officer and Executive Vice President, who are also
the only two current participants in the Plan. Payouts are to be determined
annually following determination of the Company's fiscal year-end results. The
Plan is subject to amendment of
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termination at any time, but no such action may adversely affect any rights or
obligations with respect to any awards theretofore made under the Plan.
1997 STOCK INCENTIVE PLAN. In March 1997, the Company's majority
stockholder approved the adoption of the Company's 1997 Long-Term Incentive Plan
(the "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.
Options granted under the Incentive Plan may be either "incentive stock
options," which qualify for special tax treatment under Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options, which do not
qualify. Incentive stock options may only be granted to persons who are
employees of the Company. Options will expire at such time as the Compensation
Committee determines, provided that no stock option may be exercisable later
than ten years from its grant, except that the maximum term of any incentive
stock option granted to a person who owns, directly or indirectly, 10% or more
of the combined voting power of the Company's capital stock (a "10%
Shareholder") shall be five years. If an optionee ceases to be an employee or
director by reason of death, incapacity of retirement, the option shall
terminate fifteen months after the optionee ceases to be an employee. If an
optionee ceases to be an employee because of resignation with the consent of the
Compensation Committee, the option will terminate three months after the
optionee ceases to be an employee. If an optionee ceases to be an employee or
director for any other reason, the option will expire thirty days after the
optionee ceases to be an employee.
The option price per share is determined by the Compensation Committee,
except for incentive stock options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less than
110% of such fair market value if the optionee is a 10% shareholder. Payment of
the exercise price may be made in cash, or unless otherwise provided by the
Compensation Committee in shares of Common Stock delivered to the Company by the
optionee or by the withholding of shares issuable upon exercise of the option or
in a combination thereof. Options cannot be exercised until six months after the
date that the option is granted or such later time determined by the
Compensation Committee. Each option shall be exercised in full or in part.
Options are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the life of the employee or director
only by him or her. No options may be granted under the Incentive Plan after
March 27, 2007. However, any options outstanding on March 27, 2007 will remain
in effect in accordance with their terms.
The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common Stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation Committee, provided however, that such expiration date shall not be
later than ten years from the date of the grant. SARS are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee's cessation of employment or
directorship, as pertains to options, discussed above.
The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the Committee may determine. All shares of Common
Stock subject to a stock award will be valued at not less than
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100% of the fair market value of such shares on the date the stock award is
granted. The number of shares of Common Stock which may be granted as a stock
award in any calendar year may not exceed 80,000.
The Incentive Plan will be administered by the Compensation Committee,
which has the authority to prescribe, amend and rescind rules and regulations
relating to the Plan, to accelerate the exercise date of any option, to
interpret the Plan and to make all necessary determinations in administering the
Plan.
The Incentive Plan will remain in effect until such time as it is
terminated by the Board of Directors. The Incentive Plan may be amended by the
Board of Directors upon the recommendation of the Compensation Committee, except
that, without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to issuance under the Plan; change the class of persons
eligible to participate under the Plan; withdraw the administration of the Plan
from the Compensation Committee; or, to permit any option to be exercised more
than ten years after the date it was granted.
As of the date of the Prospectus, the Compensation Committee has yet to be
formed, and accordingly, no stock incentives have been granted under the
Incentive Plan.
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 Chief Executive Officer of the Company and Mrs.
Miller is to serve as its Executive Vice President. The employment agreements
provide for an annual base salary of $125,000 for Mr. Miller and $90,000 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
discussed above. Each of these executives is also to be provided with
automobiles, at the Company's expense, for their exclusive use, the make and
model of which is to be mutually agreed upon by the executive and the Company,
from time to time. Each of these executives is also to be reimbursed for certain
personal expenses up to $7,500, which amount shall be subject to increase to pay
for any personal income tax liability should such reimbursements be deemed
taxable to the executive. Each of these executive is also entitled to
participate in any employee benefit plan which the Company may create in the
future. The Company has also agreed to maintain in force, at its expense, during
the term of the employment agreements, life insurance for the benefit of each of
the executives in an amount equal to twice the base salary of Mr. Miller and
five times the base salary of Mrs. Miller. Pursuant to the employment
agreements, each of these executives has agreed not to compete with the Company
during employment and for a period of one year following termination of
employment and has further agreed to maintain as confidential, the Company's
proprietary information.
Each of the employment agreements provide for severance compensation to be
paid in all instances other than the executive's termination for cause. In the
event that the executive becomes disabled or dies, the Company, in the case of
Mr. Miller, is required to pay an amount equal to the product of (x) and (y)
where (x) is the sum of the executive's salary and bonus paid in the prior year
multiplied by 2.99 and (y) the percentage of the employment agreement's five
year term remaining from the date of death of disability; provided, however,
that such severance compensation will not be less than the officer's salary and
bonus paid in the year prior to the year in which the officer dies or becomes
disabled. The foregoing benefit is provided in the employment agreement of Mrs.
Miller, but only in the event of disability. Each executive is also entitled to
be paid severance compensation in an amount equal to the sum of the executive's
salary and bonus paid in the prior year multiplied by 2.99 in the event that the
executive elects to terminate the employment agreement upon the Company's
material breach of the employment agreement or upon the Company's reduction of
the executive's responsibilities, duties, functions or dignity of position
resulting from a change of control, or otherwise. Assuming that severance
payments were due to each of the executive officers as of the date of the
Prospectus under the immediately preceding sentence, the amount of the severance
payment to each of Mr. Miller and
41
<PAGE>
Mrs. Miller would be $299,000 and $194,350, respectively. Each executive is
further entitled to be paid severance compensation in the amount equal to the
sum of the executive's salary and bonus paid in the last year of the executive's
employment agreement in the event that the executive is not rehired upon terms
acceptable to him or her or, in the case of Mr. Miller, a successor chief
executive officer is hired with Mr. Miller's consent to replace Mr. Miller prior
to the expiration of the term of his employment agreement. Additionally, any
executive entitled to severance compensation, above, will also be entitled to
participate in any Company-sponsored employee health benefit plan at the
Company's expense, for a maximum of eighteen months from the date of
termination.
Each of Mr. Miller and Mrs. Miller was granted under their respective
employment agreements an option to purchase 100,000 shares of the Company's
Common Stock, which will 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 shall be $5.00 per share, subject to downward adjustments in the
exercise price if the Company meets certain performance goals.
Mr. Miller is permitted under his agreement to devote such time to managing
the affairs of the various other Duncan Hill entities as he deems appropriate,
and to retain any compensation that he receives from those entities for
providing those services.
The Company will enter into a two-year consulting agreement with Jane
Martin, effective the date of the Company's acquisition of The Natural Baby
Catalog, pursuant to which Mrs. Martin will continue to be primarily responsible
for the merchandise selections design and production of The Natural Baby
Catalog. The agreement provides for an annual consulting fee of $65,000.
The Company intends to provide its executive officers and employees with
certain fringe benefits (e.g., health insurance) and may, in the future, offer
additional stock or cash incentive bonus plans, and other employer benefits on
such amounts and upon such conditions as the Company's Board of Directors may,
in its sole discretion, determine.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation contains a provision eliminating
the personal monetary liability of directors to the extent allowed under the
General Corporation Law of the State of Delaware. Under the provision, a
stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as a director or not, if he is also an officer, his role
as an officer or in any other capacity or to his responsibilities under any
other law, such as the federal securities laws. The provision, however, does not
affect the availability of seeking equitable relief against a director of the
Company. In addition, the Company's Bylaws provide that the Company will
indemnify its directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 25, 1997, certain information
with respect to the beneficial ownership of Common Stock and Series A Preferred
Stock by each person or entity known by the Company to be the beneficial owner
of 5% or more of such shares, each officer and director of the Company, and all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES OF SHARES OF SERIES A
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME AND ADDRESS ---------------------------------- -------------------------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) NUMBER PERCENT(3)
- -------------------------------- ------------------- ------------ ------------------- ---------------
<S> <C> <C> <C> <C>
Duncan Hill Co., Ltd. ......... 2,400,000(4) 84%(4) 5,000,000(4) 100%(4)
4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
William L. Miller(5) ......... 2,400,000(6) 84%(6) 5,000,000(7) 100%(7)
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
Jeanne E. Miller(8) ......... -0- -0- -0- -0-
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
Clark D. Swisher(9) ......... -0- -0- -0- -0-
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
Reginald Spinello ............ 171,428 6% -0- -0-
62 Buckeye Road
Glen Cove, NY 11542
Carico, Inc.(10) ............... 171,428 6% -0- -0-
750 Lexington Avenue
New York, NY 10022
All Officers and Directors
as a Group (3 Persons) ...... 2,400,000(6) 84%(6) 5,000,000(7) 100%(7)
<FN>
- ----------------
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act. Accordingly,
except as noted, all of the Company's securities over which the officers
and directors and nominees named, or as a group, directly or indirectly
have, or share voting or investment power, have been deemed beneficially
owned.
(2) Calculated based upon 2,842,856 shares of Common Stock outstanding.
(3) Calculated based upon 5,000,000 shares of Series A Preferred Stock
outstanding.
(4) William L. Miller will be deemed to beneficially own all such shares for
purposes of Rule 13d-3 of the Securities Exchange Act based upon his 53.9%
ownership of Duncan Hill's common stock.
(5) Chief Executive Officer and Director of the Company.
(6) Represents Mr. Miller's deemed beneficial ownership of 2,400,000 shares of
Common Stock.
(7) Represents Mr. Miller's deemed beneficial ownership of 5,000,000 shares of
Series A Preferred Stock, the record holder of which is Duncan Hill.
(8) Executive Vice President and Director of the Company.
(9) Director of the Company.
(10) The beneficial owner of Carico, Inc. is Alan Novich.
</FN>
</TABLE>
43
<PAGE>
CERTAIN TRANSACTIONS
RULE 504 SHARES
In connection with its initial capitalization, the Company sold,
commencing October 1996, an aggregate of 1,300,000 shares of Common Stock to
eight private investors at a purchase price of $.125 per share. Seven of these
investors are customers of the Representative. There are no other affiliations
or relationships between the seven private investors and either the Company or
the Representative. The eighth investor, who is not a customer of the
Representative and who had no relationship or affiliation with the
Representative, had once been engaged to provide financial consulting services
to the Company's parent, Duncan Hill. This investor has no other relationships
or affiliations with the Company.
In June 1997, the Company repurchased an aggregate of 857,144 shares of
Common Stock from five of the customers of the Representative at a repurchase
price of $.125 per share. This repurchase was required by the National
Association of Securities Dealers (the "NASD") as a condition to approving the
compensation to be received by the Underwriters in connection with this
Offering. The Company's repurchase payment was evidenced by five promissary
notes issued by it in the aggregate amount of $107,143. The notes are payable
on the earlier of the closing of this Offering or on July 31, 1997; provided,
however, that if the Offering is not completed by July 31, 1997, no payments
will be made until such time as the Company obtains sufficient capital surplus
to make such payments. The notes will bear interest at the rate of 8% per annum
commencing the date that each investor initially subscribed for his Rule 504
Shares.
The 442,856 shares which were not required to be repurchased and are still
outstanding were issued under Rule 504 of the 1933 Act (the "504 Shares") and
are freely tradeable except for 100,000 of the Rule 504 Shares which are
subject to a "lock-up" by the Representative. See "Underwriting." Any actual
future sales of the Rule 504 Shares (or the potential thereof) may have an
adverse effect on the market price of the Company's securities, should a public
trading market develop. See "RISK FACTORS--Unregistered Securities Eligible for
Immediate and Future Sale." The Underwriters have no arrangements, agreements
or understandings with any of these eight private investors to sell their Rule
504 Shares.
BRIDGE LOAN
In October 1996, the Company borrowed an aggregate of $200,000 (the
"Bridge Loan") from three private investors, two of whom are customers of the
Representative, and the third of whom was introduced by the Representative to
the Company. These three private investors are Clinthill Investments, Ltd.,
Kurt Campbell and M&M Specialties, Inc. The Bridge Loan bears interest at the
rate of 8% per annum and is payable upon the earlier of October 1997 and the
closing of this Offering.
As originally structured, $75,000 of the face amount of the Bridge Loan
was convertible into 1,500,000 Warrants upon the date of the Prospectus.
Subsequently, the Bridge Loan was restructured, at the request of the
Representative, so that the Bridge Lenders would be paid the entire $200,000
face amount of the Bridge Loan, in cash, plus accrued interest at 8% per annum,
at the closing of this Offering, and would waive the right to convert $75,000
of the face amount of the loan into 1,500,000 Warrants.
ACQUISITION OF THE NATURAL BABY CATALOG
In May, 1996, The Natural Baby Company, Inc. ("Baby Co.") contracted to
sell its catalog business, The Natural Baby Catalog, to Duncan Hill, at which
time Duncan Hill paid Baby Co. $25,000 towards the purchase price. The Company
will repay the $25,000 advanced by Duncan Hill upon the closing of this
Offering. Duncan Hill has assigned its rights to acquire The Natural Baby
Catalog to the Company, with Baby Co.'s approval. The remaining purchase price
to be paid by the Company for The Natural Baby Catalog consists of: a cash
payment in the amount of $1,225,000 to be made by the Company to Baby Co. upon
the closing of the Offering; a cash payment in the amount of $212,451 in
payment of a
44
<PAGE>
note owed by Baby Co. in the principal amount of $197,603 together with accrued
interest in the amount of $14,848 through June 30, 1997; the assumption by the
Company of Baby Co.'s accounts payable incurred in the ordinary course of
business, which is $289,894 as of June 30, 1997; the assumption of Baby Co.'s
remaining lease obligations in the approximate amount of $26,500 at June 1,
1997; a convertible promissory note to be issued by the Company to Baby Co. in
the amount of $250,000 (the "Convertible Note"), the terms of which are more
fully discussed below; a second promissory note in an amount which reflects the
pre-tax profits of Baby Co. in excess of $300,000 from the date of the
completion of the acquisition through December 31, 1997 (the "Excess Profit
Note") as more fully discussed below, and, 70,000 shares of the Company's
unregistered Common Stock to be issued to Baby Co. (the "Acquisition Shares"),
which shares will be subject to a two year lock-up from the date of this
Prospectus. The Company intends to pay the foregoing notes any assumed accounts
payable and lease obligations out of The Natural Baby Catalog's cash flow.
The unpaid balance of the Convertible Note is convertible at any time into
unregistered shares of the Company's Common Stock, at the election of the
holder, at a conversion price of $5.00 per share. The Convertible Note will
have an eight year term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the Convertible Note, only accrued interest
in arrears will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth, seventh and
eight anniversaries of the execution of the Convertible Note. The payments to
be made by the Company on the first and second anniversary dates have been
guaranteed by Mr. Miller.
The purchase price is based upon Baby Co.'s tangible net worth at December
31, 1995, and is subject to adjustment in the event that Baby Co.'s tangible
net worth at closing is higher or lower than at year end 1995. Any adjustment
in the purchase price will be made as an adjustment to the Convertible Note.
The Company did not engage an independent appraiser to evaluate whether or
not the Company has agreed to pay a purchase price in excess of The Natural
Baby Catalog's fair value. In addition, because the Company did not complete
the acquisition on or before January 3, 1997, as initially agreed to, the
Company agreed to pay an additional $350,000 (the "Additional Amount") for the
acquisition in order to obtain an extension until no later than April 30, 1997
to complete the acquisition. $250,000 of the Additional Amount is reflected in
the Convertible Note and $100,000 of the Additional Amount is reflected in the
$1,462,451 cash payment to be made upon the completion of this Offering. Baby
Co.'s demands for the increase in the purchase price was predicated upon the
strong growth of The Natural Baby Catalog's business since Baby Co. initially
agreed to sell its catalog business in May, 1996.
The Company closed the acquisition in escrow on April 15, 1997, but was
unable to complete the acquisition by April 30, 1997 because of a delay in the
Company's pending public offering while the Company was awaiting NASD approval
of the underwriting compensation arrangements in connection with this Offering.
Because the Company was unable to complete the acquisition on or before
April 30, 1997, the Company agreed to increase the cash portion of the purchase
price by $150,000 and to issue the Excess Profit Note and the Acquisition
Shares in order to obtain a second extension until no later than June 30, 1997
to complete the acquisition. The amount of the Excess Profit Note will be equal
to the pre-tax profits of Baby Co. in excess of $300,000 from the date of the
completion of the acquisition through December 31, 1997 (the "Excess Profit
Period"). The pre-tax profits of Baby Co. will be determined by the amount of
merchandise sales (net of returns and allowances) during the Excess Profit
Period, multiplied by a percentage equal to the pre-tax profits of Baby Co. for
the twelve months preceding the acquisition closing date dividend by the amount
of merchandise sales (net of returns and allowances) during that twelve month
period. The principal amount of the Excess Profit Note shall be payable over
four equal, annual installments, together with accrued interest at 8% per
annum, commencing April 14, 1998. A third extension until July 9, 1997, to
complete the acquisition was recently granted by Baby Co.
Upon payment of the purchase price to Baby Co., which now must occur no
later than July 9, 1997, the acquisition will become final. See "RISK
FACTORS--Requirement to Complete the Escrow
45
<PAGE>
Closing of the Acquisition of The Natural Baby Catalog." Should the Company
fail to complete the transaction by July 9, 1997, the Company has agreed to pay
Baby Co. the sum of $87,500 in liquidated damages in addition to the $25,000
down payment previously paid by Duncan Hill to Baby Co.
The foregoing is a summary of the material provisions of the Asset
Purchase Agreement, as amended, and the Escrow Agreement, for the Company's
acquisition of The Natural Baby Catalog. The Asset Purchasing Agreement, as
amended, and the Escrow Agreement, have been filed as an Exhibit to the
Registration Statement of which the Prospectus is a part.
GENERAL
It is the policy of the Company that future transactions with affiliates
will be on terms no less favorable than could be obtained from unaffiliated
parties.
46
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
The securities that are offered hereby are being offered and will be sold
only in units ("Units"). Each Unit consists of two shares of common stock, $.001
par value (the "Common Stock") and eight Class A warrants (the "Warrants"). The
Warrants will be in registered form and immediately separately transferable,
detachable, and exercisable.
COMMON STOCK
The Company has 25,000,000 shares of authorized Common Stock. As of the
date of this Prospectus, 2,842,856 shares of Common Stock were issued and
outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Subject to preferences that may be applicable to
any then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. See "DIVIDEND POLICY." In
the event of a dissolution, liquidation or winding-up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of this Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
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. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock other
than the Series A Preferred Stock discussed below.
SERIES A PREFERRED STOCK
As of the date of this Prospectus, the Company has issued and outstanding
5,000,000 shares of Series A Preferred Stock, $.001 par value. The holders of
the Series A Preferred Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. As of the date of
this Prospectus, all of the issued and outstanding shares of the Series A
Preferred Stock is held by Duncan Hill. The Series A Preferred Stock and the
Common Stock held by Duncan Hill will enable it and the Millers to maintain
control of the Company subsequent to the completion of this Offering. See "RISK
FACTORS-Control by Parent and Parent's Controlling 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.
WARRANTS
During the four-year period commencing one year from the date of this
Prospectus, each Warrant will entitle the registered holder to purchase one
share of Common Stock at an exercise price of $5.00
47
<PAGE>
per share. Warrants may be exercised by surrendering to the warrant agent the
Warrants and the payment of the exercise price in United States funds by cash or
certified or bank check. No fractional shares of Common Stock will be issued in
connection with the exercise of Warrants. Upon exercise, the Company will pay to
the holder the value of any such fractional shares based upon the market value
of the Common Stock at such time. The Company is required to keep available a
sufficient number of authorized shares of Common Stock for issuance to permit
exercise of the Warrants.
The Company may redeem the Warrants at a price of $.05 per Warrant at any
time after they become exercisable and prior to their expiration by giving not
less than 30 days' written notice mailed to the record holders if the closing
bid price of the Common Stock has been at least $14.40 on each of the 20
consecutive trading days ending on the 5th day prior to the date on which the
notice of redemption is given.
The Warrants will expire at 4:00 p.m., New York time, on the fifth
anniversary of the date of this Prospectus. In the event a holder of Warrants
fails to exercise the Warrants prior to their expiration, the Warrants will
expire and the holder thereof will have no further rights with respect to the
Warrants. A holder of Warrants will not have any rights, privileges or
liabilities as a stockholder of the Company. In the event of the liquidation,
dissolution or winding up of the Company, holders of the Warrants are not
entitled to participate in the distribution of the Company's assets.
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. No assurance can be given that the market
price of the Company's Common Stock will exceed the exercise price of the
Warrants at any time during the exercise period.
Purchasers of the Warrants will have the right to exercise the Warrants to
purchase shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if the shares are qualified for sale under the
securities laws of the jurisdictions in which the various holders of the
Warrants reside. The Company has undertaken to maintain the effectiveness of the
Registration Statement of which this Prospectus is a part or to file and
maintain the effectiveness of another registration statement so as to permit the
purchase of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. The Warrants may be deprived
of any value if this Prospectus or another prospectus covering the shares
issuable upon the exercise thereof is not kept effective or if such Common Stock
is not qualified or exempt from qualification in the jurisdictions in which the
holders of the Warrants reside.
For the life of the Warrants, a holder thereof is given the opportunity to
profit from a rise in the market price of the Common Stock that may result in a
dilution of the interest of other stockholders. In addition, the Company may
find it more difficult to raise capital if it should be needed for the business
of the Company while the Warrants are outstanding. At any time when the holders
of Warrants might be expected to exercise them, the Company would, in all
likelihood, be able to obtain additional capital on terms more favorable than
those provided in the Warrants.
The foregoing is a summary of certain provisions of Warrant Agreement under
which each Warrant will be issued. The Warrant Agreement has been filed as an
Exhibit to the Registration Statement of which the Prospectus is a part.
UNDERWRITERS' PURCHASE OPTION
In connection with this Offering, the Company has agreed to sell to the
Underwriters, for an aggregate purchase price of $25, the Underwriters' Purchase
Option which entitles the Underwriters to purchase 60,000 shares of Common
Stock. See "UNDERWRITING."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and
Warrants is American Stock Transfer & Trust Company.
48
<PAGE>
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
3,512,856 shares of Common Stock. Of such shares, 1,042,856 shares of Common
Stock will be freely transferable without restriction or further registration
under the 1933 Act (the "Unrestricted Shares"), other than any of such shares
acquired by persons who are currently "affiliates" of the Company as defined by
Rule 144 under the Act, which will be subject to limitations under Rule 144 for
so long as such persons are affiliates. Only 600,000 of the 1,042,856
Unrestricted Shares have been registered in this Offering. The balance (442,856
shares) were issued under Rule 504 of the 1933 Act and are freely tradeable
except for 100,000 of the Rule 504 shares which are subject to a "lock-up" by
the Representative. See "UNDERWRITING." Any future sales of the Rule 504 Shares
(or the potential therefor) may have an adverse effect on the market price of
the Company's securities, should a public trading market develop. See "RISK
FACTORS--Unregistered Shares Eligible for Immediate and Future Sale."
The Company's parent, Duncan Hill, holds 2,400,000 unregistered shares of
the Company's Common Stock and 5,000,000 unregistered shares of the Company's
Series A Preferred Stock. Upon the completion of the Offering, the Company will
issue 70,000 unregistered shares of Common Stock to the seller of The Natural
Baby Catalog. These shares of Common and Preferred Stock held by Duncan Hill,
and the shares of Common Stock to be issued to the seller of The Natural Baby
Catalog, are "restricted securities" within the meaning of Rule 144, and may not
be sold in the absence of registration other than in accordance with Rule 144
described below or another exemption from regulation under the Act. These
restricted shares are also subject to a "lock-up" by the Representative. See
"UNDERWRITING."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the 1933 Act, is
entitled to sell within any three-month period a number of shares beneficially
owned for at least one year that does not exceed the greater of (i) one percent
of the then-outstanding shares of Common Stock or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not an affiliate and has beneficially
owned such shares for at least two years is entitled to sell such shares without
regard to the volume, manner of sale or notice requirements.
No predictions can be made as to the effect, if any, that future sales of
shares under Rule 144 or the availability of shares for sale will have on the
then-prevailing market, if any. Sales of substantial amounts of Common or
Preferred Stock pursuant to Rule 144 may adversely affect the then-prevailing
market price of the Units, Common Stock or the Warrants, should a public trading
market for such securities develop.
49
<PAGE>
UNDERWRITING
The Underwriters, as set forth below and for whom VTR Capital, Inc. is the
representative (the "Representative"), have agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 300,000 Units on a "firm commitment basis." The Underwriting Agreement
provides that the obligations of the Underwriters to purchase the Units are
subject to certain conditions and that the Underwriters are obligated to
purchase all of the 300,000 Units, if any are purchased.
NUMBER
UNDERWRITERS OF UNITS
----------- -----------
VTR Capital, Inc. ...... 225,000
IAR Securities, Inc. .... 75,000
-----------
Total ............... 300,000
===========
The Representative has advised the Company that they propose to offer the
Units to the public at the offering price set forth on the cover page of this
Prospectus and that they may allow to certain dealers concessions not in excess
of $.60 per Unit. After the initial public offering, the offering price,
discount and reallowance may be changed. The Underwriters do not intend to sell
any of the securities offered hereby to accounts for which they have
discretionary authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specific maximum. Syndicate covering transactions involve purchases of the
Company's securities in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when the
securities originally sold by such syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the securities to be higher than they would otherwise be in the absence
of such transactions. These transactions may be effected on the OTC Bulletin
Board.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the 1933 Act. Insofar as
indemnification for liabilities arising under the 1933 Act may be provided to
officers, directors or persons controlling the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay the Underwriters an expense allowance on a
non-accountable basis equal to 3% of the gross proceeds from the sale of the
Units offered hereby, $0 which has been paid to date. The Company also has
agreed to pay all expenses in connection with qualifying the Units offered
hereby for sale under the laws of such states as the Underwriters may designate,
and the fees, costs and disbursements in connection with registering this
Offering with the National Association of Securities Dealers, Inc. (the "NASD"),
including fees and expenses of counsel retained for such purposes by the
Underwriters.
50
<PAGE>
The Company has also agreed to sell to the Underwriters, for an aggregate
purchase price of $25, the Underwriters' Purchase Option, which entitles the
Underwriters to purchase up to 60,000 shares of Common Stock at an exercise
price of $9.90 per share. The Underwriters' Purchase Option is exercisable for
four years commencing one year from the date of the Prospectus. The
Underwriters' Purchase Option may not be assigned, transferred, sold or
hypothecated by the Underwriters until 12 months after the date of this
Prospectus, except to officers or partners of the Underwriters and selling group
members in this Offering. Any profits realized by the Underwriters upon the sale
of the Units issuable upon exercise of the Underwriters' Purchase Option may be
deemed to be additional underwriting compensation. The exercise price and the
number of shares underlying the Underwriters' Purchase Option are subject to
adjustment in certain events to prevent dilution. For the life of the
Underwriters' Purchase Option, the holders thereof are given, at a nominal cost,
the opportunity to profit from a rise in the market price of the Common Stock
with a resulting dilution in the interest of other stockholders. The Company may
find it more difficult to raise capital for its business if the need should
arise while the Underwriters' Purchase Option is outstanding. At any time when
the holders of the Underwriters' Purchase Option might be expected to exercise
it, the Company would probably be able to obtain additional capital on more
favorable terms.
The Company has agreed to register, at its expense, under the 1933 Act, on
one occasion, the Underwriters' Purchase Option and/or the underlying securities
covered by the Underwriters' Purchase Option at the request of the holders of
50% of the Underwriters' Purchase Option. Such request may be made at any time
during a period of four years beginning one year from the date of this
Prospectus. The Company has also agreed to certain "piggyback" registration
rights for the holders of the Underwriters' Purchase Option or securities
issuable upon the exercise of the Underwriters' Purchase Option. Any exercise of
such registration rights by the Underwriters or the sale of any shares of Common
Stock by the holders thereof may be dilutive to the then present shareholders
and may also have an adverse effect upon either the Company's ability to obtain
additional capital, or the market price of the Company's securities should a
public trading market develop.
The Company has agreed with the Representative that, commencing one (1)
year from the date hereof, the Company will pay to the Representative a warrant
solicitation fee (the "Warrant solicitation Fee") equal to four percent (4%) of
the exercise price of the Warrants exercised, a portion of which may be
re-allowed to any dealer who solicited the exercise to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Securities and Exchange Commission. Such Warrant Solicitation Fee will be
paid to the Representative if (a) the market price of the Common Stock on the
date that any Warrants are exercised is greater than the exercise price of the
Warrant; (b) the exercise of such Warrant was solicited by the Representative or
other NASD members; (c) prior specific written approval for exercise is received
from the customer if the Warrant is held in a discretionary account; (d)
disclosure of this compensation agreement is made prior to or upon the exercise
of such Warrant; (e) solicitation of the exercise is not in violation of
Regulation M (formerly Rule 10b-6 of the Exchange Act); and (f) solicitation of
the exercise is in compliance with NASD Notice to Members 81-38. Unless granted
an exemption by the Securities and Exchange Commission from Regulation M
(formerly Rule 10b-6), the Underwriters and any solicitation broker-dealers are
prohibited from engaging in any market-making activities with regard to the
issuer's securities for the period from one or five business days prior to any
solicitation of the exercise of Warrants until the later of termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that the Underwriters and soliciting broker-dealers may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, the
Underwriters and soliciting broker-dealers may be unable to continue to provide
a market for the Company's securities during certain periods while the Warrants
are exercisable.
If the Company enters into a transaction (including a merger, joint
venture, or the acquisition of another entity) introduced to the Company by the
Representative, the Company has agreed to pay the Representative a finder's fee
equal to 5% of the first $4,000,000 of consideration involved in the
transaction, ranging in $1,000,000 increments down to 2% of the excess, if any,
over $6,000,000.
51
<PAGE>
Duncan Hill, the holder of 100,000 Rule 504 Shares and the seller of The
Natural Baby Catalog have each agreed not to sell, transfer, or otherwise
dispose of any securities of the Company owned by them within 24 months from the
date of this Prospectus, unless released earlier by the Representative.
The Company has agreed to enter into a three-year consulting agreement (the
"Consulting Agreement") with the Representative. Such agreement provides that
the Representative will render consulting services on investment banking and
other financial matters to be determined by the Company. Such services will be
provided upon dates requested by the Company and reasonably acceptable to the
Representative, not to exceed two business days per month. The services to be
provided by the Representative shall include: assistance in formulating plans
and presenting financial reports; analyzing third party proposals for the
provision of additional financing to the Company; assistance in dealing with
brokers and institutions; assistance in obtaining financial management,
technical and advisory services; and, assistance in obtaining financial and
corporate public relations. The aggregate fee due to the Representative for such
consulting services will be $100,000 and shall be paid in full in the closing of
this Offering.
The Representative has been granted by the Company the option to designate
one individual to serve on the Company's Board of Directors for a period of
three years from the date of this Prospectus. That individual must be reasonably
satisfactory to the Company's Board of Directors. As of the date hereof, no such
person has been designated. The Company has been advised by the Representative
that any individual appointed by the Representative will not be an officer,
director or affiliate of the Representative or any member of the NASD. In lieu
of nominating a director, the Representative may designate a non-director
observer to attend meetings of the Company's Board of Directors for a period of
three years from the date of the Prospectus.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units offered
hereby and the terms of the Warrants, including the exercise price of the
Warrants, were determined by negotiations between the Company and the
Representative and do not necessarily bear any relationship to the Company's
assets, results of operations or other generally accepted criteria of value.
Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects of the
industry in which the Company competes, an assessment of the Company's
management, the results of operations of the Company in recent periods, the
prospects of the Company, its capital structure and such other factors as were
deemed relevant.
The offering price set forth on the cover page of this Prospectus should
not be considered an indication of the actual value of the Units. Such price is
subject to change as a result of market conditions and other factors and no
assurance can be given that the Units can be resold at the offering price.
The Representative has limited experience as an underwriter of public
offerings. The Representative has been the underwriter or co-underwriter in the
nine firm commitment offerings listed below: Superior Supplements, Inc., U.S.
Opportunity Search, Inc., Interiors, Inc., Conolog, Inc., New Day Beverage,
Inc., Perry's Majestic Beer, Inc., Micro-Energy, Inc., Compare Generiks, Inc.
and Decor Group, Inc. The Company's offering is expected to be the
Representative's tenth firm commitment offering. There can be no assurance that
the Representative's limited experience as an underwriter of public offerings
will not adversely affect the proposed offering of the Units, the subsequent
development of a trading market, if any, or the market for and liquidity of the
Company's securities. Therefore, purchasers of the securities offered hereby may
suffer a lack of liquidity in their investment or a material diminution of the
value of their investment.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriters' Purchase Option which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
52
<PAGE>
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon for
the Company by Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A. ("Hornsby,
Sacher"), Miami, Florida. Hornsby, Sacher has served, and continues to serve, as
counsel to the Representative in matters unrelated to this Offering. Certain
legal matters will be passed upon for the Underwriters by Bernstein & Wasserman,
LLP, New York, New York.
EXPERTS
The financial statements of Kids Stuff, Inc. as of December 31, 1996 and
for the years ended December 31, 1996 and 1995 and the financial statements of
The Natural Baby Company, Inc., as of December 31, 1996 and for the years ended
December 31, 1996 and 1995 appearing in this Prospectus, have been audited by
Hausser - Taylor, independent auditors, and are included herein in reliance upon
the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the 1933 Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which are omitted as permitted by the rules and regulations of the Commission.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified by such
reference.
The Company does not presently file reports or other information with the
Commission. Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports and other information with the
Commission. Such reports and other information, as well as the Registration
Statement and the exhibits and schedules thereto, may be inspected, without
charge, at the public reference facility maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission maintains a Web site on the Internet (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding issuers which file electronically with the Commission through the
Electronic Data Gathering, Analysis, and Retrieval System (EDGAR). The Company's
Registration Statement on Form SB-2 has been filed through EDGAR.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined and reported upon by its
independent certified public accountants, and quarterly reports containing
unaudited financial information for its first three quarters of each year.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
------
KIDS STUFF, INC.
Report of Independent Auditors ............................................. F-2
Balance Sheets as of December 31, 1996 and as of March 31, 1997 (Unaudited) F-3
Statements of Operations
for the Years ended December 31, 1996 and 1995 and for the Three Months
ended March 31, 1997 and 1996 (Unaudited) ................................. F-4
Statements of Stockholders' Equity
for the Year ended December 31, 1996 and for the Three Months
ended March 31, 1997 (Unaudited) .......................................... F-5
Statements of Cash Flows
for the Years ended December 31, 1996 and 1995 and for the Three Months
ended March 31, 1997 and 1996 ............................................. F-6
Notes to Financial Statements ............................................. F-7
THE NATURAL BABY COMPANY, INC.
Report of Independent Auditors ............................................. F-17
Balance Sheet as of December 31, 1996 and as of March 31, 1997 (Unaudited) F-18
Statements of Operations
for the Years ended December 31, 1996 and 1995 and for the Three Months
ended March 31, 1997 and 1996 (Unaudited) ................................. F-19
Statements of Retained Earnings
for the Years ended December 31, 1996 and 1995 and for the Three Months
ended March 31, 1997 and 1996 ............................................. F-20
Statements of Cash Flows
for the Years ended December 31, 1996 and 1995 and for the Three Months
ended March 31, 1997 and 1996 ............................................. F-21
Note to Financial Statements ................................................ F-22
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction ............................................................... P-1
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1997 ............ P-2
Unaudited Pro Forma Combined Statements of Income
for the Year ended December 31, 1996 and for the Three Months
ended March 31, 1997 ...................................................... P-4
Notes to Unaudited Pro Forma Combined Financial Statements .................. P-5
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Kids Stuff, Inc.
North Canton, Ohio
We have audited the accompanying balance sheet of Kids Stuff, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kids Stuff, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
As discussed in Note A to the financial statements, Kids Stuff, Inc. was
incorporated during 1996 and prior to June 30, 1996, had no operations. The
financial position, results of operations, and cash flows prior to June 30, 1996
presented in the accompanying financial statements are those of the predecessor
company, Perfectly Safe, Inc., and certain assets of Duncan Hill Company, Ltd.,
the parent company of both Perfectly Safe, Inc. and Kids Stuff, Inc. As
discussed in Note 8 to the financial statements, the Company changed its method
of accounting for certain intangible assets.
HAUSSER + TAYLOR
Canton, Ohio
February 21, 1997, except for Note 13
which is as of May 15, 1997
F-2
<PAGE>
KIDS STUFF, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................... $ 41,932 $ 248,648
Accounts receivable .................................... 209,587 165,779
Inventories ............................................. 387,471 496,395
Deferred catalog expense .............................. 340,649 277,469
Due from affiliates .................................... 515 -
Prepaid expenses ....................................... 325,081 169,789
------------ ------------
Total current assets ................................. 1,305,235 1,358,080
PROPERTY AND EQUIPMENT
Data processing equipment .............................. 107,271 95,894
Machinery and equipment ................................. 83,360 83,360
Furniture and fixtures ................................. 100,568 98,448
------------ ------------
291,199 277,702
Less accumulated depreciation ........................... 172,934 164,093
------------ ------------
118,265 113,609
------------ ------------
$ 1,423,500 $ 1,471,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES ....................................
Current portion of long-term debt-related parties ...... $ 266,858 $ 266,858
Accounts payable ....................................... 1,329,229 1,102,311
Line of credit .......................................... 650,000 650,000
Due to affiliates ....................................... - 137,070
Customer advances and other ........................... 21,549 5,630
------------ ------------
Total current liabilities .............................. 2,267,636 2,161,869
LONG-TERM DEBT-RELATED PARTIES, NET OF
CURRENT PORTION ....................................... 300,000 300,000
STOCKHOLDERS' EQUITY
Common stock .......................................... 3,700 3,700
Preferred Stock ....................................... 5,000 -
Additional paid-in capital ........................... 458,800 458,800
Retained earnings (deficit) ........................... (1,611,636) (1,452,680)
------------ ------------
Total stockholders' equity ........................... (1,144,136) (990,180)
------------ ------------
$ 1,423,500 $ 1,471,689
============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-3
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
----------------------------- ------------------------------
1997 1996 1996 1995
------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES ........................... $ 1,465,541 $ 1,519,716 $ 6,638,995 $ 5,724,337
COST OF SALES .................. 825,394 994,142 4,204,321 3,540,487
----------- ----------- ----------- -----------
GROSS PROFIT ..................... 640,147 525,574 2,434,674 2,183,850
SELLING EXPENSES ............... 594,841 448,393 2,193,219 1,998,502
GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 189,443 170,414 768,580 730,950
----------- ----------- ----------- -----------
(LOSS) FROM OPERATIONS ......... (144,137) (93,233) (527,125) (545,602)
NET OTHER INCOME (EXPENSE) ...... (14,819) (6,404) 5,485 8,610
----------- ----------- ----------- -----------
NET (LOSS) ..................... $ (158,956) $ (99,637) $ (521,640) $ (536,992)
=========== =========== =========== ===========
(LOSS) PER SHARE ............... $ (.04) $ (.03) $ (.14) $ (.15)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-4
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
COMMON PAID-IN PREFERRED RETAINED
STOCK CAPITAL STOCK EARNINGS TOTAL
--------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE-DECEMBER 31, 1994 .................. $2,400 $297,600 $ 0 $ 234,503 $ 534,503
PRIOR PERIOD ADJUSTMENT .................. - - - (628,551) (628,551)
BALANCE-DECEMBER 31, 1994
as restated .............................. 2,400 297,600 0 (394,048) (94,048)
DEDUCTION
Net loss ................................. - - - (536,992) (536,992)
------- --------- ------- ------------- -------------
BALANCE-DECEMBER 31, 1995 .................. 2,400 297,600 0 (931,040) (631,040)
ADDITION
Sale of common stock ..................... 1,300 161,200 - - 162,500
DEDUCTION
Net loss ................................. - - - (521,640) (521,640)
------- --------- ------- ------------- -------------
BALANCE-DECEMBER 31, 1996 .................. 3,700 458,800 0 (1,452,680) (990,180)
ADDITION
Sale of preferred stock (unaudited) ...... - - 5,000 - 5,000
DEDUCTION
Net loss (unaudited) ..................... - - - (158,956) (158,956)
------- --------- ------- ------------- -------------
BALANCE-MARCH 31, 1997
(UNAUDITED) .............................. $3,700 $458,800 $5,000 $ (1,611,636) $ (1,144,136)
======= ========= ======= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-5
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------------------ ----------------------------
1997 1996 1996 1995
------------- -------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) .......................................... $ (158,956) $ (99,637) $ (521,640) $ (536,992)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation ....................................... 8,841 4,615 17,005 25,991
Loss on disposal of assets ........................... - - 30,450 -
(Increase) decrease in accounts receivable ......... (43,808) 275 (92,146) 21,705
Decrease (increase) in inventories .................. 108,924 (45,846) 105,622 (237,747)
(Increase) in deferred catalog expense ............... (63,180) (171,660) (105,944) (34,072)
Increase in accounts payable, customer advances
and other ........................................ 242,322 155,853 354,020 250,974
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities ...... 94,143 (156,400) (212,633) (510,141)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment .................. (13,497) (17,610) (38,921) (28,016)
Prepaid amounts for acquisition of Natural Baby
Catalog business .................................... (19,533) (11,699) (126,007) -
----------- ----------- ----------- -----------
Net cash (used) by investing activities ............... (33,030) (29,309) (164,928) (28,016)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit ........................ - 275,000 220,000 255,000
Sale of common stock ................................. - - 162,500 -
Sale of preferred stock .............................. 5,000 - - -
Borrowings on long-term debt-related parties ......... - - 566,858 -
Prepaid amounts for public offering .................. (135,759) - (43,782) -
(Decrease) increase in due to affiliates ............ (137,070) (81,710) (315,086) 281,726
----------- ----------- ----------- -----------
Net cash (used) provided by financing activities ...... (267,829) 193,290 590,490 536,726
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH ........................ (206,716) 7,581 212,929 (1,431)
CASH-BEGINNING ....................................... 248,648 35,719 35,719 37,150
----------- ----------- ----------- -----------
CASH-ENDING .......................................... $ 41,932 $ 43,300 $ 248,648 $ 35,719
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for interest ............... $ 13,512 $ 10,137 $ 50,554 $ 46,336
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND REORGANIZATION
A. REORGANIZATION-Kids Stuff, Inc. ("Kids Stuff" or the "Company") was
incorporated during 1996 as a wholly-owned subsidiary of Duncan Hill Company,
Ltd. ("Duncan Hill"). Prior to a reorganization occurring June 30, 1996, Kids
Stuff had no operations. The operations shown in the accompanying financial
statements prior to June 30, 1996 are those of Perfectly Safe, Inc., which was
dissolved as part of the reorganization and is sometimes referred to as
"Predecessor" in these financial statements.
Perfectly Safe, Inc. was also a wholly-owned subsidiary of Duncan Hill.
Effective June 30, 1996, the assets and liabilities of Perfectly Safe, Inc.,
reverted to Duncan Hill, and Perfectly Save, Inc. was dissolved. As part of the
reorganization, the Company acquired the assets and liabilities of its
Predecessor. The Company also acquired, as part of the reorganization, certain
fixed assets formerly belonging to Duncan Hill at a net book value of $122,143
at December 31, 1995. The combination of the Company's acquisition of the assets
of its Predecessor and the Company's acquisition of certain assets of Duncan
Hill were accounted for at historical cost as a reorganization of companies
under common control. The operations of the Predecessor are currently operated
as the Perfectly Safe Division and Jeanne's Kids Club Division of the Company.
B. BUSINESS DESCRIPTION-The Company is in the mail order business and sells
to customers throughout the United States. Perfectly Safe, a division of the
Company, primarily sells children's safety products for use up to age 3.
Jeanne's Kids Club, a division of the Company, sells hard good products for
children primarily up to the age of 3. Products are purchased from a variety of
vendors.
C. USE OF ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
D. FAIR VALUE OF FINANCIAL INSTRUMENTS-The fair value of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying values because of the short maturities of those financial instruments.
The carrying values of the Company's long-term obligations approximate their
fair value. In accordance with Statement of Accounting Standards No. 107,
"Disclosure About Fair Value of Financial Instruments," rates available at
balance sheet dates to the Company are used to estimate the fair value of
existing debt.
E. TRADE RECEIVABLES-It is the Company's policy to record accounts
receivable net of an allowance for doubtful accounts. Management has determined
that no allowance is necessary as of December 31, 1996 or March 31, 1997
(unaudited). Bad debt expense was $5,908 (unaudited) and $5,640 (unaudited) for
the three months ended March 31, 1997 and 1996, respectively, and $34,752 and
$18,742 for the years ended December 31, 1996 and 1995, respectively.
F. Inventories consist of finished goods held for resale and are stated at
the lower of cost or market with cost being determined by the first-in,
first-out (FIFO) method.
G. Deferred catalog expenses are costs of catalogs mailed to customers
which are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers
F-7
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND REORGANIZATION-(CONTINUED)
utilize catalogs and other mail order mailings from the Company. Catalog expense
was $482,771 (unaudited) and $367,856 (unaudited) for the three months ended
March 31, 1997 and 1996, respectively, and $1,936,094 and $1,772,770 for the
years ended December 31, 1996 and 1995, respectively.
H. At December 31, 1996, prepaid expenses include $43,782 relative to the
public offering (see Note 9) and $126,007 relative to the acquisition of the
Natural Baby Catalog (see Note 5). At March 31, 1997, prepaid expenses include
$179,541 (unaudited) relative to the public offering and $145,540 (unaudited)
relative to the acquisition of The Natural Baby Catalog.
I. Property and equipment are carried at cost and depreciated using the
straight-line method over their estimated useful lives ranging from five to ten
years. Depreciation expense amounted to $8,841 (unaudited) and $4,615
(unaudited) for the three months ended March 31, 1997 and 1996, respectively,
and $17,005 and $25,991 for the years ended December 31, 1996 and 1995,
respectively. Maintenance, repairs, and minor renewals are charged against
earnings when incurred. Additions and major renewals are capitalized.
J. The Company developed and maintains a mailing list of customers who have
purchased merchandise in the recent past. The cost of developing, maintaining,
and updating this list is expensed in the period incurred.
K. New Authoritative Pronouncements-In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF (SFAS 121). SFAS 121 requires the Company to review long-lived
assets and certain identifiable intangibles, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment of impairment is based on the
estimated undiscounted future cash flows from operating activities compared with
the carrying value of the assets. If the undiscounted future cash flows of an
asset are less than the carrying value, a write-down would be recorded measured
by the amount of the difference between the carrying value of the asset and the
fair value of the asset. The adoption of SFAS 121 did not have a material effect
on the financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not have any effect
to the Company's financial statement other than to require disclosure of the pro
forma effect on net income of using the fair value-based method of accounting.
Management believes this effect to currently be immaterial.
F-8
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND REORGANIZATION-(CONTINUED)
NOTE 1. PARENT CORPORATION
Prior to June 30, 1996, the telemarketing, order fulfillment, data
processing, and administrative function of Perfectly Safe, Inc. were provided by
Duncan Hill, which also provided those services, as applicable, to its other
operating subsidiaries. Duncan Hill allocated the cost of its services,
including rent, to its operating subsidiaries on a direct cost basis, as
applicable, or on a pro rata basis determined by the percentage of total assets
of the various operating subsidiaries, exclusive of the assets of Duncan Hill.
Management believes this is a reasonable basis of cost allocation and that these
expenses would not have been materially different had the Company been on a
stand-alone basis.
As of June 30, 1996, the Company purchased from Duncan Hill the assets used
by Duncan Hill to perform the telemarketing, order fulfillment, data processing,
and administrative functions. The Company commenced the performance of these
functions as of June 30, 1996, except for the payroll and accounting functions,
which Duncan Hill continued to provide through December 31, 1996. Duncan Hill
charged the Company for its allocated portion of these expenses on the basis of
total assets, which management believes to be a reasonable basis of cost
allocation. Management believes that, had the Company been on a stand-alone
basis, these expenses would not be materially different. Amounts due to
affiliate are a result of the unpaid portion of these charges.
Subsequent to December 31, 1996, the Company will provide services to
Duncan Hill and Duncan Hill's other subsidiaries, as requested, on an actual
cost basis. Actual costs are those direct costs that can be charged on a per
order or per hour basis, plus fixed costs allocated on a pro rata basis by
dividing the total assets of the operating entity requesting services by the sum
of the total assets of all operating entities of Duncan Hill and the operating
entity requesting services.
The accounts receivable and inventory of the Company and Duncan Hill's
other subsidiaries are pledged as collateral against an $800,000 line of credit
held by Duncan Hill prior to December 31, 1996. The balance on the line of
credit was $650,000 (unaudited) at March 31, 1997. As a part of the
reorganization of the Company, the responsibility for the repayment of the line
of credit was assumed by the Company from Duncan Hill in exchange for a
reduction of the intercompany indebtedness owed by the Company to Duncan Hill.
Effective December 31, 1996, the Company obtained an $800,000 line of credit in
its name and the Duncan Hill line of credit, with the same institution, was
simultaneously terminated and the outstanding balance of $650,000 at December
31, 1996 was transferred to the Company's line of credit. (See Note 3.)
All of the assets of the Company have been pledged to secure the Company's
obligation under its line of credit. Due to the current nature of the liability,
the carrying amount of the line approximates fair value.
Interest expense was $56,065 and $46,336 for the years ended December 31,
1996 and 1995, respectively, and $13, 512 (unaudited) and $10, 137 (unaudited)
for the three months ended March 31, 1997 and 1996, respectively.
NOTE 2. CAPITAL STOCK
A. COMMON
Prior to the reorganization, Perfectly Safe, Inc. had common stock at
December 31, 1995 with no par value, 750 shares were authorized, 100 shares
issued and outstanding. At March 31, 1997
F-9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2. CAPITAL STOCK-(CONTINUED)
(unaudited) and December 31, 1996, the Company has common stock of $.001 par
value, 25,000,000 shares authorized, 3,700,000 shares issued and outstanding.
Stockholders' equity reflects the reorganization for all periods presented.
Additionally, earnings per share were calculated based on the 3,700,000 shares
of common stock issued in the reorganization for all periods presented.
B. PREFERRED
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.
NOTE 3. NOTE PAYABLE-LINE OF CREDIT
Kids Stuff, Inc. has an $800,000 line of credit from United Bank with an
open term which is payable on demand, bearing interest payable monthly at the
bank's prime lending rate (8.25% at December 31, 1996) plus 1% and had a balance
of $650,000 at March 31, 1997 (unaudited) and December 31, 1996. The line is
secured by assets of the Company, as well as the assets of Duncan Hill and
another Duncan subsidiary, E. A. Carey of Ohio, Inc. The repayment of the
facility is guaranteed by Mr. Miller, the Company's Chief Executive Officer. It
is the policy of the bank to review the credit facility, annually, commencing
June 30, 1997, and to require that the Company maintain a zero balance on the
credit line for a period of thirty consecutive days sometime during the course
of each year. The bank has agreed to waive the "zero balance" required for the
1997 loan year ending June 30, 1997. The weighted average interest rate for the
years ended December 31, 1996 and 1995 was 9.3% and 9.7%, respectively.
NOTE 4. LONG-TERM DEBT-RELATED PARTIES
A. Long-term debt-related parties consists of the following at December 31,
1996 and March 31, 1997 (unaudited):
<TABLE>
<S> <C>
Note Payable-Duncan Hill Company, Ltd. (parent company), unsecured and payable in
four annual principal payments plus interest at 8.0%, matures June 2000. The first
installment is for $66,858 and the three remaining installments are for $100,000......... $366,858
Note Payable-(bridge lenders-see Note 6), the entire principal plus interest at 8.0%,
payable on the earlier of October, 1997 or the closing date of the initial public
offering of Company's securities ...................................................... 125,000
Note Payable-(bridge lenders-see Note 6), the entire principal plus interest at 8%,
payable on October, 1997 or convertible, at the option of the holder into 1,500,000
Class A Warrants of the Company (see Note 13A) .......................................... 75,000
---------
566,858
Less current portion ..................................................................... 266,858
---------
$300,000
=========
</TABLE>
F-10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 4. LONG-TERM DEBT-RELATED PARTIES-(CONTINUED)
B. Principal payments required to be made for the next five years ending
December 31 are as follows:
YEAR
- -------------
1997 ...... $266,858
1998 ...... 100,000
1999 ...... 100,000
2000 ...... 100,000
---------
$566,858
=========
NOTE 5. ACQUISITION OF THE NATURAL BABY CATALOG
In May, 1996, The Natural Baby Company, Inc. ("Baby Co.") contracted to
sell the assets of its catalog business (hereinafter referred to as "The Natural
Baby Catalog") to Duncan Hill, at which time Duncan Hill paid Baby Co. $25,000
towards the purchase price. The Company will repay the $25,000 advanced by
Duncan Hill upon the closing of a public offering. The Company filed the
registration statement on January 8, 1997. Duncan Hill has assigned its rights
to acquire The Natural Baby Catalog to the Company, with Baby Co.'s approval.
The remaining purchase price to be paid, upon the closing of a public offering,
by the Company for The Natural Baby Catalog consists of: a cash payment in the
amount of $1,075,000 to be made to the seller; a cash payment in the amount of
$210,777 in payment of a note owed by Baby Co. in the principal amount of
$197,603 together with accrued interest in the amount of $13,174 through April
30, 1997; the assumption by the Company of Baby Co.'s accounts payable incurred
in the ordinary course of business which is $289,894 (unaudited) as of March 31,
1997; assumption of Baby Co.'s remaining lease obligations in the approximate
amount of $35,500 as of December 31, 1996 ($30,000 unaudited as of March 31,
1997); a convertible promissory note issued by the Company to Baby Co. in the
amount of $250,000 (the "Convertible Note"), the terms of which are more fully
discussed below. The Company intends to pay the Convertible Note and assumed
accounts payable and lease obligations out of The Natural Baby Catalog's cash
flow. (See Note 13C for additonal discussion of the acquisition.)
The unpaid balance of the Convertible Note is convertible at any time into
unregistered shares of the Company's Common Stock, at the election of the
holder, at a conversion price of $5.00 per share. The Convertible Note will have
an eight-year term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the Convertible Note, only accrued interest in
arrears will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth, seventh and
eighth anniversaries of the execution of the Convertible Note.
The purchase price, in part, is based upon Baby Co.'s tangible net worth at
December 31, 1995, and is subject to adjustment in the event that Baby Co.'s
tangible net worth at closing is higher or lower than at year end 1995. Any
adjustment in the purchase price will be made as an adjustment to the
Convertible Note.
The Company did not engage an independent appraiser to evaluate whether or
not the Company has agreed to pay a purchase price in excess of The Natural Baby
Catalog's fair value. In addition, because the Company did not complete the
acquisition on or before January 3, 1997, as initially agreed to, the Company
agreed to pay an additional $350,000 (Additional Amount) for the acquisition in
order to obtain an extension until no later than April 30, 1997 to complete the
acquisition. $250,000 of the Additional Amount is reflected in the Convertible
Note and $100,000 of the Additional Amount is
F-11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5. ACQUISITION OF THE NATURAL BABY CATALOG-(CONTINUED)
reflected in the $1,285,777 cash payment to be made upon the completion of the
Company's pending public offering. Baby Co.'s demands for the increase in the
purchase price was predicated upon the strong growth of The Natural Baby
Catalog's business since Baby Co. initially agreed to sell its catalog business
in May, 1996.
NOTE 6. RECENT SALES OF UNREGISTERED SECURITIES
The following shares of unregistered securities have been issued by the
Company since its inception. There were no underwriting discounts and
commissions paid in connection with the issuance of any said securities.
In connection with the reorganization effective June 30, 1996, the Company
issued to its parent, Duncan Hill Co., Ltd., 2,400,000 shares of Common Stock at
a value of $.125 per share.
Commencing October, 1996, the Company sold an aggregate of 1,300,000 shares
of Common Stock to seven private investors for the aggregate purchase price of
$162,500.
In October, 1996, the Company borrowed an aggregate of $200,000 (bridge
loan) from three private investors, $75,000 of which is convertible upon its
terms into 1,500,000 Class A Warrants upon the effective date of the
registration statement described in Note 9. The 1,500,000 Warrants, as well as
the shares of Common Stock underlying those warrants are included as securities
being registered under the registration statement (see Note 13A).
NOTE 7. INCOME TAX
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes. The Company
does not anticipate filing as part of a consolidated group.
The Company had net operating loss carryforwards of approximately $360,000
(unaudited) and $210,000 as of March 31, 1997 and December 31, 1996,
respectively for tax purposes, which represents activity from July 1, 1996
through March 31, 1997. They expire in the year 2011 and are fully reserved for
book purposes. Tax net operating losses of the Predecessor incurred prior to
July 1996 reverted to the parent company in the reorganization.
NOTE 8. PRIOR PERIOD ADJUSTMENT
During 1996, the Company changed its accounting principle utilized
regarding internally-generated customer lists and development costs. Prior to
the change, the Company capitalized and amortized these costs over their
estimated useful life. The Company now expenses these costs as incurred.
Additionally, the Company has adjusted its financial statements to eliminate
goodwill associated with its 1990 acquisition of the Perfectly Safe Catalog
business because the transaction would be deemed to have been between affiliated
parties. The January 1, 1995 retained earnings and the related 1995 Statement of
Income have been restated for the effect of the following adjustments:
F-12
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 8. PRIOR PERIOD ADJUSTMENT-(CONTINUED)
<TABLE>
<CAPTION>
1995 NET INCOME (LOSS)
---------------------------
RETAINED
EARNINGS AMOUNT PER SHARE
------------- ------------- -----------
<S> <C> <C> <C>
As previously reported .......................................... $ 234,503 $ (163,232) $ (.05)
Elimination of internally-generated customer lists and development
costs and goodwill ............................................. (765,251) (336,660) (.09)
Elimination of the related deferred tax liability ............... 136,700 (37,100) (.01)
----------- ----------- --------
As adjusted ...................................................... $ (394,048) $ (536,992) $ (.15)
=========== =========== ========
</TABLE>
NOTE 9. PUBLIC OFFERING
The Company filed a registration statement in January, 1997, as amended,
relating to the offering by the Company of 287,500 units at an offering price of
$12 per unit, including 37,500 units to cover over-allotments, if any, each unit
consisting of two shares of common stock, $.001 par value, and one Class A
Warrant (see Note 13A).
The common stock and warrants are immediately separately transferable as of
the date of the prospectus. Each warrant entitles the holder to purchase one
share of common stock at a price of $5.00 for a period of four years commencing
one year after the date of this prospectus. The Company may redeem the Warrants
at a price of $.05 per Warrant, at any time after they become exercisable, upon
not less than 30 days' prior written notice, if the closing bid price of the
Common Stock has been at least $14.40 per share for 20 consecutive trading days
ending on the fifth day prior to the date on which the notice of redemption is
given.
NOTE 10. PREFERRED STOCK ISSURANCE
During January 1997, the Company issued to its parent, Duncan Hill Co.,
Ltd., 5,000,000 shares of Series A Preferred Stock, at par value of $.001 per
share, as a part of the reorganization (See Note A). The holders of the Series A
Preferred Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders.
The Series A Preferred Stock is not subject to redemption and has no
conversion rights or rights to participate in dividend payments. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company, each share of Series A Preferred Stock has a liquidation
preference of $.001 per share.
NOTE 11. EMPLOYMENT AGREEMENT
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 Chief Executive Officer of the Company and Mrs.
Miller is to serve as its Executive Vice President. The employment agreements
provide for an annual base salary of $125,000 for Mr. Miller and $90,000 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.
Each of Mr. Miller and Mrs. Miller was granted under their respective
employment agreements an option to purchase 100,000 shares of the Company's
Common Stock, which will vest 25% on each of the
F-13
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 11. EMPLOYMENT AGREEMENT-(CONTINUED)
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 shall be $5.00 per share, subject
to downward adjustments in the exercise price if the Company meets certain
performance goals.
NOTE 12. INCENTIVE PLANS
A. INCENTIVE COMPENSATION PLAN
The Company's Incentive Compensation Plan (the "Plan") is designed to
motivate employee participants to achieve the Company's annual strategic goals.
Eligibility for participation in the Plan is limited to the Chief Executive
Officer and the Executive Vice President of the Company, and such other
employees of the Company as may be designated by the Board of Directors from
time to time. For each fiscal year of the Company, the Board will establish a
bonus pool not to exceed 10% of the Company's operating income. The amount of
such pool with respect to any year shall be determined subsequent to the end of
that year upon the determination of the Company's operating income for that
year. Each participant in the Plan is eligible to receive from the bonus pool an
annual award of up to 50% of the participant's base salary.
B. 1997 STOCK INCENTIVE PLAN
The Company anticipates adopting a Stock Incentive Plan (Incentive Plan),
which will be shortly submitted to the stockholders for approval. 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.
13. SUBSEQUENT EVENTS
A. RESTRUCTURED BRIDGE LOAN
In October 1996, the Company borrowed an aggregate of $200,000 (Bridge Loan
further described in Note 4) from private investors. The Bridge Loan bears
interest in 8% annum and was payable upon earlier of October 1997 and the
closing of the public offering described in Note 9. As originally structured,
$75,000 of the Bridge Loan was convertible into 1,500,000 Class A Warrants upon
the date of the related Prospectus.
Subsequent to the original release of the Company's 1996 audited financial
statements, the Bridge Loan was restructured, at the request of VTR Capital,
Inc., the representative of the underwriters, so that the Bridge Lenders would
be paid the entire $200,000 face amount of the Bridge Loan, in cash, plus
accrued interest at the closing of the public offering, and would waive the
right to convert $75,000 of the face amount of the loan into 1,500,000 Warrants.
B. ADOPTION OF 1997 STOCK INCENTIVE PLAN
In March 1997, the Company's Board of Directors and majority stockholder
adopted the 1997 Stock Incentive Plan (further described in Note 12B).
F-14
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
13. SUBSEQUENT EVENTS-(CONTINUED)
C. ACQUISITION OF THE NATURAL BABY CATALOG
In May 1997, a second addendum to extend the date of the contract to sell
the assets of The Natural Baby Catalog to the Company, to June 30, 1997, was
agreed upon by both parties. The addendum provides for an additional cash
payment of $150,000 at the closing, for a total of $1,225,000; the cash payment
for the note payable owed by Baby Co. in the principal amount of $197,603 is
increased to $212,451 to include additional interest in the amount of $1,674,
calculated through June 30, 1997, for a total payment of the note in the amount
$212,451; a second promissory note in an amount which reflects the pre-tax
profits of the Baby Co. in excess of $300,000 from the date of the completion of
the acquisition through December 31, 1997 (the "Excess Profit Note") as more
fully discussed in the following paragraph; 70,000 shares of the unregistered
Common Stock the Company to be issued to Baby Co. (the "Acquisition Shares")
which will be subject to a two year lock-up from the date of the Prospectus;
and, the agreement on the part of the Company's Chief Executive Officer, William
L. Miller, to guarantee the payments to be made by the Company under the
Convertible Note on the first and second anniversary dates.
The amount of the Excess Profit Note shall be equal to the pre-tax profits
of Baby Co. in excess of $300,000 from the date of the completion of the
acquisition through December 31, 1997 (the "Excess Profit Period"). The pre-tax
profits of Baby Co. will be determined by the amoount of its merchandise sales
(net of returns and allowances) during the Excess Profit Period, multiplied by
the percentage equal to the pre-tax profits of Baby Co. for the twelve months
preceding the acquisition closing date divided by the amount of Baby Co.'s
merchandise sales (net of returns and allowances) during that twelve month
period. The principal amount of the Excess Profit Note shall be payable over
four equal, annual installments, together with accrued interest at 8% per annum,
commencing April 14, 1998.
Should the Company fail to complete the transaction by June 30, 1997, the
Company has agreed to pay Baby Co. the sum of $87,500 in liquidated damages in
addition to the $25,000 down payment previously paid by Duncan Hill to Baby Co.
D. AMENDED PUBLIC OFFERING REGISTRATION
The Company intends to file in June, 1997, an amended registration
statement relating to the offering by the Company of 300,000 units at an
offering price of $12 per unit, each unit consisting of two shares of common
stock, $.001 par value, and eight (8) Class A Warrants (see Note 9).
NOTE 14. RECENT REPURCHASE OF UNREGISTERED SECURITIES (UNAUDITED)
Commencing in October 1996, the Company sold an aggregate of 1,300,000
shares of Common Stock to eight private investors at a purchase price of $.125
per share. In June 1997, the Company repurchased an aggregate of 857,144 of
those shares from five of those investors, who were customers of one of the
Underwriters of the Company's pending public offering, at a repurchase price of
$.125 per share. This repurchase was required by the National Association of
Securities Dealers as a condition to approving the compensation to be received
by the Underwriters in connection with the public offering. The Company's
repurchase payment will be evidenced by five promissory notes issued by it in
the aggregate amount of $107,143. The notes are payable on earlier of the
closing of this offering or on July 31, 1997; provided, however, that if the
public offering is not completed by July 31, 1997, no payments will be made
until such time as the Company obtains sufficient capital surplus to make such
F-15
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. RECENT REPURCHASE OF UNREGISTERED SECURITIES (UNAUDITED)--(CONTINUED)
payments. The notes bear interest at the rate of 8% per annum commencing the
date that the investor initially subscribed for his Rule 504 Shares.
NOTE 15. RECENT THIRD EXTENSION FOR THE ACQUISITION OF THE NATURAL BABY CATALOG
(UNAUDITED)
A third extension until July, 1997, to complete the acquisition was
granted by Baby Co. on June 18, 1997. Should the acquisition not be completed
by July 9, 1997, the Company's contract to acquire The Natural Baby Catalog
will expire and the Company will be obligated to pay Baby Co. the liquidated
damage amount referenced in Note 13C.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio
We have audited the accompanying balance sheet of The Natural Baby Company,
Inc. as of December 31, 1996, and the related statements of income, retained
earnings, and cash flows for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Natural Baby Company,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
HAUSSER + TAYLOR
Canton, Ohio
January 22, 1997, except for Note 4,
which is of May 15, 1997
F-17
<PAGE>
THE NATURAL BABY COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ...................................................... $ 0 $ 81,140
Accounts receivable-trade ................................. 52,242 36,463
Inventories ................................................ 487,426 475,843
Deferred catalog expense .................................... 280,391 262,694
Prepaid expenses .......................................... 26,110 15,266
--------- ---------
Total current assets ....................................... 846,169 871,406
PROPERTY AND EQUIPMENT
Computer equipment .......................................... 70,093 69,394
Vehicle ................................................... 16,936 16,936
Furniture and fixtures .................................... 10,053 10,053
--------- ---------
97,082 96,383
Less accumulated depreciation .............................. 62,453 54,293
--------- ---------
34,629 42,090
OTHER ASSETS
Deposit ................................................... 1,779 1,779
--------- ---------
$882,577 $915,275
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable-related parties .............................. $197,603 $197,603
Accounts payable .......................................... 289,894 275,958
Accrued distributions to stockholders ..................... 0 140,000
Accrued bonus to stockholders .............................. 41,265 41,265
Accrued expenses .......................................... 19,516 29,096
--------- ---------
Total current liabilities ................................. 548,278 683,922
STOCKHOLDERS' EQUITY
Common stock, no par value, 10 shares authorized, issued and
outstanding .............................................. 100 100
Additional paid-in capital ................................. 10,000 10,000
Retained earnings .......................................... 324,199 221,253
--------- ---------
Total stockholders' equity ................................. 334,299 $231,353
--------- ---------
$882,577 $915,275
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-18
<PAGE>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
----------------------------- ------------------------------
1997 1996 1996 1995
------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES ........................ $ 1,459,225 $1,381,120 $ 6,451,215 $ 5,228,469
COST OF SALES ............... 945,610 909,045 3,596,965 2,828,165
----------- ---------- ----------- -----------
GROSS PROFIT ............... 513,615 472,075 2,854,250 2,400,304
SELLING EXPENSES ............ 275,618 345,885 1,698,746 1,664,664
GENERAL AND ADMINISTRATIVE
EXPENSES .................. 95,127 119,178 601,777 507,348
----------- ---------- ----------- -----------
INCOME FROM OPERATIONS ...... 142,870 7,012 553,727 228,292
OTHER INCOME (EXPENSE)
Interest .................. (2,540) (2,800) (11,725) (14,499)
Miscellaneous ............... (221) (4,560) 16,647 (1,060)
----------- ----------- ----------- -----------
(2,761) (7,360) 4,922 (15,559)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............ $ 140,109 ($ 348) $ 558,649 $ 212,733
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-19
<PAGE>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE-BEGINNING ...... 221,253 $ 340,025 $340,025 $127,292
ADDITION
Net income (loss) ...... 140,109 (348) 558,649 212,733
--------- --------- --------- ---------
361,362 339,667 898,674 340,025
DEDUCTION
Distributions ......... 37,163 - 677,421 -
--------- --------- --------- ---------
BALANCE-ENDING ......... $324,199 $ 339,677 $221,253 $340,025
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-20
<PAGE>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------------- -----------------------------
1997 1996 1996 1995
------------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................... $ 140,109 ($ 348) $ 558,649 $ 212,733
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation .......................................... 8,160 641 12,782 9,558
(Increase) decrease in accounts
receivable-trade .................................... (15,779) (56,066) (6,545) 5,920
Decrease (increase) in inventories .................. (11,583) 62,382 45,410 (165,329)
(Increase) decrease in deferred catalog expense ...... (17,697) (56,485) (76,429) 72,648
(Increase) decrease in prepaid expenses ............... (10,844) 1,674 (7,966) 19,574
Increase (decrease) in accounts payable and
accrued expenses .................................... 4,356 (19,208) 21,010 (51,983)
---------- --------- ---------- ----------
Net cash provided (used) by operating activities ...... 96,772 (67,411) 546,911 103,121
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment .................. (699) (119) (4,397) (40,686)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term debt .............................. - - - (26,648)
Proceeds from long-term borrowings ..................... - 40,000 - 40,000
Distributions to stockholders ........................ (177,163) - (537,421) -
---------- --------- ---------- ----------
Net cash (used) provided by financing activities ...... (177,163) $ 40,000 (537,421) 13,352
NET INCREASE (DECREASE) IN CASH ........................ (81,140) (27,530) 5,093 75,787
CASH-BEGINNING .......................................... 81,140 76,047 76,047 260
---------- --------- ---------- ----------
CASH-ENDING ............................................. $ - $ 48,517 $ 81,140 $ 76,047
========== ========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for interest ............... $ - $ - $ - $ 8,744
Non-cash financing activity- accrued
distributions to stockholders ........................ - - 140,000 -
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-21
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BUSINESS DESCRIPTION-The Natural Baby Company, Inc. (Company) is in the
mail order business and sells children's clothes and toys to customers
throughout the United States. Products are purchased from a variety of vendors.
B. USE OF ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
C. ACCOUNTS RECEIVABLE-In management's opinion, accounts receivable as of
March 31, 1997 were collectible and no material uncollectible accounts existed.
As such, any allowance would be immaterial. Bad debt expense was $1,436
(unaudited) and $3,763 (unaudited) for the three months ended March 31, 1997 and
1996, respectively, and $6,578 and $32,386 for 1996 and 1995, respectively.
D. Inventories consist of finished goods held for resale and are stated at
the lower of cost or market with cost being determined by current purchases
applied on an average cost method.
E. Deferred catalog expenses are costs of catalogs mailed to customers
which are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers utilize catalogs and other mail
order mailings from the Company. Catalog expense was $237,836 (unaudited) and
$290,601 (unaudited) for the three months ended March 31, 1997 and 1996,
respectively, and $1,080,210 and $1,058,976 for 1996 and 1995, respectively.
F. Property and equipment are carried at cost and depreciated using
straight-line and accelerated methods over their estimated useful lives, ranging
from five to ten years. Depreciation expense amounted to $8,160 (unaudited) and
$641 (unaudited) for the three months ended March 31, 1997 and 1996,
respectively, and $12,782 and $9,558 for the years ended December 31, 1996 and
1995, respectively.
Maintenance, repairs and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.
G. FAIR VALUE OF FINANCIAL INSTRUMENTS-The fair value of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying value because of the short maturities of those financial instruments
H. The Corporation has elected to be treated as a Subchapter S corporation.
No provision for income taxes is necessary because any income or loss is
includible in the tax returns of the individual stockholders.
NOTE 1. NOTES PAYABLE-RELATED PARTIES
Notes payable totaling $197,603 at December 31, 1996 consist of amounts due
to a stockholder and several individuals related to the stockholders. The notes
are unsecured, bear interest at 5%, and have no repayment terms.
The loan agreements do not specify payment requirements. However, it is
management's intention to repay the loans during 1997. Therefore, the total
balance of all loans is considered current as of December 31, 1996. Due to the
short maturities of the notes, carrying value approximates fair value.
F-22
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2. LEASE COMMITMENTS
The Company leases facilities for office and warehouse operations under
noncancellable operating leases. The following is a schedule of minimum future
lease payments under noncancellable operating leases for the years ending
December 31:
1997 ............................................... $21,344
1998 ............................................... 14,229
--------
$35,573
========
Rental expense was $11,800 (unaudited) and $18,200 (unaudited) for the
three months ended March 31, 1997 and 1996, respectively, and $52,245 and
$33,775 for the years ended December 31, 1996 and 1995, respectively.
NOTE 3. CATALOG SALE CONTRACT
In May, 1996, the Company contracted to sell the assets of its catalog
business (hereinafter referred to as "The Natural Baby Catalog") to Duncan Hill
Co., Ltd., at which time Duncan Hill paid the Company $25,000 towards the
purchase price. Duncan Hill has assigned its rights to acquire The Natural Baby
Catalog under that contract to Kids Stuff, Inc., a subsidiary of Duncan Hill.
The remaining purchase price to be paid by Kids Stuff, Inc. for the Company's
catalog business consists of: a cash payment to the Company in the amount of
$1,075,000, a cash payment in the amount of $210,777 in payment of a note owed
by the Company in the principal amount of $197,603 together with accrued
interest in the amount of $13,174 through April 30, 1997; the assumption by Kids
Stuff, Inc. of the Company's accounts payable incurred in the ordinary course of
business which is $275,958 as of December 31, 1996 and $289,894 (unaudited) as
of March 31, 1997; assumption of the Company's remaining lease obligations in
the approximate amount of $35,500 as of December 31, 1996 ($30,000 unaudited as
of March 31, 1997); and, a convertible promissory note issued by Kids Stuff,
Inc. to the Company in the amount of $250,000 (the "Convertible Note"), the
terms of which are discussed below.
The unpaid balance of the Convertible Note is convertible at any time into
unregistered shares of the Kids Stuff, Inc.'s Common Stock, at the election of
the holder, at a conversion price of $5.00 per share. The Convertible Note will
have an eight-year term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the Convertible Note, only accrued interest in
arrears will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth, seventh and
eighth anniversaries of the execution of the Convertible Note.
The purchase price, in part, is based upon the Company's tangible net worth
at December 31, 1995 which was $350,125, and is subject to adjustment in the
event that the Company's tangible net worth at closing is higher or lower than
at year end 1995. Any adjustment in the purchase price will be made as an
adjustment to the Convertible Note.
F-23
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 3. CATALOG SALE CONTRACT-(CONTINUED)
Unless the acquisition is completed on or before April 30, 1997, the
Company's contract to sell its catalog business to Kids Stuff, Inc. will expire.
NOTE 4. SUBSEQUENT EVENT - CATALOG SALE CONTRACT
In May 1997. a second addendum to extend the date of the contract to sell
the assets of The Natural Baby Catalog to Kids Stuff, Inc. to June 30, 1997, was
agreed upon by both parties. The addendum provides for an additional cash
payment of $150,000 at the closing, for a total of $1,225,000; the cash payment
for the note payable owed by the Company in the principal amount of $197,603 is
increased to $212, 451 to include additional interest in the amount of $1,674,
calculated through June 30, 1997, for a total payment of the note in the amount
of $212,451; a second promissory note in an amount which reflects the pre-tax
profits of the Company in excess of $300,000 from the date of the completion of
the acquisition through December 31, 1997 (the "Excess Profit Note") as more
fully discussed in the following paragraph, and 70,000 shares of the
unregistered common stock of Kids Stuff, Inc. to be issued to the Company (the
"Acquisition Shares"), which will be subject to a two year lock-up; and, the
agreement on the part of Kids Stuff, Inc. Chief Executive Officer, William L.
Miller, to guarantee payments to be made by the Company under the Convertible
Note on the first and second anniverary dates.
The amount of the Excess Profit Note shall be equal to the pre-tax profits
of the Company in excess of $300,000 from the date of the completion of the
acquisition through December 31, 1997 (the "Excess Profit Period"). The pre-tax
profits of the Company will be determined by the amount of its merchandise sales
(net of returns and allowances) during the Excess Profit Period, multiplied by
the percentage equal to the pre-tax profits of the Company for the twelve months
preceding the acquisition closing date divided by the amount of the Company's
merchandise dales (net of returns and allowances) during that twelve month
period. The principal amount of the Excess Profit Note shall be payable over
four equal, annual installments, together with accrued interest at 8% per annum,
commencing April 14, 1998.
Unless the acquisition is completed on or before June 30, 1997, the
Company's contract to sell its catalog business to Kids Stuff, Inc. will expire
and Kids Stuff, Inc. will be obligated to pay the Company the sum of $87,500 in
liquidated damages in addtion to the $25,000 down payment previously paid by
Duncan Hill.
NOTE 5. RECENT EXTENSION--CATALOG SALE CONTRACT (UNAUDITED)
On June 18, 1997, a third extension to complete the acquisition of the
Natural Baby Catalog was granted by the Company to Kids Stuff, Inc. Should the
acquisition not be completed by July 9, 1997, the Company's contract to sell
its catalog business to Kids Stuff, Inc. will expire and Kids Stuff, Inc. will
be obligated to pay the Company the liquidated damage amount referred to in
Note 4.
F-24
<PAGE>
KIDS STUFF, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following Unaudited Pro Forma Combined Financial Statements of Kids
Stuff, Inc. give effect to (i) the acquisition of The Natural Baby Catalog, (ii)
the sale of common stock to the public and (iii) the sale of common stock to
private investors and a bridge loan from private investors.
The Unaudited Pro Forma Combined Financial Statements assume that these
transactions occurred at the beginning of the fiscal year ending December 31,
1996 for the Unaudited Pro Forma Combined Statements of Income and as of March
31, 1997 for the Unaudited Pro Forma Combined Balance Sheet. In the opinion of
management of the Company, all adjustments necessary to present fairly such
Unaudited Pro Forma Combined Financial Statements have been made.
The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical financial statements and the notes thereto
included elsewhere in this prospectus. The Unaudited Pro Forma Combined
Statements of Income are not necessarily indicative of what actual results of
operations would have been had these transactions occurred at the beginning of
the respective period nor do they purport to indicate the results of future
operations of the Company.
P-1
<PAGE>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
MARCH 31, 1997
<TABLE>
<CAPTION>
KIDS STUFF NATURAL BABY PRO FORMA
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
------------- --------------- ------------ ------------------ -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash ........................... $ 41,932 $ 0 $ 41,932 $(1,462,451)(1) $ 202,802
(100,000)(1)
2,670,093 (2)
(839,629)(3)
(107,143)(4)
Accounts receivable ............ 209,587 52,242 261,829 261,829
Inventories .................. 387,471 487,426 874,897 874,897
Deferred catalog expense ...... 340,649 280,391 621,040 621,040
Due from affiliates ............ 515 0 515 515
Prepaid expenses ............... 325,081 26,110 351,191 (179,541)(2) 26,110
(145,540)(5)
----------- --------- ----------- ----------
Total Current Assets ......... 1,305,235 846,169 2,151,404 1,987,193
Property and Equipment, Net of
Accumulated Depreciation ...... 118,265 34,629 152,894 152,894
Other Assets, Net of
Accumulated Amortization
Customer lists ............... 0 0 0 505,000 (1) 505,000
Goodwill ..................... 0 0 0 734,354 (1) 879,894
145,540 (5)
Other ........................ 0 1,779 1,779 1,779
----------- --------- ----------- ----------
0 1,779 1,779 1,386,673
----------- --------- ----------- ----------
Total Assets .................. $1,423,500 $882,577 $2,306,077 $3,526,760
=========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-2
<PAGE>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
MARCH 31, 1997-(CONTINUED)
<TABLE>
<CAPTION>
KIDS STUFF NATURAL BABY PRO FORMA
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable ............... $ 1,329,229 $289,894 $ 1,619,123 (532,000)(3) $ 1,087,123
Current Portion of Long-
Term Debt-Related Parties ........ 266,858 197,603 464,461 (197,603)(1) 0
(66,858)(3)
(200,000)(3)
Line of Credit .................. 650,000 0 650,000 650,000
Due to affiliates ............... 0 0 0 0
Accrued Bonus to
Stockholders ................... 0 41,265 41,265 (41,265)(1) 0
Customer advances and other . 21,549 19,516 41,065 41,065
------------ --------- ------------ ------------
Total Current Liabilities ...... 2,267,636 548,278 2,815,914 1,778,188
Long-Term Debt Payable to
Related Parties, net of current
portion ........................ 300,000 0 300,000 250,000 (1) 550,000
Stockholders' Equity
Common stock, $0.001 par
value, 25,000,000 shares
authorized, 3,700,000 issued
and outstanding historical;
3,684,284 issued and
outstanding pro forma .......... 3,700 100 3,800 (100)(1) 3,513
70 (1)
600 (2)
(857)(4)
Preferred Stock, $0.001 par
value, 10,000,000 shares
authorized, 5,000,000 issued
and outstanding ................ 5,000 0 5,000 $ 5,000
Additional paid-in capital ...... 458,800 10,000 468,800 (10,000)(1) $ 2,801,695
2,489,952 (2)
(40,771)(3)
(106,286)(4)
Retained earnings ............... (1,611,636) 324,199 (1,287,437) (324,199)(1) (1,611,636)
------------ --------- ------------ --------------- ------------
Total Stockholders' Equity ...... (1,144,136) 334,299 (809,837) 1,198,572
------------ --------- ------------ ------------
Total Liabilities and
Stockholders' Equity ............ $ 1,423,500 $882,577 $ 2,306,077 $ 3,526,760
============ ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-3
<PAGE>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 FISCAL YEAR ENDED DECEMBER 31, 1996
------------------------------------------------ -----------------------------------------------
KIDS STUFF NATURAL BABY KIDS STUFF NATURAL BABY
HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
------------- --------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales .................. $ 1,465,541 $ 1,459,225 $ 2,924,766 $ 6,638,995 $6,451,215 $13,090,210
Cost of Sales ......... 825,394 945,610 1,771,004 4,204,321 3,596,965 7,801,286
----------- ----------- ----------- ----------- ----------- ------------
Gross Profit ............ 640,147 513,615 1,153,762 2,434,674 2,854,250 5,288,924
Selling Expenses ...... 594,841 275,618 870,459 2,193,219 1,698,746 3,891,965
General and
Administrative
Expenses ............... 189,443 95,127 284,570 768,580 601,777 1,370,357
----------- ----------- ----------- ----------- ----------- ------------
Income (Loss) from
Operations ............ (144,137) 142,870 (1,267) (527,125) 553,727 26,602
Other Income
(Expense) ............ (14,819) (2,761) (17,580) 5,485 4,922 10,407
----------- ----------- ----------- ----------- ----------- ------------
Net (Loss) Income ...... $ (158,956) $ 140,109 $ (18,847) $ (521,640) $ 558,649 $ 37,009
=========== =========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-4
<PAGE>
KIDS STUFF, INC.
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
(1) Adjustment for the acquisition of The Natural Baby Catalog from The
Nataural Baby Company, Inc. ("Baby Co.") with a cash payment of $1,462,451 and a
note payable of $250,000. The Company will acquire the assets of Natural Baby
Catalog and assume the accounts payable. The current notes payable will be
liquidated at the time of the purchase. This acquisition will be accounted for
using the purchase method, with assets valued at fair market value and the
customer list being valued at $505,000 as calculated by management. The balance
is attributed as follows: goodwill in the amount of $734,354; a note payable to
Baby Co. in the amount of $250,000, the principal of which is due in five equal
annual installments with the first installment due four years from the date of
purchase, prior thereto, only accrued interest will be payable; 70,000
unregistered shares of the Company's Common Stock to be issued to Baby Co.; a
note payable to Baby Co., the amount of which will be equal to the pre-tax
profits of Baby Co. in excess of $300,000 from the date of the completion of the
acquisition through December 31, 1997 (the "Excess Profit Period"). The pre-tax
profits of Baby Co. will be determined by the amount of its merchandise sales
(net of returns and allowances) during the Excess Profit Period, multiplied by a
percentage equal to the pre-tax profits of Baby Co. for the twelve months
preceding the acquisition closing date divided by the amount of Baby Co.'s
merchandise sales (net of returns and allowances) during that twelve month
period. The principal amount of the Excess Profit Note will be payable over four
equal, annual installments, together with accrued interest at 8% per annum. Also
includes expenses of $100,000 for the consolidation of the operations of The
Natural Baby Catalog.
(2) Adjustment for the sale of 300,000 units to the public at $12 per unit,
less estimated commissions of $360,000 and less estimated offering costs of
$569,907.
(3) Adjustment for the repayment of bridge loan of $200,000, plus interest
at 8%, payment of $532,000 towards accounts payable, and payment of note payable
to Duncan Hill of $66,858 plus interest at 8% to be paid on June 30, 1997.
(4) Adjustment for the buyback of 857,144 Rule 504 shares of Common Stock
previously issued.
(5) Adjustment of $145,540 of prepaid expenses attributable to the purchase
of The Natural Baby Catalog which will be capitalized as goodwill upon the
completion of the acquisition.
Management believes the Company's historical financial statements reflect
its historical costs of doing business. As a public entity the Company will
likely incur additional costs estimated to be approximately $50,000 on a
quarterly basis which are not reflected in the Unaudited Pro Forma Combined
Financial Statements of Income. Also not reflected in the Unaudited Pro Forma
Combined Financial Statements are $50,000 of additional annual payroll expense
relating to the salaries of the Company's two executive officers, as well as any
additional compensation that may be awarded under any incentive compensation
plan.
P-5
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK AND WARRANTS OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary ..................... 3
Risk Factors ........................... 7
Use of Proceeds ........................ 16
Dividend Policy ........................ 17
Dilution .............................. 18
Capitalization ........................ 19
Selected Financial Data ............... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 21
The Company and Its Parent ............ 29
Business .............................. 30
Management .............................. 38
Principal Stockholders .................. 43
Certain Transactions .................. 44
Description of Securities ............... 47
Unregistered Shares Eligible for
Immediate and Future Sale ............ 49
Underwriting ........................... 50
Legal Matters ........................... 52
Experts ................................. 53
Available Information .................. 53
Index to Financial Statements .......... F-1
</TABLE>
------------
UNTIL SEPTEMBER 24, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF UNITS, COMMON STOCK AND WARRANTS
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
300,000 UNITS
Each Unit Consisting of
Two Shares of Common Stock
and
Eight Common Stock
Class A Purchase Warrants
KIDS STUFF, INC.
----------
PROSPECTUS
----------
VTR CAPITAL, INC.
June 26, 1997
===============================================================================
