<PAGE>
As filed with the Securities and Exchange Commission on August 14, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KIDS STUFF, INC.
(Name of small business issuer in its charter)
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Delaware 5961 34-1843520
(State or other jurisdiction of organization) (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code No.)
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4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Address and telephone number of principal executive offices and principal
place of business.)
William L. Miller, Chief Executive Officer
Kids Stuff, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Name, address and telephone number of agent for service)
Copies to:
Steven Morse, Esq.
Lester Morse P.C.
111 Great Neck Road
Suite 420
Great Neck, NY 11021
(516) 487-1446
(516) 487-1452 (fax)
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Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act
of 1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429, this Registration Statement is a Post-Effective
Amendment to Form SB-2 Registration Statement, File No. 333-19423 with respect
to 2,400,000 shares of Common Stock issuable upon exercise of a like number of
Class A Warrants and 60,000 shares of Common Stock issuable upon exercise of an
Underwriters' Purchase Option. However, the Prospectus does not include the
aforesaid 60,000 shares at the present time since there is no current intent to
exercise the Underwriters' Purchase Option at the date of the filing of this
Registration Statement although it may do so in a subsequent post-effective
amendment.
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Amount Maximum Aggregate
Title of Each Class of to be Offering Price Offering Amount of
Securities Being Registered Registered Per Unit Price (1) Registration Fee
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Shares of Common Stock to be
offered by a Selling
Stockholder ................ 400,000 $ 2.50 $1,000,000 $295
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
<PAGE>
KIDS STUFF, INC.
Cross-Reference Sheet Showing Location in Prospectus of Information Required by
Items in Part I of Form SB-2
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Registration Statement
Item Number and Caption Location in Prospectus
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1. Front of Registration Statement and Outside Outside Front Cover Page of Prospectus
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus; Additional Information
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus; Plan of
Distribution
6. Dilution Dilution
7. Selling Securityholders Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of Prospectus; Plan of
Distribution
9. Legal Proceedings Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Owners Principal Stockholders
and Management
12. Description of Securities Description of Securities; Dividends
13. Interest of Named Experts and Counsel Experts and Legal Matters
14. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Risk Factors; Unregistered Shares Eligible for
Stockholder Matters Immediate and Future Sale; Description of
Securities
21. Executive Compensation Management -- Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants Not Applicable
on Accounting and Financial Disclosure
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PRELIMINARY PROSPECTUS DATED AUGUST 14, 1998
PROSPECTUS
KIDS STUFF, INC.
2,400,000 Class A Common Stock Purchase Warrants
to purchase 2,400,000 Shares
This Prospectus of Kids Stuff, Inc. (the "Company") relates to the
exercise of Class A Common Stock Purchase Warrants (the "Class A Warrants") to
purchase 2,400,000 shares of the Company's Common Stock. Each Class A Warrant
entitles the holder to purchase one share of Common Stock at a price of $5.00
at any time commencing on or after June 26, 1998 and expiring June 26, 2002.
The Company may redeem the Class A Warrants at a price of $.05 per Warrant, at
any time on or after June 26, 1998 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. See "Description of
Securities."
Persons who desire to exercise their Class A Warrants must complete the
subscription form on the reverse side of their warrant certificate(s) and
forward same together with the exercise price to American Stock Transfer &
Trust Company, 40 Wall Street, New York, NY 10005. Common Stock certificates
will be issued as soon as practicable after the funds have cleared but no later
than the __ business day after exercise of their Warrants. See "Plan of
Distribution."
This Prospectus also includes the registration on behalf of Duncan Hill,
Inc. ("Duncan Hill"), as a Selling Security Holder of the resale of up to
400,000 shares of Common Stock. The Selling Security Holder intends to sell its
shares of Common Stock through VTR Capital, Inc. ("VTR") from time-to-time,
subject to release from a lock-up agreement with VTR. The distribution by the
Selling Security Holder may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to VTR for
resale of such shares as principal, at market prices prevailing at the time of
sale or at negotiated prices. In the event VTR purchases shares as principal,
it will resell the shares at market prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holder in connection with such sales of shares. The amount of the markdown or
commissions to be charged by VTR will depend upon the size and volume of
trading activity at that time and will range from zero to 5% for commissions
and zero to 10% for markdowns. The Company will not receive any proceeds of the
sale of shares by the Selling Security Holder. All costs incurred in the
registration of shares on behalf of Selling Security Holder are being borne by
the Company. See "Selling Security Holder."
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 6 AND "DILUTION" BEGINNING ON PAGE 13.
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.
The Company's Common Stock and Class A Warrants are quoted on the OTC
Electronic Bulletin Board under the symbols "KDST"and "KDSTW," respectively. On
August 11, 1998, the closing sales prices of the Company's Common Stock and
Class A Warrants were $2.50 and $.4375, respectively. The exercise price of the
Class A Warrants was arbitrarily determined by the Company and VTR, the
Managing Underwriter of the Company's initial public offering. Such factors
considered by the Company and VTR included the prevailing market conditions,
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 Company anticipates that
the exercise of the Class A Warrants will be qualified (or exempt from
qualification) by the Company in a limited number of states. See "Risk
Factors."
Duncan Hill, the Company's parent, and William L. Miller, the Company's
Chief Executive Officer, beneficially own approximately 86% of the Company's
outstanding voting capital stock. See "Risk Factors" and "Principal
Stockholders."
The date of this Prospectus is _____ , 1998.
<PAGE>
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.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company can be inspected and copied (at prescribed rates) at the Commission's
Public Reference section, 450 Fifth Street, N.W., Washington, D.C. 20549, as
well as the New York Regional Office, Seven World Trade Center, New York, NY.
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 that file electronically with the commission through the
Electronic Data Gathering, Analysis, and Retrieval System (EDGAR).
The Company has filed with the Commission a registration statement on Form
SB-2, File No. 333-______, which registration statement is also a
post-effective amendment to the Company's Registration Statement on Form SB-2,
File No. 333-19423 (herein together with all amendments and exhibits referred
to as the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), of which this Prospectus forms a part. This
Prospectus does not contain all of the information set forth in the
registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement. 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.
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.
This Prospectus contains forward looking statements which reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and the financial results. 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, including, without limitation, competition and possible
future changes to state sales tax laws. 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, competition, availability and price
of goods and other factors. Any changes in such assumptions or factors could
produce significantly different results.
The Company
Kids Stuff, Inc. (the "Company") is a specialty direct marketer which
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," 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 second catalog, "Jeannie's Kids Club," 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.
In July 1997, the Company acquired a third catalog, The Natural Baby
Catalog, from The Natural Baby Company, Inc. ("Baby Co."), which specializes in
children's products made from natural fiber from prenatal to age three, and
consolidated its operations with those of the Company. See "Business."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, Ohio 44718, and its telephone number is (330)
492-8090.
3
<PAGE>
The Offering
Securities Offered by the
Company................. This Prospectus of the Company relates to the
exercise of publicly-held 2,400,000 Class A
Warrants to purchase 2,400,000 shares of the
Company's Common Stock. Each Class A Warrant
entitles the holder to purchase one share of Common
Stock at a price of $5.00 at any time commencing on
or after June 26, 1998 and expiring June 26, 2002.
The Company may redeem the Class A Warrants at a
price of $.05 per Warrant, at any time on or after
June 26, 1998 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. See "Description of Securities."
Securities Offered by Selling
Security Holder......... This Prospectus also includes the registration on
behalf of Duncan Hill, as a Selling Security Holder
of the resale of 400,000 shares of Common Stock. The
Selling Security Holder intends to sell its shares
of Common Stock through VTR from time-to-time,
subject to release from a lock-up agreement with
VTR. The distribution by the Selling Security Holder
may be effected in one or more transactions that may
take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated
transactions or through sales to VTR for resale of
such shares as principal, at market prices
prevailing at the time of sale or at negotiated
prices. In the event VTR purchases shares as
principal, it will resell the shares at market
prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid
by the Selling Security Holder in connection with
such sales of shares. The amount of the markdown or
commissions to be charged by VTR will depend upon
the size and volume of trading activity at that time
and will range from zero to 5% for commissions and
zero to 10% for markdowns. The Company will not
receive any proceeds of the sale of shares by the
Selling Security Holder. All costs incurred in the
registration of shares on behalf of Selling Security
Holder are being borne by the Company. See "Selling
Security Holder."
Capitalization
Common Stock prior to the
Offering (1).............. 3,512,856 Shares
Common Stock to be
Outstanding after this
Offering assuming all
Class A Warrants and the
Underwriters' Unit Purchase
Option are exercised (2).. 5,912,856 Shares
Class A Warrants outstanding
prior to Offering......... 2,400,000 Class A Warrants
4
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Class A Warrants to be
outstanding after Offering
assuming all Warrants have
been exercised (3)....... -0- Class A Warrants
Series A Non-Convertible
Voting Preferred
Stock (4)............... 5,000,000 Shares
OTC Symbols
Common Stock............ KDST
Warrants................ KDSTW
Use of Proceeds.......... The Company intends to apply the net proceeds of
the Offering to purchase inventory, for marketing,
to purchase additional property, equipment and
facilities and working capital and other general
corporate purposes. See "Use of Proceeds."
Risk Factors............. The Offering involves a high degree of risk and
immediate and substantial dilution.
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(1) Does not include the possible exercise of the following: (i) Class A
Warrants to purchase 2,400,000 shares of the Company's Common Stock; (ii)
Options to purchase 280,000 shares of the Company's Common Stock; and
(iii) Warrants granted to the Underwriter of the Company's initial public
offering to purchase an aggregate of 60,000 shares of the Company's Common
Stock. Also does not include options to purchase up to 400,000 shares of
the Company's Common Stock that may be granted pursuant to the Company's
1997 Stock Incentive Plan.
(2) Does not include the possible exercise of the following: (i) options to
purchase 280,000 shares of the Company's Common Stock; and possible
exercise of the (ii) Warrants granted to the Underwriter of the Company's
initial public offering to purchase an aggregate of 60,000 shares of the
Company's Common Stock. Also does not include options to purchase up to
400,000 shares of the Company's Common Stock that may be granted pursuant
to the Company's 1997 Stock Incentive Plan.
(3) No assurances can be given that all or any portion of the outstanding Class
A Warrants will be exercised.
(4) Generally, the Holder of the Series A Preferred Stock has the right to vote
each share of Preferred Stock on the same basis as each share of Common
Stock.
5
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RISK FACTORS
An investment in the securities offered hereby is speculative and involve
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 the Offering, together with the
other information in his prospectus, before making an investment decision.
1. History of Operating and Net Losses. Although the Company had a net
income of $59,060 for the three months ended March 31, 1998 and a net income of
$50,097 for the year ended December 31, 1997, the Company incurred net losses
of ($521,640) and ($536,992) for fiscal 1996 and 1995, respectively. A
substantial portion of the aforesaid losses was associated with the
establishment and development of the Jeannie's Kids Club Catalog beginning in
July, 1995. There can be no assurances that the Company will not incur net
losses in the future. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations."
2. Limited Working Capital/Possible Need for Additional Financing. The
Company's working capital of $242,122 at March 31, 1998 is limited. The Company
currently depends upon cash from operations and an institutional lender to
finance its operations and cash received in July 1997 from the completion of an
initial public offering of its securities. In the event that cash from
operations is insufficient to finance its operations or the Company's
institutional credit facility is terminated or the credit limit is insufficient
to provide needed financing for the Company, it will be necessary for the
Company to seek to obtain additional public or private financing. No assurances
can be given that such financing will be available or, if available, that it
can be obtained on terms satisfactory to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements."
3. Possible Lack of Savings from the Recent Integration and Consolidation
of the Natural Baby Catalog Business. The Company believes that its
consolidation of the operations of The Natural Baby Catalog with the Company
has realized savings in direct labor and general and administrative areas for
the first nine months from completion of such transaction. No assurances can be
give that the Company will be successful in obtaining the aforesaid savings on
an annual basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Financial Statements" and "Business."
4. 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 that the USPS will raise its rates commencing January 1, 1999. United
Parcel 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 methods for acquiring new customers so that
it need not rely upon catalog circulation as the sole method to acquire new
customers. See "Business."
5. Need for Mailing Lists. 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. The Company has not experienced 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 in the
future, or that such an occurrence would not have an adverse effect upon the
profitability of The Natural Baby Catalog. See "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6
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6. 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."
7. 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. See "Business."
8. No Plans for Additional Catalog Acquisitions. The Company believes
that due to the cost driven pressures to consolidate, there may be future
opportunities to acquire other children's niche catalogs. The Company, however,
has no current plans to make any acquisitions and no assurances can be given
that any acquisitions will be successfully completed in the future. See
"Business."
9. 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. 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. See "Business."
10. 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."
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."
12. Product Liability Insurance. Since 1990, the Company's parent, Duncan
Hill, has carried product liability insurance for the Company and Duncan Hill's
subsidiary, The Havana Group, Inc. ("Havana"). 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 Havana as named insureds. The
policies are issued for a period of one year and are currently in effect
through September 17, 1998. The Company may, in the future, procure the same
coverage in its name, alone. 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. An 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."
13. Dependence Upon Key Personnel; Need for Additional Personnel. The
success of the Company is highly dependent upon the continued services of
William L. Miller ("W. Miller"), the Company's Chairman
7
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of the Board and Chief Executive Officer, and Jeanne E. Miller, ("J. Miller")
the Company's President. W. Miller, one of the co-founders of the Company's
parent, is principally responsible for the strategic planning and development
of the Company. W. Miller, however, is not required to devote his full-time
attention to managing the affairs of the Company. J. Miller, the other co-
founder of the Company's parent, is primarily responsible for the merchandise
selection, design and production of the catalog. Both W. Miller and J. Miller
have entered into employment agreements with the Company. However, if the
employment by the Company of either W. Miller and J. 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 is found. The Company has obtained a $1
million key man life insurance policy on each of W. Miller and J. Miller, who
are husband and wife. See "Management."
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
Management personnel over time, including a suitable candidate to succeed W.
Miller, who is 61 years of age, as Chief Executive Officer. There can be no
assurance, however, that the Company will be able to successfully recruit and
retain such additional qualified Management personnel.
14. The Company's Chief Executive Officer Will Not be Required to Work
Full Time. W. Miller, is a co-founder of the Company's parent, Duncan Hill,
which has other operating subsidiaries. W. Miller is currently the President of
Duncan Hill and Havana, as well as Chairman of the Board of Directors and Chief
Executive Officer of the Company. W. 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 (including Havana) as he deems appropriate.
Accordingly, W. Miller is not devoting his full-time attention to managing the
operations of the Company. See "Management."
15. Potential Conflicts of Interest. Conflicts of interest could
potentially develop (i) to the extent that W. Miller is not able to devote his
full-time and attention to a matter that would otherwise require the full-time
and attention of a business' chief executive officer, (ii) involving
competition for business opportunities, and (iii) involving transactions
between the Company and its affiliated companies. The Company has not adopted
any procedure for dealing with such conflicts of interest, except that the
Company's Board of Directors has adopted a policy that all new transactions
between the Company and Duncan Hill, Havana or any other affiliated company
must be approved by at least a majority of the Company's disinterested
directors, if any. Currently, the Company has no disinterested directors and
Duncan Hill and the Millers control the election of the directors. See
"Management."
16. Lack of at Least Two Independent Directors and Committees Thereof.
The Company has three directors, including two executive officers of the
Company and another director who is a director of Duncan Hill, an affiliate of
the Company. The absence of at least two outside or disinterested directors and
committees composed of such disinterested directors could result in less
objectivity and an increased risk for conflicts of interest with respect to
decisions made by the Board of Directors. See "Management."
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, namely, W. Miller and J. Miller 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. 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. See "Management."
18. 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
8
<PAGE>
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."
19. 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. See "Business."
20. Control by Parent and Its Controlling Stockholders. Duncan Hill
beneficially owns approximately 66% 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. As a result,
Duncan Hill, which beneficially owns approximately 86% of the outstanding
voting stock, will remain in a position to effectively elect all of the
directors of the Company and control its affairs and policies. W. Miller and J.
Miller, the Company's respective Chief Executive Officer and President, own
approximately 68% 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.
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. See
"Principal Stockholders."
21. Dilution. Persons exercising the Class A Warrants will incur
immediate and substantial dilution of their investment. See "Dilution."
22. 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."
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 5,000,000 shares preferred stock (in
addition to the Series A Preferred Stock owned by Duncan Hill) 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. See
"Description of Securities."
24. No Cash Dividends. The Company has never paid cash dividends on its
capital 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. Broad Discretion in Application of Proceeds. Approximately $2,670,000
or 23% of the net proceeds of this Offering has been allocated to working
capital of the Company (assuming all Class A Warrants are exercised, of which
no assurances can be given), 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
9
<PAGE>
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."
26. Arbitrary Determination of Class A Warrant Exercise Price. The
exercise price and other terms of the Class A Warrants have been arbitrarily
determined by the Company and VTR, the Managing Underwriter of the Company's
initial public offering in 1997, 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 exercise price should not be considered an
indication of the Company's actual value. See "Description of Securities."
27. Limited Public Market; Market Volatility. Prior to this offering,
there has been a limited public market for the Company's Common Stock and Class
A Warrants which are quoted on the OTC Electronic Bulletin Board under the
symbols "KDST" and "KDSTW," respectively. There is no assurance that an
established public trading market will develop or be sustained. Additionally,
the market price of the Company's securities may be adversely affected 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. See "Market Information."
28. Possible Adverse Effect on Public Market Price Due to Exercise of the
Class A Warrants. The exercise or potential exercise of the Class A Warrants
may have a depressing effect on the market price of the Company's Common Stock.
29. Certain Implications of Trading Over-the-Counter; "Penny Stock"
Regulations. The Company's Common Stock and Class A Warrants are quoted for
sale in over-the-counter on the NASD OTC Electronic Bulletin Board under the
symbols "KDST" and "KDSTW", respectively. An investor may find it more
difficult to dispose 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, or on the Nasdaq SmallCap market. The
Company has not applied for listing on a national securities exchange or the
Nasdaq SmallCap market because of the Company's belief that it 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, a warrant that has an exercise price
of less than $5.00 per share, an equity security of an issuer (assuming the
corporation has been in existence for at least three years) with net tangible
assets of less than $2,000,000 or an equity security of an issuer with average
revenues in the last three fiscal years of less than $6,000,000, as indicated
in audited financial statements. 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
in the future 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 Common Stock in the secondary market.
30. Restrictions on VTR's Market Making Activities During Warrant
Solicitation. VTR has the right to act as the Company's sole agent in
connection with any future solicitation of warrant holders to exercise their
Class A Warrants and may purchase shares of Common Stock from the Selling
Security Holder. Unless granted an exemption by the Securities and Exchange
Commission from Regulation M (formerly Rule 10b-6)
10
<PAGE>
promulgated under the Securities Exchange Act of 1934, as amended, VTR will be
prohibited from engaging in any market-making activities with regard to the
Company's securities for a period of time before and during the distribution of
securities. Such limitation could impair the liquidity and market prices of the
Common Stock and Class A Warrants. See "Plan of Distribution."
31. Underwriters' Purchase Option. In connection with the Company's
initial public offering completed in July 1997, the Company sold 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 became exercisable at any time after June 26, 1998 for a period of four
years 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 "Description of Securities."
32. Potential Adverse Effect of Redemption or Exercise of Class A
Warrants. The Class A Warrants may be redeemed by the Company under certain
circumstances. Should the Company provide a notice of redemption of the Class A
Warrants, the holders thereof would be forced to either exercise the Class A
Warrants at a time when it may be disadvantageous for them to do so, sell the
Class A Warrants at the then current market price, or accept the redemption
price, which will likely be substantially less than the market value of the
Class A Warrants. In addition, the exercise of the Class A Warrants, may have
an adverse effect on the market price of the Company's securities should a
public trading market develop. Also, while the Class A 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 Class A
Warrants to be dilutive to future investors. See "Description of
Securities--Class A 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 (the "Rule 504 Shares") of the
Securities Act. Of the 442,856 shares, 100,000 of the Rule 504 Shares are
subject to "lock-up" by VTR and cannot be sold or transferred until June 26,
1999, unless otherwise permitted by VTR, at which time these shares will be
freely tradeable without any necessity for their registration under the
Securities Act. The balance of the Rule 504 Shares, i.e., 342,856 shares, are
not subject to VTR's "lock-up" and are freely tradeable without any necessity
for their registration under the Securities 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 June 1997 initial public offering price of each of the two shares of
Common Stock and eight Class A Warrants 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, Duncan Hill, holds 1,915,000 shares of the Company's Common
Stock in addition to the 400,000 shares registered for sale as a Selling
Security Holder and 5,000,000 shares of the Company's Series A Preferred Stock
(collectively the "Restricted Securities"). These 1,915,000 shares of Common
and Preferred Stock held by Duncan Hill, and 70,000 shares of Common Stock
originally issued to the seller of Baby Co., are "restricted securities" as
that term is defined by Rule 144 of the Securities Act. Such securities may
only be sold in compliance with the provision of Rule 144 unless otherwise
registered by the Company. Furthermore, Duncan Hill has agreed with VTR not to
sell or transfer the Restricted Securities until June 26, 1999 unless earlier
permitted by VTR. While there are no agreements, arrangements or understandings
with Duncan Hill with respect to the early release of the lock-up in previous
offerings, VTR has released the lockup prior to the end of the lock-up period.
In making its decision to release the lock-up, VTR evaluates the totality of
the facts and
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<PAGE>
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 "Unregistered Shares
Eligible for Future Sale."
34. Current Prospectus and State Blue Sky Registration Required to
Exercise Class A Warrants.
The Company will be able to issue shares of its Common Stock upon exercise of
the Class A Warrants only if there is then a current prospectus relating to the
shares of Common Stock issuable upon the exercise of the Class A Warrants under
an effective registration statement filed with the 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 Class A 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 Class A 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 Class A Warrants
reside. 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 which include Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland,
New York, Rhode Island, Utah and Virginia. See "Description of Securities--
Warrants."
USE OF PROCEEDS
The net proceeds to be received from the assumed exercise of all of the
Class A Warrants, after deduction of offering expenses estimated at a maximum
of $580,000 (assuming all Class A Warrants are solicited for exercise by VTR)
will be approximately $11,420,000. No assurances can be given that any Class A
Warrants will be exercised. The Company intends to use the net proceeds of the
offering, if any, over at least the next twelve months approximately as
follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount of Percentage of
Net Proceeds Net Proceeds
-------------- --------------
<S> <C> <C>
Inventory ............................................................... $ 3,000,000 26%
Institutional Debt Retirement or Reduction(1) ........................... 750,000 7
Sales and Promotional Activities ........................................ 2,000,000 18
Purchase of Property, Equipment and Additional Facilities for Expansion . 3,000,000 26
Working Capital ......................................................... 2,670,000 23
----------- --
Total ............................................................... $11,420,000 100%
=========== ===
</TABLE>
- ------------
(1) See "Management's Discussions and Analysis of Financial Condition and
Results of Operations."
(2) The Company intends to use such funds for general working capital purposes
and possible acquisition of other Children Niche Catalogs. See "Risk
Factors."
In the event that less than all 2,400,000 Class A Warrants are exercised,
than the net proceeds will be allocated proportionately to all categories
specified above.
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 "Risk Factors."
12
<PAGE>
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 cash dividends by the Company are subject to the discretion of the
Board of Directors of the Company. Any future determination to pay cash
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
currently subject to any contractual arrangements which restricts its ability
to pay cash dividends.
DILUTION
The net tangible book value per Common share of the Company as of March
31, 1998 was approximately $(.06) per share of Common Stock. Net tangible book
value per share is determined by dividing the tangible net worth of the Company
(tangible assets less all liabilities), after deduction for the liquidation
value of the Preferred Stock, by 3,512,856 shares which represents the total
number of outstanding shares of Common Stock at March 31, 1998). After giving
effect to the sale by the Company of 2,400,000 shares of Common Stock from the
assumed exercise of all 2,400,000 Class A Warrants, of which no assurances can
be given in this regard, and the receipt of the estimated maximum net proceeds
therefrom of $11,420,000, the adjusted net tangible book value per share of the
Company as of March 31, 1998 would have been approximately $1.90. This
represents an immediate increase in the adjusted net tangible book value per
share of $1.96 to existing Common Stockholders and an immediate dilution (the
difference between the exercise 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 $3.10 per share of Common
Stock to new investors.
The following table illustrates this per share of Common Stock dilution:
<TABLE>
<S> <C> <C>
The exercise price of the Class A Warrants ...................................... $ 5.00
Net tangible book value per share of Common Stock before the Offering ........... $(.06)
Increase in net tangible book value per share of Common Stock attributable to new
investors ...................................................................... 1.96
Adjusted net tangible book value per share of Common Stock after the Offering ... 1.90
Dilution in net tangible book value per share of Common Stock to new investors .. $ 3.10
======
</TABLE>
Does not include the exercise of the following: (i) Options to purchase 800,000
shares of the Company's Common Stock; and (ii) Underwriters' Purchase Option to
purchase an aggregate of 60,000 shares of the Company's Common Stock. Also does
not include options to purchase up to 400,000 shares of the Company's Common
Stock that may be granted pursuant to the Company's 1997 Stock Incentive Plan.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information 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.
Since 1990, the Perfectly Safe Catalog has relied upon catalog circulation to
acquire new customers and to provide its revenue base. During 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 favorably impacts 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. During 1997, the Company has identified other mailing lists which
have helped to increase the circulation and revenues of The Perfectly Safe
Catalog.
In July 1997, the Company acquired from Baby Co., The Natural Baby Catalog
utilizing the proceeds of the Company's initial public offering. The Natural
Baby Catalog offers children's clothing and toys made of natural materials.
During the second half of 1997, The Natural Baby Catalog generated $3.8 million
in net sales on orders of 55,188, (an average order of over $70). The Company
is seeking to increase circulation while generating the same, or a higher,
average order.
Results of Operations
Three Months ended March 31, 1998 compared to three months ended March 31,
1997.
Revenues for the quarter ended March 31, 1998 increased 119% to
$3,204,877, compared with $1,465,541 for the same period of 1997. Net profits
for the first quarter of 1998 improved to $59,060 compared with a net loss of
($158,956) for the same period in 1997.
Approximately 80% of the Company's increased revenues were attributed to
The Natural Baby Catalog. Combined revenues from the Company's Perfectly Safe
and Kids Club catalogs increased 24.5% compared with 1997, producing the
remainder of its overall revenue increase.
Cost of sales increased from 56.3% of net sales in 1997 to 62.5% in 1998.
The change is attributable to post holiday returns and the shipping rate
increase imposed by United Parcel Service during February 1998.
14
<PAGE>
Selling expenses, consisting of advertising and marketing costs, were
24.0% of net sales in the first quarter of 1998, compared with 40.6% in the
first quarter of 1997. This 40.9% reduction in selling expense as a percentage
of net sales, reflects the impact of The Natural Baby Catalog, whose selling
expenses are less than those of the Company's other catalogs. Additionally, the
Company improved the productivity of its Perfectly Safe and Kids Club catalog
mailings during the first quarter of 1998, which resulted in lower selling
expenses compared with the first quarter of 1997.
General and Administrative expenses increased by $176,798, but improved
from 12.9% of net sales in 1997 to 11.4% this quarter. As a result of the
Natural Baby Catalog acquisition, the growth of the Company's operation has
given rise to higher support costs, although proportionately lower than the
increase in sales. Costs of outside legal and accounting services have also
increased because of the compliance requirements associated with being a public
company. General and administrative costs are also affected by services the
Company provides to Havana, an affiliated company.
Since January 1, 1997, the Company has been providing administrative and
other support services to Havana. During the first quarter 1997, the costs of
these services were allocated based on the percentage of Havana's total assets
to that of the controlled group. Beginning January 1, 1998, a contract was
established between Kids Stuff and Havana. The contract details specific fees
to be charged by Kids Stuff for providing administrative support and order
fulfillment services to Havana. The contract also provides an additional charge
of 5% of Havana's pretax profit for 1998. Management of the Company believes
that these fees are substantially the same as the cost of Havana staffing these
functions itself. During this quarter the Company charged Havana $73,569,
including order fulfillment costs, as compared to approximately $95,000
allocated last year.
Net income improved by $218,016 this quarter as compared to the same
quarter last year. Last year's net loss amounted to (10.8%) of net sales, while
net income for the current quarter amounted to 1.8% of sales. The earnings
improvement is a direct result of the increase in revenues.
Year ended December 31, 1997 compared to the year ended December 31, 1996.
Total net sales for the year ended December 31, 1997 increased $4,377,606,
or 65.9%, to $11,016,601, compared with $6,638,995 for the year ended December
31, 1996. Net sales include sales from merchandise, Jeannie's Kids Club
memberships, shipping and handling charges, and mailing list rentals. This
increase is mainly attributable to the acquisition from Baby Co. of The Natural
Baby Catalog on July 2, 1997, and the resulting net sales of $3,811,894 for the
six months ended December 31, 1997. The net sales of the Perfectly Safe Catalog
increased from $2,717,056 for the year ended December 31, 1996 to $3,937,809
for the year ended December 31, 1997. This increase is attributable to a 26.9%
increase in catalog circulation from 1,595,890 catalogs mailed to 2,025,375
catalogs mailed during 1996 and 1997, respectively, and also to an increase in
net revenue per book mailed of 14%, from $1.70 per book during 1996 to $1.94
per book in 1997. This increase was offset by a decrease in net sales of
Jeannie's Kids Club, which decreased from $3,921,434 to $3,202,238 for the
years ended December 31, 1996 and 1997, respectively. The circulation of
Jeannie's Kids Club was reduced from 2,372,891 to 1,432,716 for the years ended
December 31, 1996 and 1997, respectively.
Cost of sales, as a percentage of net sales, decreased 1.5% from 63.3% for
the year ended December 31, 1996 to 61.8% for the year ended December 31, 1997.
The Company attributes this decrease to increased fulfillment efficiencies
resulting from the addition from Baby Co. of The Natural Baby Catalog. During
the fourth quarter, the Company recorded a charge to earnings of $105,000 for
obsolete inventory.
Selling expenses, which consists of advertising and other marketing
related expenses, decreased 6.1% as a percentage of net sales, from 33.0% to
26.9% for the years ended December 31, 1996 and 1997, respectively. This
decrease is due to the Perfectly Safe net revenue per catalog increasing from
$1.70 to $1.94 for the years ended December 31, 1996 and 1997, respectively,
Jeannie's Kids Club net revenue per catalog increasing from $1.65 to $2.24, for
the same periods, and the addition of The Natural Baby Catalog.
General and administrative expenses were $1,077,041, or 9.8% of net sales,
for the year ended December 31, 1997, and $712,515, or 10.7% of net sales, for
the same period of 1996. This dollar increase is attributable to increased
legal, accounting and consulting fees relating to the Company becoming public,
increased wages
15
<PAGE>
and expenses for the relocation of The Natural Baby Catalog operations from
Trenton, New Jersey, to the Company's Canton, Ohio facility. The Company
believes that its general and administrative functions have become more
efficient and cost effective since the integration of The Natural Baby Catalog
operations and the completion of the learning curve relating to the new product
line is complete. General and administrative expenses for 1996 were incurred
substantially by 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. For 1996, the Company's allocation was 69% of Duncan
Hill's total general and administrative expenses. Effective June 30, 1996, the
Company began a six month transition period to handle certain of its own
administrative functions, directly. Effective January 1, 1997, the Company
began handling administrative functions for Havana. General and administrative
expenses incurred by the Company are allocated to Havana, on a pro rata basis
determined by the percentage of total assets of Havana and the operating
divisions of the Company. For the six months ended June 30, 1997, Havana's
allocation was 33% of the Company's total general and administrative expenses.
For the year ended December 31, 1997, Havana's allocation was 21% of the
Company's total general and administrative expenses, due to the acquisition of
The Natural Baby Catalog.
Net income for the year ended December 31, 1997 was $50,097, or .5% of net
sales, compared to a net loss of $521,640, or 7.9% of net sales for the same
period of 1996. The Company attributes this increase to the increase in
revenues, the acquisition of The Natural Baby Catalog, and decreased selling
expenses as a percentage of net sales.
Selected financial information for Baby Co. relating to The Natural Baby
Catalog for the six months ended June 30, 1997 and the year ended December 31,
1996 are as follows:
Six months ended Year ended
June 30, 1997 December 31, 1996
------------------ ------------------
Total revenues ......... $2,938,276 $6,451,215
Net income ............. 248,738 558,649
Total assets ........... 760,065 915,275
On a pro forma basis, assuming the Company had acquired The Natural Baby
Catalog from Baby Co. at the beginning of fiscal year 1996, the combined
operations would have resulted in combined net sales of $13,954,877, net income
of $298,835, and net income per share of common stock of $.08, for the year
ended December 31, 1997 and combined net sales of $13,090,210, net income of
$37,009, and net income per share of common stock of $.01, for the year ended
December 31, 1996.
The Company believes that its consolidation of the operations of The
Natural Baby Catalog with the Company has realized savings 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 is incurring as a public entity, estimated to be $250,000 annually. No
assurances can be given that the Company will be successful in obtaining the
aforesaid savings on an annual basis.
In July 1997, the operations of The Natural Baby Catalog were relocated to
the Company's Canton, Ohio facilities, including inventories, telemarketing,
customer service and fulfillment. The cost of this relocation resulted in a
charge to earnings of $50,000.
Year ended December 31, 1996 compared to the year ended December 31, 1995.
Total net sales for the year ended December 31, 1996 increased $914,658,
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 $1,033,805 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.
16
<PAGE>
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 15.9% to $1.75 per book, versus $1.51 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 purchases within 24, 12, 6, or 3 months.
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 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
4.6% from 1995 to 1996. While outbound shipping costs fluctuate with the
package size and number of shipments per order, 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
$684,615, or 12.0% of net sales, in fiscal 1995 and $712,515, or 10.7% of net
sales, in fiscal 1996. This increase 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 1995 and for 1996 were substantially all incurred by 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.
As a result of the reorganization in which the
17
<PAGE>
Company succeeded to the operations of Perfectly Safe and acquired certain
assets of Duncan Hill, the Company began to directly handle certain of its own
administrative functions during a six month transition period ended December
31, 1996. In 1995 and for 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
Liquidity and Capital Resources
At March 31, 1998 the Company's accumulated deficit was reduced by $59,060
from December 31, 1997 because of first quarter earnings performance. In
addition to net earnings, cash provided by operating activities was increased
by non-cash charges of $39,859 for depreciation and goodwill amortization.
Working capital changes used $155,578 of cash, primarily due to increased
deferred catalog expense of $245,112. Higher volume mailings of our Spring
catalogs, as compared to the last quarter of 1997, accounts for the increased
expense.
At July 24, 1998, the balance of the Company's credit line was $732,000.
The Company's current credit line is $800,000, payable on demand. The line is
secured by the assets of the Company and its affiliated companies, Havana and
Duncan Hill, and is guaranteed by W. Miller, the Company' Chief Executive
Officer. The interest rate is 1% over prime. It is the policy of the bank to
review the credit facility annually, and to require that the Company maintain a
zero balance on the credit line for a period of thirty consecutive days
sometime during the course of each year. The bank has agreed to waive the "zero
balance" required for the fiscal 1997 and 1998 loan years because the Company's
current cash flow would not allow it to comply before then.
At December 31, 1997, the Company had a deficit in retained earnings of
$1,402,583, compared with a deficit of $1,452,680 at December 31, 1996. This
increase resulted from a net profit of $50,097 for the year ended December 31,
1997.
For the year ended December 31, 1997, the operating activities consumed
$576,038 in cash through increases in accounts receivable, inventories and
prepaid expenses, but provided $553,709 in cash through a decrease in deferred
catalog expense, and an increase in accounts payable, customer advances and
other. The net effect of these changes and non cash charges of $80,687 relating
to depreciation and amortization, when added to the net profit was a decrease
in the Company's cash position, so that net cash provided by operating
activities was $108,455.
For the year ended December 31, 1997, the Company's financing activities
provided $1,497,636 in cash, with $2,619,890 from the sale of common stock,
$21,000 from borrowings on the Company's bank credit line, $43,782 from a
decrease in prepaid amounts for the public offering and $5,000 from the sale of
preferred stock, while using $718,035 from changes in current obligations
to/from affiliates, $107,143 for the repurchase of the Company's Common Stock
from bridge lenders relating to the Company's initial public offering and
$366,858 from the repayment of debt, $266,858 which was paid to related
parties.
For the year ended December 31, 1997, the combined effect of net cash
provided by operating activities of $108,455, net cash provided by financing
activities of $1,497,636, and investments in fixed assets and the acquisition
of The Natural Baby Catalog totaling $1,752,845, decreased cash from $248,648
to $108,894 at December 31, 1997.
Effective June 30, 1996, the Company was formed by Duncan Hill for the
purpose of acquiring certain operating assets of Duncan Hill and the children's
catalog business of Perfectly Safe. The Company paid for those assets through
the assumption of Perfectly Safe 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. The first installment of the promissory note to Duncan
Hill in the principal amount of $66,858, plus accrued interest, was paid on
July 7, 1997 with the next installment in the amount of $100,000 due on June
30, 1998, together with accrued interest.
18
<PAGE>
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 from its initial public offering, 8%
promissory notes in the amount of $75,000, convertible upon the effective date
of the Company's initial public offering 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 VTR, the Managing Underwriter of the
Company's initial public offering, agreed to accept a cash payment at the
closing of the initial public offering in the 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 July 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. On July 2, 1997, the Company repaid the 8% promissory
notes in the principal amount of $125,000, plus accrued interest, the 8%
Convertible Notes in the principal amount of $75,000, plus accrued interest,
and the payment of notes in the principal amount of $107,143, plus accrued
interest for the repurchase of the 857,144 shares of Common Stock of the
Company mentioned above, out of the proceeds of its initial public offering:
The Company filed a registration statement in 1997 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
Class A Warrants. The Company's initial public offering was declared effective
by the Commission on June 26, 1997, and the proceeds were distributed to the
Company on July 2, 1997. See "Notes To Financial Statements -- Note 7. Public
Offering."
On July 2, 1997, the Company completed its acquisition of The Natural Baby
Catalog from Baby Co. The Company paid the following: a cash payment of
$1,225,000 to the seller; a cash payment in the amount of $219,831 in payment
of a note owed by Baby Co. in the principal amount of $197,603 together with
accrued interest in the amount of $22,228 through July 2, 1997; a cash payment
of $50,134 to Core States Bank to pay off Baby Co's line of credit in the
principal amount of $50,000 plus interest of $134; the assumption by the
Company of Baby Co.'s accounts payable incurred in the ordinary course of
business which was approximately $266,287 as of June 30, 1997; assumption of
Baby Co.'s remaining lease obligations in the approximate amount of $24,000 as
of June 30, 1997; a convertible promissory note issued by the Company to Baby
Co. in the amount of $250,000 (Convertible Note); 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 completion of the acquisition through December 31, 1997 (the
"Excess Profit Note"); 70,000 shares of the unregistered Common Stock of the
Company issued to Baby Co., valued at $3.50 per share, which are subject to a
two year lock-up until June 26, 1999; and, the agreement on the part of W.
Miller to guarantee the payments to be made by the Company under the
convertible note on the first and second anniversary dates.
Effective December 31, 1997, the Company paid $100,000 in exchange for the
cancellation of both the $250,000 Convertible Note and the Excess Profit Note
mentioned above. The Company also signed a four year non-compete agreement with
the sellers at a cost of $130,000, payable over two years.
In June, 1997, the Company replaced its data processing hardware. The
Company is leasing the hardware at an annualized cost of approximately $24,000.
Lease payments will be paid out of the Company's cash flow or working capital.
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 statements other than to require disclosure of the
pro forma effect on net income (loss) of using the fair value-based method of
accounting.
Effective January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company expects that comprehensive
income (loss) will not be materially different from net income (loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information." SFAS
No. 131 changes the standards for reporting financial results by operating
segments, related products and services, geographic areas and major customers.
The Company must adopt SFAS No. 131 for the fiscal year ended December 31,
1998. The Company believes that the effect of adoption will not be material.
19
<PAGE>
MARKET INFORMATION
The Company's Units (consisting of two shares of Common Stock and eight
Class A Warrants) were quoted from June 1997 to November 1997 and the Company's
Common Stock and Class A Common Stock Purchase Warrants ("Class A Warrants")
are quoted since June 1997 on the OTC Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. ("NASD") under the symbols "KDST" and
"KDSTW, respectively." As of July 23 , 1998 at 4:00 P.M. Eastern Standard Time,
the last sale price of the Common Stock and Class A Warrants in the
over-the-counter market were $3.312 and .625, respectively.
The following table reflects the high and low sales prices for the
Company's Units, Common Stock and Class A Warrants for the periods indicated as
reported by the NASD.
Units
Fiscal Year Ended December 31, 1997: HIGH LOW
- ---------------------------------------- -------- --------
June 1997 ............................. $ 62.00 $ 14.00
Third Quarter ......................... 62.00 54.00
October through November 1997 ......... 50.00 35.00
Common Stock
Fiscal Year Ended December 31, 1997:
- -------------------------------------
June 1997 ......................... $ 11.25 $ 5.00
Third Quarter ..................... 10.00 4.00
Fourth Quarter .................... 7.50 5.25
Fiscal Year Ended December 31, 1998:
- -------------------------------------
First Quarter ..................... $ 6.50 $ 3.625
Second Quarter .................... 5.125 2.375
Class A Warrants
Fiscal Year Ended December 31, 1997:
- -------------------------------------
June 1997 ......................... $ 6.00 $ 5.00
Third Quarter ..................... 6.53 5.00
Fourth Quarter .................... 5.47 .63
Fiscal Year Ended December 31, 1998:
- -------------------------------------
First Quarter ..................... $ 2.25 $ 0.25
Second Quarter .................... 1.75 0.50
The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.
The Company had six record holders as of March 20, 1998 as reported by its
transfer agent (American Stock Transfer & Trust Company). The foregoing does
not include beneficial holders of the Company's Common Stock which are held in
"street name" (i.e. nominee accounts such as Depository Trust Company). For
example, as of March 25, 1998, VTR advised the Company that it has 398
customers who beneficially own the Company's Common Stock.
No cash dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.
20
<PAGE>
BUSINESS
The Company
The Company is a specialty direct marketer which 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," 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
second catalog, "Jeannie's Kids Club," 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.
In July 1997, the Company acquired The Natural Baby Catalog from The
Natural Baby Company, Inc. ("Baby Co.") which specializes in children's
products made from natural fiber from prenatal to age three, and consolidated
its operations with those of the Company.
History of Duncan Hill
The Company's principal stockholder, 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. Duncan Hill is a publicly-held
corporation controlled (approximately 68%) by William Miller, the Company's
Chief Executive Officer ("W. Miller") and Jeanne E. Miller, President of the
Company ("J. Miller"). In 1980, a Duncan Hill subsidiary, Highland Pipe
Company, acquired the pipe manufacturing business of the Monarch Pipe Co., of
Bristow, Oklahoma, and subsequently changed its name to Monarch Pipe Co.
("Monarch"). 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. ("Carey"). Subsequently Carey acquired
Monarch from Duncan Hill. In December 1997, Carey reincorporated in Delaware
through a merger with its then newly formed wholly-owned subsidiary, The Havana
Group, Inc. ("Havana"), with Havana as the Surviving Corporation. Havana filed
a Form SB-2 Registration Statement (File No. 333-45863) and completed an
initial public offering of its securities on May 22, 1998. All references to
Havana include the operations of its predecessor, Carey and its subsidiary,
Monarch.
Perfectly Safe, Inc. ("Perfectly Safe") was formed by Duncan Hill in 1990
under Ohio law for the purpose of publishing The Perfectly Safe Catalog, which
was acquired from J. Miller in January 1990. J. Miller purchased the Perfectly
Safe Catalog in 1988 from the catalog's creator. In July, 1995, Perfectly Safe
began to publish its second catalog, Jeannie's Kids Club.
Prior to January 1, 1997, all fulfillment and administrative services of
Perfectly Safe were performed and paid for by Duncan Hill which also provided
similar services to its subsidiary, Havana. Fulfillment services included order
taking, order processing, customer service, warehouse packing and delivery,
telephone contracts and shipping contracts. Fulfillment services were charged
to Perfectly Safe and Havana based on the actual cost. Administrative services
included wages and salaries of officers, accounting, purchasing, executive and
creative/marketing personnel. It also included all leases, contracts, equipment
rentals and purchases, audit, legal, data processing, insurance and building
rent and maintenance. The administrative costs were allocated by Duncan Hill to
Perfectly Safe and Havana based upon the percentage of assets of each operating
subsidiary to the total assets of all operating subsidiaries.
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, which was dissolved. The Company was incorporated by Duncan Hill under
Delaware law on July 26, 1996 and had no operations prior to the
reorganization.
21
<PAGE>
Effective June 30, 1996, the Company also acquired from Duncan Hill the
assets used by Duncan Hill 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 six-month transition
period ended December 31, 1996 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 purchase price of Perfectly Safe and the aforementioned Duncan Hill
assets acquired by the Company was $2,613,404, payable as follows: The Company
issued to 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 was $66,858 (which has been paid) and is $100,000 for each ensuing
installment. In addition, the Company issued to Duncan Hill 2,400,000 shares of
the Company's Common Stock valued at $.125 per share and 5,000,000 shares of
the Company's Series A Preferred Stock valued at $.001 per share. Further, the
Company agreed to assume all of the liabilities of Perfectly Safe as of June
30, 1996 in the amount of $1,291,546, as well as Duncan Hill's outstanding
obligations as of June 30, 1996 under its credit facility in the amount of
$650,000. Almost all of the borrowings under the credit facility were used to
support the Company's operations.
Services Provided to Havana
Since 1997, the Company has provided administrative and fulfillment
services to Havana. During 1997, all fulfillment services were contracted and
paid by the Company and charged to Havana based on the actual cost. All
administrative costs were allocated between the Company and Havana based upon
the percentage of assets for each respective operating company to the total
assets of both operating companies with 33% charged to Havana for the period
January 1, 1997 through June 30, 1997 and 21% charged to Havana for the period
July 1, 1997 through December 31, 1997. Duncan Hill incurred certain other
costs, including legal and outside accounting/auditing expenses, which were
allocated by Duncan Hill to the Company and Havana based on the same method and
percentages as described above.
Effective January 1, 1998, Havana entered into an agreement with the
Company whereby the Company will provide administrative functions to Havana at
an annual cost of $206,100 consisting of: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management, $34,900 for
data processing, $32,200 for office equipment and facilities use, $38,100 for
merchandising and marketing services and $15,300 for purchasing services. The
Company will also provide fulfillment services to Havana at a cost of $2.40 per
order processed. The Company calculated these fees based on actual 1997 costs.
Management believes these fees would represent actual costs should Havana
undertake to provide these services itself. Havana is also obligated to pay the
Company an amount equal to 5% of Havana's 1998 pre-tax profits as additional
consideration for the Company providing administrative and fulfillment services
to Havana. See "Certain Transactions."
Acquisition of The Natural Baby Catalog
In July 1997, the Company acquired the net assets and operations of The
Natural Baby Catalog from Baby Co., a mail order retailer of children's
clothing and toys. This acquisition was funded with the net proceeds of the
Company's initial public offering and has been accounted for as a purchase. The
aggregate purchase price consists of the following:
<TABLE>
<S> <C>
Cash ............................................ $1,444,831
Acquisition costs ............................... 276,998
Issuance of 70,000 Kids Stuff unregistered common
shares to the former owners of Baby Co. ......... 245,000
Note Payable .................................... 100,000
----------
Total purchase price ........................ $2,066,829
==========
</TABLE>
22
<PAGE>
See "Certain Transactions" and "Notes to Financial Statements." All references
to the Company include the operations acquired by it from Perfectly Safe,
Duncan Hill and Baby Co. unless the context indicates otherwise.
Company's Operations
The Company is a specialty direct marketer which 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 a review of the
catalog trade publication called "SRDS Direct Marketing List Service," the
Company believes that its first catalog, "Perfectly Safe, The Catalog For
Parents Who Care," is the nation's only catalog devoted to child safety,
child-proofing the home, and safety-related products for the family. Since
1990, the Company has published over 20 million Perfectly Safe catalogs and
helped childproof over 350,000 homes.
During July, 1995 the Company introduced "Jeannie's Kids Club" catalog to
broaden its market through a new direct marketing concept in children's
products. Jeannie's Kids Club offers parents who become club 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.
In July 1997, the Company acquired from Baby Co. 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 recent addition of The Natural Baby Catalog, the Company
believes that it is one of the leading direct marketers of quality children's
products from prenatal to age three.
In July 1997, the Company consolidated the operations of The Natural Baby
Catalog with the operations of the Company. As a result, savings on annualized
basis are expected in direct labor expenses of approximately $200,000 and in
general and administrative expenses of approximately $450,000. Assuming the
acquisition took place January 1, 1996, the pro forma combined revenues of the
Company and The Natural Baby Catalog were $13,954,877 and $13,090,210 for the
years ended December 31, 1997 and December 31, 1996, respectively. See "Risk
Factors."
Market
The Company's market for children's goods is affected by the historical
rise of births as well as 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 approximately 16 other children's hardgood
catalogs. The Company estimates each of those catalogs have a revenue base of
less than $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.
Strategies
The Company believes that its expertise in the marketing and merchandising
of children's products and its recent acquisition of The Natural Baby catalog
provides 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. In 1997, the Company consolidated the warehouse, telemarketing, data
processing and administrative functions of The Natural Baby Catalog into the
operations of the Company.
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
23
<PAGE>
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 39,000 ;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. The
Company intends to embark upon vigorous marketing efforts to expand 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 $6.7 million in 1997.
The Company is satisfied with the performance of The Natural Baby Catalog and
will endeavor to maintain continuity in the merchandising and marketing of this
catalog.
CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied upon
catalog circulation as the sole method to acquire new customers. Due to 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 will be largely dependent
upon the Company's ability to develop alternative customer acquisition
programs. See "Risk Factors."
RECENTLY REPLACED OUTDATED DATA PROCESSING SYSTEM. During 1997, the
Company replaced its computer hardware at an annual lease cost of $24,000. The
Company expects this upgrade to improve the efficiencies of its operations. The
Company intends to periodically review software upgrade or replacement
anticipated to cost approximately $25,000 annually, on a leased basis, but does
not expect to replace or upgrade the software until future periods.
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 further acquisitions and no assurances can be given that any
acquisitions will be successfully completed in the future. See "Risk Factors"
and "Use of Proceeds."
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 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 approximately 250 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, J. Miller, the author of "The Perfectly Safe Home."
During 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. Jeannie's Kids Club Catalog consists of
selected popular quality hardgoods products from other children's catalogs
offered at discounts of up to 60%. Jeannie's Kids Club Catalog currently
consists of 48 pages containing approximately 300 products.
24
<PAGE>
The Natural Baby Catalog emphasizes alternative hard and softgood products
for babies and their parents. The catalog is 80 pages and contains
approximately 400 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 ratio between hardgoods to softgoods contained in the Company's three
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 catalog pages consumed in its presentation. Products
are then rated by profitability performance 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 1997 was over 53,000 for Perfectly Safe, and over
33,000 member and non-member buyers for Jeannie's Kids Club. (Nonmember 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. The Company is in the
process of developing that software. 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 1997, the catalog mailings
for Perfectly Safe and Jeannie's Kids Club were 2,025,375 and 1,432,716,
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, lesser quantities are mailed monthly in the period
February-June, with quantities increasing to the fall/winter season. The
Natural Baby Catalog mailed approximately 1,242,000 catalogs during the second
half of 1997.
Due to 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. See "Use of Proceeds."
25
<PAGE>
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 employs 35 full-time and 15 part-time customer service and
telemarketing employees at January 1, 1998. During 1996 and 1997, the Company
processed over 708,497 telephone orders, catalog requests and service
requirements. The Company also processes orders, catalog requests and service
requests for Havana. The Company charges Havana $2.40 per order processed. See
"Certain Transactions."
Possible 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
the near future. United Parcel 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. See "Risk Factors."
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 18,000 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 588,000
shipments in 1997 and 1996.
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.
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 1997. The Company believes that no single source likewise supplied
more than 10% of The Natural Baby Catalog products in 1997.
26
<PAGE>
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 1997, The Natural Baby Catalog sales in the fourth quarter were
approximately 34% of The Natural Baby Catalog total 1997 sales.
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 an
$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 Havana. The
repayment of the facility is guaranteed by W. Miller and Havana. The amount
outstanding under the facility as of July 16, 1998 is approximately $732,000.
Interest is charged at the rate of 1% over prime.
It is the policy of the Bank to review the credit facility annually, and
to require that the Company maintain a zero balance on the credit line for a
period of thirty consecutive days sometime during the course of each year. The
Bank agreed to waive the "zero balance" required for the fiscal 1997 and 1998
loan years, because the Company's cash flow would not allow it to comply before
then. See "Risk Factors" and "Use of Proceeds."
Competition
The mail order catalog industry 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." "The Right Start Catalog" and "One Step Ahead" have
substantially larger revenues than the Company, even with the consolidation of
the revenues of The Natural Baby Catalog since July 1997 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." Many of those catalogs have
substantially higher revenues than the Company.
Certain 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 many of
these catalogs have substantially higher revenues than The Natural Baby
Catalog.
27
<PAGE>
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. The
Company has not experienced 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 in the future, or that such an
occurrence would not have an adverse effect upon the profitability of The
Natural Baby Catalog. See "Risk Factors."
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 recent acquisition of The Natural Baby Catalog, the Company
acquired the ownership of the trademark "The Natural Baby Co., Inc." with logo,
which is a federally registered trademark. There can be no assurance as to the
extent of the protection that will be provided to the Company as a result of
having such trademarks and trade names or that the Company will be able to
afford the expenses of any complex litigation which may be necessary to enforce
the proprietary rights.
Employees
As of June 30, 1998, the Company had 57 full time employees and 18 part
time employees. Of this total, 11 employees or 19% of total full-time
employees, hold positions of managers; 52 employees or 69% 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 52 employees or 69% 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.
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 taxes in states where it is required to
do so. However, 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. There can be no
assurances given that these state sales tax laws will not be changed in the
future to the detriment of the Company. The Company has no claims or regulatory
matters in process or pending as of June 30, 1998. [Verify.] See "Risk
Factors."
Product Liability Insurance
Since 1990, the Company's parent, Duncan Hill, has carried product
liability insurance for the Company and Havana. The current coverage is $1
million per occurrence with an aggregate limit of $2 million. The policy
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<PAGE>
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 Havana as named insureds. The
policies are issued for a period of one year and are currently in effect
through September 17, 1998. The Company may, in the future, procure the same
coverage in its name, alone. 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. An 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 "Risk Factors."
Description of Property
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 18,000 square feet, which is leased for a one
year term expiring September 30, 1998, and subject to earlier termination
without penalty at the option of the lessee upon sixty days written notice to
the landlord. All leases are in the name of Duncan Hill and the rent is charged
to the Company and Havana consistent with past practices.
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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<PAGE>
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 (1) 61 Chairman of the Board of Directors, Chief Executive
Officer, Principal Financial Officer, Secretary
Jeanne E. Miller (1) 50 President, Director
William T. Evans 46 Vice President of Finance and Operations
Clark D. Swisher 46 Director
</TABLE>
- ------------
(1) W. Miller and J. Miller are husband and wife.
The term of office for each of the Company's directors is one year until
their respective successors are elected and shall qualify. Executive officers
serve at the pleasure of the Board of Directors.
WILLIAM L. MILLER, Chairman of the Board, Chief Executive Officer,
Principal Financial Officer, Treasurer and Secretary of the Company since its
formation in July 1996. Mr. Miller serves as Chairman of the Board, President
and Chief Executive Officer of Havana since December 1997. Previously, he was
the sole director and an executive officer of Carey from 1984 to December 1997.
Mr. Miller had been a director of Perfectly Safe, Inc. and its vice President
since it was formed by Duncan Hill in 1990 until July 1996. Mr. Miller is
President, Founder and a director of Duncan Hill, a company he formed in 1977,
Mr. Miller founded the MBI Corporation, which designed and developed packaging
machinery (1975-78). Mr. Miller served in executive capacities in the direct
marketing industry from 1971 to 1975. He holds a Bachelors Degree. in
Mechanical Engineering from Purdue University and a Masters Degree in Business
Administration from Indiana University
JEANNE E. MILLER has been a director of the Company since July 1996, and
its President since January 1998. Previously, she served as Executive Vice
President of the Company from July 1996 until January 1998. Since July 1996,
Mrs. Miller had been a director of Perfectly Safe, Inc., and its President
since its formation in 1990 until July 1996. Mrs. Miller co-founded Duncan Hill
in 1977 and has been a director and its Vice President since 1977. 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 served as Vice President and a director of Carey and
Highland Pipe Company, both of which are subsidiaries of Duncan Hill, from 1984
to 1996.
WILLIAM T. EVANS, Vice President of Finance and Operations since December
9, 1997. Previously he helped form and served as Treasurer of Premier Plastic
Recyclers, Inc. (1994-1997), which reprocessed plastics for use as raw
material. He served in senior manasgement positions with Bridgestone/Firestone,
Inc. from 1989 to 1994, including Chief Financial Officer of South American
oprerations. As a CPA with the accounting firm Deloitte & Touche, he served a a
Senior Manager from 1977 through 1988. Mr. Evans holds a Bachelors degree in
accounting from the University of Akron.
CLARK D. SWISHER is a director of the Company since July 1996. 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.
The Company intends to identify and appoint two individuals who are not
affiliated with the Company 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 would 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
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<PAGE>
audit activities of the independent auditors and review audit results and have
general responsibility for all auditing related matters. The Compensation
Committee would consist entirely of directors who are not affiliated with the
Company. The Compensation Committee would 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
compensation and benefit plans, fringe benefits, non-cash perquisites and other
forms of compensation. The Committee would also administer the Company's 1997
Long-Term Stock Incentive Plan.
VTR, the Managing Underwriter of the Company's initial public offering,
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 June 26,
1997. As of the date of this Prospectus, no such person has been designated.
Compensation of Directors
The Company pays its directors who are not also employees of the Company
$100 for each meeting attended and reimburses such directors for travel and
other expenses incurred by them in connection with attending Board of Directors
meetings. Directors are eligible to participate in 1997 Stock Incentive Plan.
Executive Compensation
The following table provides a summary compensation table with respect to
the compensation of W. Miller, the Company's Chief Executive Officer (CEO), and
J. Miller, the Company's President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------------- --------------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Number of Payouts sation
Position Year Salary ($) Bonus ($) ($)(1) ($)(2) Options (3) ($) ($)
- ----------------------- ------ ------------ ----------- --------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Miller, ............ 1997 125,000 -0- -0- -0- 100,000 -0- -0-
Chief Executive Officer 1996 100,000 -0- -0- -0- -0- -0- -0-
1995 100,000 -0- -0- -0- -0- -0- -0-
J. Miller, ............ 1997 90,000 -0- -0- -0- 100,000 -0- -0-
President 1996 65,000 -0- -0- -0- -0- -0- -0-
1995 65,000 -0- -0- -0- -0- -0- -0-
</TABLE>
- ------------
(1) Does not include the value of leased automobiles used almost exclusively
for the Company's business or key man life insurance on the lives of each
of W. Miller and J. Miller in the amount of $1,000,000, payable to the
Company in the event of death.
(2) Does not include 2,400,000 shares of the Company's Common Stock and
5,000,000 shares of the Company's Series A Preferred Stock issued to
Duncan Hill in connection with a reorganization.
(3) See "Employment Contracts" for a description of these options.
31
<PAGE>
OPTION GRANTS TABLE
The information provided in the table below provides information with
respect to individual grants of the Company's stock options during fiscal 1997
of each of the executive officers named in the summary compensation table
above. The Company did not grant any stock appreciation rights during 1997.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term (2)
- --------------------------------------------------------------------------- --------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
Granted to
Employees Exercise
Options in Fiscal Price Expiration
Name Granted (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- ------------------- ------------- ----------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
W. Miller ......... 100,000 50% 5.00 1/1/07 314,000 797,000
J. Miller ......... 100,000 50% 5.00 1/1/07 314,000 797,000
</TABLE>
- ------------
(1) The percentage of total options granted to the Company's employees in
fiscal year is based upon options granted to officers, directors and
employees.
(2) The potential realizable value of each grant of the Company's options
assumes that the market price of its Common Stock appreciates in value
from the date of grant to the end of the option term at annualized rates
of 5% and 10%, respectively, and after subtracting the exercise price from
the potential realizable value.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
The information provided in the table below provides information with
respect to each exercise of the Company's stock option during fiscal 1997 by
each of the executive officers named in the summary compensation table and the
fiscal year end value of the Company's unexercised options.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Options at Options
Acquired Value FY-End (#) at FY-End ($)
on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) (1) Unexercisable Unexercisable (1)
- ---------------------------- -------------- ---------- --------------- ------------------
<S> <C> <C> <C> <C>
William L.. Miller ......... -0- -0- -0- / 100,000 -0- / 100,000
Jeanne E. Miller ........... -0- -0- -0- / 100,000 -0- / 100,000
</TABLE>
- ------------
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the Company's
options at exercise or fiscal year end, respectively. In calculating the
dollar value realized upon exercise, the value of any payment of the
exercise price is not included.
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 executive officers 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 Board intends to establish
its first bonus pool for 1998. 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
32
<PAGE>
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 W.
Miller and J. Miller, the Company's respective Chief Executive Officer and
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 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. As of the date of this
Prospectus, no compensation has been paid 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
33
<PAGE>
shares of Common Stock subject to a stock award will be valued at not less than
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 this 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
W. Miller and J. Miller, effective January 1, 1997, pursuant to which W. Miller
is serving as Chief Executive Officer of the Company and J. Miller served as
its Executive Vice President. (In January 1998, the Company elected J. Miller
President of the Company.) The employment agreements provide for an annual base
salary of $125,000 for W. Miller and $90,000 for J. 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 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. (During 1997, these automobiles were used
almost exclusively for business purposes.) 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. (No such personal expenses
were incurred in 1997.) Each of these executives 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 W. Miller
and five times the base salary of J. Miller. (As of June 30, 1998, the Company
has not been requested by W. Miller and/or J. Miller to take out such
insurance.) 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
W. 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 J.
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 W. Miller and J. Miller would be $299,000 and
$194,350, respectively. Each executive is further entitled to be paid severance
compensation in the amount
34
<PAGE>
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 W. Miller, a
successor chief executive officer is hired with W. Miller's consent to replace
W. 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. See "Risk Factors."
Each of W. Miller and J. 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 on January 1, 2007. 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.
W. 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. See "Risk Factors."
The Company also provides W. Miller and J. Miller and all other employees
with health insurance on a non-discriminatory basis. The Company intends to
provide its executive officers and employees with certain fringe benefits 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.
Potential Conflicts of Interest
W. Miller is a co-founder, Chairman of the Board of Directors and Chief
Executive Officer of Havana, Duncan Hill and the Company. W. Miller's
employment agreement with the Company provides that he shall be permitted to
devote such time to managing Duncan Hill and Havana as he deems appropriate.
Accordingly, W. Miller will not be devoting his full-time attention to managing
the operations of the Company. Thus, conflicts of interest could potentially
develop (i) to the extent that W. Miller is not able to devote his full-time
and attention to a matter that would otherwise require the full-time and
attention of a business' chief executive officer, (ii) involving competition
for business opportunities, and (iii) involving transactions between the
Company and its affiliated companies. The Company has not adopted any procedure
for dealing with such conflicts of interest, except that the Company's Board of
Directors has adopted a policy that all new transactions between the Company
and Duncan Hill, Havana or any other affiliated company must be approved by at
least a majority of the Company's disinterested directors, if any. Currently,
the Company has no disinterested directors and Duncan Hill and W. Miller
control the election of the directors. See "Risk Factors."
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 of 1933, as
amended (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. See "Risk
Factors."
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of August 12, 1998, 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. ............................. 2,315,000(4) 65.9% 5,000,000(4) 100%
4450 Belden Village Street, N.W.,
Suite 406
Canton, OH 44718
William L. Miller and Jeanne E. Miller(4) ......... 2,365,000(5) 66.4% 5,000,000(6) 100%
c/o 4450 Belden Village Street, N.W.,
Suite 406
Canton, OH 44718
Clark D. Swisher .................................. -0- -0- -0- -0-
c/o 4450 Belden Village Street, N.W.,
Suite 406
Canton, OH 44718
All Officers and Directors
as a Group (3 Persons) ........................... 2,365,000(7) 66.4% 5,000,000(6) 100%
</TABLE>
- ------------
(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 3,512,856 shares of Common Stock outstanding.
(3) Calculated based upon 5,000,000 shares of Series A Preferred Stock
outstanding. 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 has no conversion rights
or rights to participate in dividend payments.
(4) The Millers will be deemed to beneficially own all of Duncan Hill's shares
for purposes of Rule 13d-3 of the Exchange Act based upon his controlling
ownership of its common stock. The Millers together control approximately
68% of Duncan Hill.
(5) Includes the Miller's deemed beneficial ownership of 2,315,000 shares of
Common Stock and options to purchase 50,000 shares.
(6) Represents the Miller's deemed beneficial ownership of 5,000,000 shares of
Series A Preferred Stock, the record holder of which is Duncan Hill.
36
<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 were customers of VTR, the Managing Underwriter of the Company's
initial public offering. There were no other affiliations or relationships
between the seven private investors and either the Company or VTR. The eighth
investor, who was not a customer of the VTR and who had no relationship or
affiliation with VTR had once been engaged to provide financial consulting
services to 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 VTR 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 VTR in connection with the Company's initial public offering.
The Company's repurchase payment was evidenced by five promissory notes issued
by it in the aggregate amount of $107,143, which notes have been paid. The
notes bore interest at the rate of 8% per annum commencing the date that each
investor initially subscribed for his Rule 504 Shares.
The remaining 442,856 shares which were not required to be repurchased are
still outstanding. Such 442,856 shares were issued under Rule 504 of Securities
Act (the "504 Shares") and are freely tradeable except for 100,000 of the Rule
504 Shares which are subject to a "lock-up" agreement with VTR until June 26,
1999. 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.
Bridge Loan
In October 1996, the Company borrowed an aggregate of $200,000 (the
"Bridge Loan") from three private investors, two of whom were customers of VTR,
and the third of whom was introduced by VTR to the Company. These three private
investors are Clinthill Investments, Ltd., Kurt Campbell and M&M Specialties,
Inc. The Bridge Loan, which has been paid, bore interest at the rate of 8% per
annum.
As originally structured, $75,000 of the face amount of the Bridge Loan
was convertible into 1,500,000 Warrants upon the effective date of the public
offering. Subsequently, the Bridge Loan was restructured, at the request of VTR
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
the Company's initial public offering in July 1997, 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, Baby Co. contracted to sell its catalog business, The
Natural Baby Catalog, to Duncan Hill on behalf of the Company, at which time
Duncan Hill paid Baby Co. $25,000 towards the purchase price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding a description of the terms and conditions of the Company's
acquisition of The Natural Baby Catalog from Baby Co. In connection with this
transaction, 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 was
reflected in the $250,000 Convertible Note described in "Management's
Discussion and Analysis and Results of Operations" and $100,000 of the
Additional Amount is reflected in the cash payments made in July 1997 described
in "Management's Discussion and Analysis and Results of Operations." 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.
37
<PAGE>
General
Reference is made to "Business" and "Management's Discussion and Analysis
and Results of Operations" for a description of various related party
transactions involving the Company, Havana and Duncan Hill.
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.
DESCRIPTION OF SECURITIES
Common Stock
The Company has 25,000,000 shares of authorized Common Stock. As of the
date of this Prospectus, 3,512,856 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 from 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, all of which are
owned by Duncan Hill. 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 and the Common Stock held by
Duncan Hill enable it and the Millers to maintain control of the Company
subsequent to the completion of this Offering. See "Risk Factors."
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
Commencing June 26, 1998 and expiring June 26, 2002, (the "Expiration
Date") each Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $5.00 per share. Class A Warrants may be
exercised by surrendering to the warrant agent the Class A 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
38
<PAGE>
be issued in connection with the exercise of Class A 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 Class A Warrants.
The Company may redeem the Class A Warrants at a price of $.05 per Warrant
at any time after they become exercisable and prior to the Expiration Date 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.
In the event a holder of Class A Warrants fails to exercise the Class A
Warrants prior to the Expiration Date, the Class A Warrants will expire and the
holder thereof will have no further rights with respect to the Class A
Warrants. A holder of Class A 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 Class A Warrants are
not entitled to participate in the distribution of the Company's assets.
The exercise price of the Class A Warrants and the number of shares
issuable upon exercise of the Class A 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 Class A Warrants at any time during the exercise period.
Purchasers of the Class A Warrants will have the right to exercise the
Class A 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 Class A 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 Class A Warrants, but there can be no assurance that the Company
will be able to do so. The Class A 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
Class A Warrants reside.
For the life of the Class A 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 Class A Warrants are outstanding. At
any time when the holders of Class A 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 Class A Warrants.
The foregoing is a summary of certain provisions of a Warrant Agreement
under which each Warrant will be issued. The Warrant Agreement dated June 26,
1997 between American Stock Transfer & Trust Company and the Company has been
filed as an Exhibit to the Registration Statement of which the Prospectus is a
part.
Underwriters' Purchase Option
In connection with the Company's initial public offering, the Company sold
to the Underwriters, for an aggregate purchase price of $25, the Underwriters'
Purchase Option which entitles the holders to purchase 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 June 26, 1998 and expiring June
26, 2002. 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
39
<PAGE>
might be expected to exercise it, the Company would probably be able to obtain
additional capital on more favorable terms. The Registration Statement of which
this Prospectus is a part includes the registration of the 60,000 shares of
Common Stock underlying the Underwriters' Purchase Option. However, this
Prospectus does not include the exercise of the Underwriters' Purchase Option
or the resale of the underlying shares since there is no present intent to
exercise the Underwriters' Purchase Option or to resell the underlying Shares.
The Company will file a post-effective amendment to include the exercise of the
Underwriters' Purchase Option and the resale of the Underlying Shares at such
time as there is a present intention to exercise the Underwriters' Purchase
Option.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Units, Common Stock and
Class A Warrants is American Stock Transfer & Trust Company, 40 Wall Street,
New York, NY 10005.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
In connection with obtaining equity bridge financing, the Company has
outstanding 442,856 shares of Common Stock under Rule 504 (the "Rule 504
Shares") of the Securities Act. Of the 442,856 shares, 100,000 of the Rule 504
Shares are subject to "lock-up" by VTR and cannot be sold or transferred until
June 26, 1999, unless otherwise permitted by VTR, at which time these shares
will be freely tradeable without any necessity for their registration under the
Securities Act. The balance of the Rule 504 Shares, i.e., 342,856 shares, are
not subject to VTR's "lock-up" and are freely tradeable without any necessity
for their registration under the Securities 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 June 1997 initial public offering price of each of the two shares of
Common Stock and eight Class A Warrants 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, Duncan Hill, holds 1,915,000 shares of the Company's Common
Stock in addition to the 400,000 shares registered for sale as a Selling
Security Holder and 5,000,000 shares of the Company's Series A Preferred Stock
(collectively the "Restricted Securities"). These 1,915,000 shares of Common
and Preferred Stock held by Duncan Hill, and 70,000 shares of Common Stock
originally issued to the seller of Baby Co., are "restricted securities" as
that term is defined by Rule 144 of the Securities Act. Such securities may
only be sold in compliance with the provision of Rule 144 unless otherwise
registered by the Company. Furthermore, Duncan Hill has agreed with VTR not to
sell or transfer the Restricted Securities until June 26, 1999 unless earlier
permitted by VTR. While there are no agreements, arrangements or understandings
with Duncan Hill with respect to the early release of the lock-up in previous
offerings, VTR has released the lock-up prior to the end of the lock-up period.
In making its decision to release the lock-up, VTR 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.
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.
40
<PAGE>
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 Stock
pursuant to Rule 144 or otherwise may adversely affect the then-prevailing
market price of the Units, Common Stock and the Class A Warrants, should a
public trading market for such securities develop.
SELLING SECURITY HOLDER
This Prospectus includes the registration on behalf of Duncan Hill as a
Selling Security Holder of the resale of 400,000 shares of Common Stock. The
Selling Security Holder is the principal stockholder of the Company which is
controlled by W. Miller and J. Miller, two executive officers and directors of
the Company. The Selling Security Holder intends to sell their shares of Common
Stock through VTR from time-to-time, subject to release from a lock-up
agreement with VTR. The distribution by the Selling Security Holder may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to VTR for resale of such
shares as principal, at market prices prevailing at the time of sale or at
negotiated prices. In the event VTR purchases shares as principal, it will
resell the shares at market prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holder in connection with such sales of shares. The amount of the markdown or
commissions to be charged by VTR will depend upon the size and volume of
trading activity at that time and will range from zero to 5% for commissions
and zero to 10% for markdowns. The Company will not receive any proceeds of the
sale of shares by the Selling Security Holder. All costs incurred in the
registration of shares on behalf of Selling Security Holder are being borne by
the Company.
Duncan Hill has agreed with VTR not to sell or transfer the Restricted
Securities until June 26, 1999 unless earlier permitted by VTR. While there are
no agreements, arrangements or understandings with Duncan Hill with respect to
the early release of the lock-up in previous offerings, VTR has released the
lock-up prior to the end of the lock-up period. In making its decision to
release the lock-up, VTR 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 following table sets
forth the beneficial ownership of the Common Stock of the Company held by the
Selling Security Holder prior to the offering and after the offering, assuming
all 400,000 shares of the Common Stock owned and to be offered for sale by the
Selling Security Holder are sold. The number of shares of Common Stock owned by
the Selling Security Holder do not include beneficial ownership of options
beneficially owned by W. Miller and J. Miller.
Percent of Common
Stock
Name of Beneficial Owner Common Stock Owned Owned%
Prior to After Prior to After
Offering(1) Offering Offering Offering
- -------------------------------------------------------------------------------
Duncan Hill, Inc. 2,315,000 1,915,000 65.9 54.5
The Selling Security Holders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act with respect to the Common Stock offered, and any profits
realized or commissions received may be deemed underwriting compensation.
Under the Exchange Act, and the regulations thereto, VTR and any other
person engaged in a distribution of the shares of Common Stock of the Company
offered by the Selling Security Holder may not simultaneously engage in
market-making activities with respect to such securities of the Company during
the applicable "cooling off" period (up to 5 days) prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the Selling
Security Holder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including without limitation,
Regulation M, in connection with transactions in such securities, which
provisions may limit the timing of purchase and sales of the Company's Common
Stock by the Selling Securities Holder.
41
<PAGE>
PLAN OF DISTRIBUTION
Persons who desire to exercise their Class A Warrants must complete the
subscription form on the reverse side of their warrant certificate(s) and
forward same together with the exercise price to American Stock Transfer &
Trust Company, 40 Wall Street, New York, NY 10005. Common Stock certificates
will be issued as soon as practicable after the funds have cleared but no later
than the __ business day after exercise of their Warrants. See "Selling
Security Holder" regarding the Plan of Distribution for the Selling Security
Holder.
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon
for the Company by Lester Morse P.C., Suite 420, 111 Great Neck Road, Great
Neck, NY 11021.
EXPERTS
The financial statements of Kids Stuff, Inc. as of December 31, 1997 and
December 31, 1996 and for the three years ended December 31, 1997, 1996 and
1995 have been audited by Hausser +Taylor LLP, independent auditors, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting.
42
<PAGE>
INDEX
<TABLE>
<S> <C>
Independent Auditors Report .............................................................. F-2
Balance Sheets -- March 31, 1998 (Unaudited) and December 31, 1997 and 1996 .............. F-3
Statements of Operations -- Three Months Ended March 31, 1998 and 1997 (Unaudited) and
Years Ended December 31, 1997, 1996 and 1995 ............................................. F-5
Statements of Stockholders' Equity -- Three Months Ended March 31, 1998 (Unaudited) and
Years Ended December 31, 1997, 1996 and 1995 ............................................. F-6
Statements of Cash Flows -- Three Months Ended March 31, 1998 and 1997 (Unaudited) and
Years Ended December 31, 1997, 1996 and 1995 ............................................. F-7
Notes to Financial Statements ............................................................ F-9
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio
We have audited the accompanying balance sheets of Kids Stuff, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, 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
results of operations and cash flows prior to June 30, 1996 included 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.
Canton, Ohio
February 10, 1998
F-2
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS (Unaudited) December 31,
- ---------- March 31, -----------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash ....................................... $ 79,490 $ 101,894 $ 248,648
Accounts receivable ........................ 312,487 335,013 165,779
Due from affiliates ........................ 588,037 580,965 --
Inventories ................................ 1,330,787 1,389,012 496,395
Deferred catalog expense ................... 504,704 259,592 277,469
Prepaid expenses ........................... 40,360 21,798 169,789
---------- ---------- ----------
Total current assets .................... 2,855,865 2,688,274 1,358,080
PROPERTY AND EQUIPMENT
Leasehold improvements ..................... 19,909 19,909 --
Data processing equipment .................. 213,432 207,378 95,894
Machinery and equipment .................... 95,788 93,366 83,360
Vehicles ................................... 9,089 9,089 --
Furniture and fixtures ..................... 140,511 129,314 98,448
---------- ---------- ----------
478,729 459,056 277,702
Less accumulated depreciation .............. 205,754 193,634 164,093
---------- ---------- ----------
272,975 265,422 113,609
OTHER ASSETS, net of accumulated amortization
Goodwill ................................... 1,102,881 1,119,425 --
Customer list .............................. 463,746 474,940 --
---------- ---------- ----------
1,566,627 1,594,365 --
$4,695,467 $4,548,061 $1,471,689
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Kids Stuff, Inc.
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
March 31, ---------------------------------
1998 1997 1996
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt -- related parties ......... $ 100,000 $ 100,000 $ 266,858
Accounts payable ............................................. 1,698,584 1,617,204 1,102,311
Line of credit ............................................... 732,000 671,000 650,000
Due to affiliates ............................................ -- -- 137,070
Customer advances and other .................................. 83,159 137,193 5,630
------------ ------------ ------------
Total current liabilities ................................. 2,613,743 2,525,397 2,161,869
LONG-TERM DEBT -- RELATED PARTIES, NET OF
CURRENT PORTION .............................................. 200,000 200,000 300,000
STOCKHOLDERS' EQUITY
Preferred stock -- $.001 par value, 10,000,000 shares
authorized, 5,000,000 issued and outstanding, voting,
without dividend in 1997 ................................... 5,000 5,000 --
Common stock -- $.001 par value, 25,000,000 shares
authorized, 3,512,856, 3,512,856 and 3,700,000 shares
issued and outstanding in 1998, 1997 and 1996,
respectively ............................................... 3,513 3,513 3,700
Additional paid-in capital ................................. 3,216,734 3,216,734 458,800
Retained earnings (deficit) ................................ (1,343,523) (1,402,583) (1,452,680)
------------ ------------ ------------
Total stockholders' equity ................................ 1,881,724 1,822,664 (990,180)
------------ ------------ ------------
$ 4,695,467 $ 4,548,061 $ 1,471,689
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Kids Stuff, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
----------------------------- ----------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- -------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales ....................... $3,204,877 $1,465,541 $11,016,601 $6,638,995 $5,724,337
Cost of Sales ............... 2,001,467 825,394 6,812,422 4,204,321 3,540,487
---------- ---------- ----------- ---------- ----------
Gross Profit ................ 1,203,410 640,147 4,204,179 2,434,674 2,183,850
Selling Expenses ............ 769,728 594,841 2,966,929 2,193,219 1,998,502
General and Administrative
Expenses ................... 366,241 189,443 1,077,041 712,515 684,615
---------- ---------- ----------- ---------- ----------
Income (Loss) From
Operations ................. 67,441 (144,137) 160,209 (471,060) (499,267)
Net Other (Expense) ......... (8,381) (14,819) (110,112) (50,580) (37,725)
---------- ---------- ----------- ---------- ----------
Net Income (Loss) ........... $ 59,060 $ (158,956) $ 50,097 $ (521,640) $ (536,992)
---------- ---------- ----------- ---------- ----------
Basic and Diluted Income
(Loss) Per Share ........... $ 0.02 $ (0.04) $ 0.01 $ (0.14) $ (0.15)
========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Kids Stuff, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
---------- ----------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 ........... $2,400 $ -- $ 297,000 $ (394,048) $ (94,048)
Net Loss ............................ -- -- -- (536,992) (536,992)
------ ------ ---------- ------------ ----------
Balance - December 31, 1995 ......... 2,400 -- 297,600 (931,040) (631,040)
Sale of 1,300,000 Common Shares
to Bridge Lenders .................. 1,300 -- 161,200 -- 162,500
Net Loss ............................ -- -- -- (521,640) (521,640)
------ ------ ---------- ------------ ----------
Balance - December 31, 1996 ......... 3,700 -- 458,800 (1,452,680) (990,180)
Issuance of 5,000,000 Preferred
Shares to Duncan Hill .............. -- 5,000 -- -- 5,000
Repurchase of 857,144 Common
Shares from Bridge Lenders ......... (857) -- (106,286) -- (107,143)
Net Proceeds from the Issuance Of
600,000 Common Shares in
Public Offering .................... 600 -- 2,619,290 -- 2,619,890
Issuance of 70,000 Unregistered
Common Shares for Purchase Of
Natural Baby ....................... 70 -- 244,930 -- 245,000
Net Income .......................... -- -- -- 50,097 50,097
------ ------ ---------- ------------ ----------
Balance - December 31, 1997 ......... $3,513 $5,000 $3,216,734 $ (1,402,583) $1,822,664
Net Income (Unaudited) .............. -- -- -- 59,060 59,060
------ ------ ---------- ------------ ----------
Balance - March 31, 1998
(Unaudited) ........................ $3,513 $5,000 $3,216,734 $ (1,343,523) $1,881,724
====== ====== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------------ -------------------------------------------------
1998 1997 1997 1996 1995
------------- -------------- --------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ...................... $ 59,060 ($ 158,956) $ 50,097 ($ 521,640) ($ 536,992)
Adjustments to reconcile net
income (loss) to net cash pro-
vided (used) by operating activities:
Depreciation and amortization ........ 39,859 8,841 80,687 17,005 25,991
Loss on disposal of assets ........... -- -- -- 30,450 --
(Increase) decrease in accounts
receivable ......................... 22,524 (43,808) (139,937) (92,146) 21,705
(Increase) decrease in inventories 58,226 108,924 (417,847) 105,622 (237,747)
(Increase) decrease in deferred
catalog expense ..................... (245,112) (63,180) 203,464 (105,944) (34,072)
(Increase) in prepaid expenses ....... (18,562) -- (18,254) -- --
Increase in accounts payable,
customer advances and other ........ 27,346 242,322 350,245 354,020 250,974
---------- --------- ------------ --------- ---------
Net cash provided (used) by operating
activities ............................. (56,659) 94,143 108,455 (212,633) (510,141)
Cash Flows From Investing Activities
Investment in property and equip-
ment ................................. (19,673) (13,497) (157,023) (38,921) (28,016)
(Increase) decrease in prepaid
amounts for acquisition of Natu-
ral Baby Catalog business ............ -- (19,533) 126,007 (126,007) --
Purchase of Natural Baby Catalog
business ............................. -- -- (1,721,829) -- --
---------- --------- ------------ --------- ---------
Net cash (used) by investing activities (19,673) (33,030) (1,752,845) (164,928) (28,016)
Cash Flows From Financing Activities
Borrowings on line of credit - net ..... 61,000 -- 21,000 220,000 255,000
Sale of common stock ................... -- -- 2,619,890 162,500 --
Purchase of common stock ............... -- -- (107,143) -- --
Sale of preferred stock ................ -- 5,000 5,000 -- --
Borrowings on long-term debt -
related parties ...................... -- -- -- 566,858 --
Payments on long-term debt -
related party ........................ -- -- (266,858) -- --
Payment on note payable for acqui-
sition of Natural Baby Catalog ....... -- -- (100,000) -- --
(Increase) decrease in prepaid
amounts for public offering .......... -- (135,759) 43,782 (43,782) --
(Increase) decrease in due to affili-
ates ................................. -- (137,070) (137,070) (315,086) 281,726
(Increase) in due from affiliates ...... (7,072) -- (580,965) -- --
---------- --------- ------------ --------- ---------
Net cash provided (used) by financing
activities ............................. 53,928 (267,829) 1,497,636 590,490 536,726
Net (Decrease) increase in Cash ......... (22,404) (206,716) (146,754) 212,929 (1,431)
Cash - Beginning ........................ 101,894 248,648 248,648 35,719 37,150
---------- --------- ------------ --------- ---------
Cash - Ending ........................... $ 79,490 $ 41,932 $ 101,894 $ 248,648 $ 35,719
========== ========= ============ ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
----------------------- -------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Disclosure of Cash
Flow Information Cash paid dur-
ing the year for interest ........... $11,214 $13,512 $108,778 $50,554 $42,729
Supplemental Disclosure of Non-
Cash Investing Activity
Borrowing on note payable for the
purchase of The Natural Baby
Catalog ............................. $ -- $ -- $100,000 $ -- $ --
Issuance of 70,000 unregistered
common shares for the purchase
of The Natural Baby Catalog ........ -- -- 245,000 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<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 Safe, Inc. was dissolved. As part of the
reorganization, the Company acquired the assets and liabilities of its
Predecessor. The Company also acquired, as part of the reorganization, certain
fixed assets formerly belonging to Duncan Hill at a net book value of $122,143
at December 31, 1995. The combination of the Company's acquisition of the
assets of its Predecessor and the Company's acquisition of certain assets of
Duncan Hill were accounted for at historical cost as a reorganization of
companies under common control. The operations of the Predecessor are currently
operated as the Perfectly Safe Division and Jeanne's Kids Club Division of the
Company.
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. Natural Baby, a division of the Company,
sells clothing and toys for children primarily up to the age of 3. Products are
purchased from a variety of vendors.
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. Interim Statements -- Interim statements have been prepared by the
Company. In the opinion of the Company's management, the disclosures made are
adequate to make the information presented not misleading, and the interim
financial statements contain all adjustments necessary to present fairly the
financial position as of March 31, 1998, and 1997, and the related statements
of operations and cash flows for the three months ended March 31, 1998 and 1997
and stockholders equity for the three months ended March 31, 1998. The results
for the three months ended March 31, 1998 and 1997 are not necessarily
indicative of the results to be expected for the full year.
E. 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.
F. 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, 1997 and 1996. Bad debt
expense was $9,321 (unaudited) and $5,908 (unaudited) for the three months
ended March 31, 1998 and 1997, respectively; and $37,904, $34,752, and $18,742
for the years ended December 31, 1997, 1996, and 1995 respectively.
G. 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.
H. 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
F-9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
other mail order mailings from the Company. Catalog expense was $576,650
(unaudited) and $482,761 (unaudited) for the three months ended March 31, 1998
and 1997 respectively; and $2,473,778, $1,936,094, and $1,772,770 for the years
ended December 31, 1997, 1996 and 1995, respectively.
I. December 31, 1996 prepaid expenses include $43,782 relative to the
public offering (see Note 7) and $126,007 relative to the acquisition of The
Natural Baby Catalog (see Note 5).
J. 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 $29,541, $17,005, and $25,991 for the
years ended December 31, 1997, 1996, and 1995, respectively.
Maintenance, repairs, and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.
K. Intangible Assets -- During 1997, the Company purchased the net assets
and operations of The Natural Baby Company as discussed in Note 5. Management
has determined the fair value of the customer list acquired in that acquisition
to be $505,000. The excess purchase price over the fair value of assets
acquired amounted to $1,140,512 and was recorded as goodwill. The customer list
is being amortized using the straight-line method over seven years. Goodwill is
being amortized using the straight-line method over twenty years. For the
customer list, accumulated amortization was $41,254 (unaudited) as of March 31,
1998; and $30,060 as of December 31, 1997. For goodwill accumulated
amortization was $37,631 (unaudited) as of March 31, 1998; and $21,087 as of
December 31, 1997.
L. 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.
M. Per Share Amounts -- Net income per share is calculated using the
weighted average number of shares outstanding during the year and additional
shares assumed to be outstanding to reflect the dilutive effect of common stock
equivalents. The only common stock equivalents outstanding were the 2,400,000
Class A Warrants. The number of shares outstanding in computing basic and
diluted earnings per share for the three months ended March 31, 1998 and 1997
and for the years ended 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Actual weighted average number of common
shares outstanding ..................... 3,512,856 3,700,000 3,551,432 3,700,000 3,700,000
Effect of dilutive warrants ............. 29,000 -- 768,000 -- --
--------- --------- --------- --------- ---------
Weighted average assuming conversion used
for diluted earnings per share ......... 3,541,856 3,700,000 4,319,432 3,700,000 3,700,000
========= ========= ========= ========= =========
</TABLE>
For the 1996 and 1995 calculation of shares outstanding, the 3,700,000
shares includes the 857,144 shares that the Company bought back from the
private investors in 1997 (see Note 2A).
N. Reclassification -- Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
O. New Authoritative Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued. SFAS
130 established new standards for reporting comprehensive income and its
components and is effective for fiscal years beginning after December 15, 1997.
The Company expects that comprehensive income will not differ materially from
net income.
F-10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS 131
changes the standards for reporting financial results by operating segments,
related products and services, geographical areas and major customers. The
Company must adopt SFAS 131 no later than December 31, 1998. The Company
believes that the effect of adoption will not be material.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at
fair value. If certain conditions are met, a derivative may be designated
specifically as (a) a hedge of the exposure to changes in fair value of a
recognized asset or liability or an unrecognized firm commitment (fair hedge),
(b) a hedge of the exposure to variable cash flows of a forecasted transaction
(a cash hedge), or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The Company does not anticipate having each of these types of
hedges, but will comply with requirements of SFAS 133 when adopted.
This statement is effective for all fiscal quarters or fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 beginning
January 1, 2000. The effect of adopting SFAS 133 is not expected to be
material.
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.
Subsequent to December 31, 1996, the Company provides services to Duncan
Hill and Duncan Hill's other subsidiary, 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 general and administrative 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.
Note 2. Stockholders' Equity
A. Common Stock
The Company has 25,000,000 shares of common stock authorized, 3,512,856
shares issued and outstanding. In connection with the reorganization effective
June 30, 1996, the Company issued to its parent, Duncan
F-11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
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 eight private investors for the aggregate purchase price of
$162,500. These 3,700,000 shares of unregistered securities were issued by the
Company at its inception. There were no underwriting discounts and commissions
paid in connection with the issuance of any said securities.
In June 1997, the Company repurchased 857,144 of the shares sold to five
of the eight private investors at a repurchase price of $.125 per share. The
Company's repurchase payment was in the form of promissory notes totaling
$107,143. These notes were paid off in July 1997 with the proceeds of the
public offering.
In July 1997, the Company completed an initial public offering (see Note
7) in which 600,000 common shares were issued.
In July 1997, the Company issued 70,000 unregistered restricted shares
which represented $245,000 of the $2,066,829 purchase cost of The Natural Baby
Catalog (see Note 5).
B. Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges, and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, and the number of shares constituting any
series or the designation of such series.
During January 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock, $.001 par value to Duncan Hill as part of the reorganization
(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.
C. Warrants
In conjunction with the public offering discussed in Note 7, the Company
issued 2,400,000 Class A warrants. 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 the Company's 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 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 plus 1%, for an effective rate of 9.5% at December
31, 1997, and had a balance of $671,000 at December 31, 1997. The line is
secured by assets of the Company, as well as the assets of Duncan Hill and
another Duncan subsidiary, Havana Group, Inc., formerly E. A. Carey of Ohio,
Inc. The repayment of the facility is guaranteed by Mr. Miller, the Company's
Chief Executive Officer. The credit facility extends through June 30, 1998, and
a condition of renewal is 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 weighted average interest rate for the years ended December
31, 1997, 1996, and 1995 was 9.4%, 9.3%, and 9.7%, respectively. Due to the
current nature of the liability, the carrying amount of the line approximates
fair value.
F-12
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
Note 4. Long-Term Debt -- Related Parties
A. Long-term debt -- related parties consists of the following at March 31,
1998 (unaudited) and December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Unaudited)
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Note Payable -- Duncan Hill Company (parent company),
unsecured and payable in four annual principal payments
plus interest at 8.0%, matures June 2000. The initial
installment was for $66,858 and the three remaining
installments are for $100,000. ........................... $300,000 $300,000 $366,858
Note Payable -- (bridge lenders) -- The entire principal
plus interest at 8.0%, was paid off during 1997. ......... -- -- 125,000
Note Payable -- (bridge lenders) -- The entire principal
plus interest at 8.0%, was paid off during 1997. ......... -- -- 75,000
-------- -------- --------
300,000 300,000 566,858
Less current portion ...................................... 100,000 100,000 266,858
-------- -------- --------
$200,000 $200,000 $300,000
======== ======== ========
</TABLE>
B. Principal payments required to be made for the next three years are as
follows:
Year
------------
1998 $ 100,000
1999 100,000
2000 100,000
---------
$ 300,000
---------
Note 5. Acquisition of The Natural Baby Catalog
In July 1997, the Company acquired the net assets and operations of The
Natural Baby Catalog, a mail order retailer of children's clothing and toys.
The purchase was funded with the net proceeds of an initial public offering.
The acquisition has been accounted for as a purchase and, accordingly, the
operating results of the acquired company have been included in the Company's
financial statements since the date of acquisition. The aggregate purchase
price is comprised of the following:
Cash paid to former owners and to pay off debt
of The Natural Baby Company ................. $1,444,831
Costs of acquisition ......................... 276,998
Issuance of 70,000 Kids Stuff unregistered
common shares to the former owners of The
Natural Baby Company ...................... 245,000
Note payable ................................. 100,000
----------
Total purchase price ...................... $2,066,829
==========
F-13
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
The purchase price was allocated to the net assets acquired based on fair
values as follows:
Accounts receivable ......................... $ 29,297
Inventory ................................... 474,769
Deferred catalog costs ...................... 185,587
Prepaid expenses ............................ 3,544
Property and equipment ...................... 24,331
Customer list ............................... 505,000
Accounts payable assumed .................... (296,211)
----------
Net assets acquired ...................... 926,317
Excess of the purchase price over fair market
value of assets acquired ................... 1,140,512
----------
Total purchase price ..................... $2,066,829
==========
The excess of the aggregate purchase price over the fair market value of
net assets acquired of $1,140,512 was recorded as goodwill.
The following unaudited pro forma results of operations for the years
ended December 31, 1997, 1996, and 1995 assume the acquisition occurred as of
January 1, 1995:
1997 1996 1995
------------ ------------ -------------
Sales ....................... 13,954,877 13,090,210 10,952,806
Net income .................. 298,835 37,009 (324,259)
Earnings per share .......... .08 .01 (.09)
Note 6. Income Tax
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes.
Deferred tax assets (liabilities) consisted of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward ......... $ 122,529 $ 174,883
Inventory obsolescence .................. 37,796 --
--------- ---------
Total deferred tax assets ................ 160,325 174,883
Valuation allowance ...................... (62,573) (80,544)
--------- ---------
Net deferred tax asset ................... 97,752 94,339
Deferred tax liabilities:
Deferred catalog expense ................ (88,261) (94,339)
Amortization ............................ (4,586) --
Depreciation ............................ (4,905) --
--------- ---------
Total deferred tax liabilities ........... (97,752) (94,339)
--------- ---------
Net deferred income taxes ................ $ -- $ --
========= =========
</TABLE>
F-14
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
The Company's ability to recognize deferred tax assets is dependent on
generating future regular taxable income. In accordance with the provisions of
SFAS 109, management has provided a valuation allowance.
The Company had net operating loss carryforwards of approximately $360,000
as of December 31, 1997 for tax purposes. The loss carryforwards expire in the
year 2011. Tax net operating losses of the Predecessor incurred prior to July
1996 reverted to the parent company in the reorganization.
Note 7. Public Offering
In July 1997, the Company completed an initial public offering in which
300,000 units were sold for $2,619,890, net of issuance costs of $980,110. Each
unit consisted of two common shares and eight redeemable Class A warrants, and
sold for $12 per unit. The common stock and warrants are separately
transferable.
The proceeds of the public offering were used to acquire net assets and
operations of The Natural Baby Catalog, to pay on accounts payable, to repay
indebtedness to bridge lenders, to repay indebtedness to the Company's parent,
Duncan Hill, to consolidate the operations of The Natural Baby Catalog, and for
general corporate purposes.
Note 8. 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 were 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.
The Company accounts for employee stock options under APB 25 and,
accordingly, no compensation cost has been recognized. If the Company had
elected to recognize compensation cost consistent with the fair-value based
method prescribed by SFAS 123, the Company's net income would have been reduced
by approximately $330,000 or $.09 per share for the year ended December 31,
1997.
For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted using the Black-Scholes option
pricing model assuming no dividends, 45% volatility, an expected life of 50% of
the ten-year option terms, and a risk-free interest rate of 6.3%.
Note 9. Incentive Plans
A. Incentive Compensation Plan
During 1997, the Company adopted an Incentive Compensation Plan (the
"Plan"). The Plan is designed to motivate employee participants to achieve the
Company's annual strategic goals. Eligibility for participation in the Plan is
limited to the Chief Executive Officer and the Executive Vice President of the
Company, and such
F-15
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Summary of Significant Accounting Policies and Reorganization -- (Continued)
other employees of the Company as may be designated by the Board of Directors
from time to time. For each fiscal year of the Company, the Board will
establish a bonus pool not to exceed 10% of the Company's operating income. The
amount of such pool with respect to any year shall be determined subsequent to
the end of that year upon the determination of the Company's operating income
for that year. Each participant in the Plan is eligible to receive from the
bonus pool an annual award of up to 50% of the participant's base salary. There
were no awards in 1997, or the first quarter of 1998.
B. Stock Incentive Plan
During 1997, the Company adopted a Stock Incentive Plan (Incentive Plan).
Under the Incentive Plan, the Compensation Committee of the Board of Directors
may grant stock incentives to key employees and the directors of the Company
pursuant to which a total of 400,000 shares of Common Stock may be issued;
provided, however, that the maximum amount of Common Stock with respect to
which stock incentives may be granted to any person during any calendar year
shall be 20,000 shares, except for a grant made to a recipient upon the
recipients initial hiring by the Company, in which case the number shall be a
maximum of 40,000 shares. These numbers are subject to adjustment in the event
of a stock split and similar events. Stock incentive grants may be in the form
of options, stock appreciation rights, stock awards or a combination thereof.
No stock incentives were granted under the Incentive Plan in 1997 or for the
three months ended March 31, 1998.
F-16
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offer made 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 Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Use of Proceeds .......................... 12
Dividend Policy .......................... 13
Dilution ................................. 13
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 14
Market Information ....................... 20
Business ................................. 21
Management ............................... 30
Principal Stockholders ................... 36
Certain Transactions ..................... 37
Description of Securities ................ 38
Unregistered Shares Eligible for Immediate
and Future Sale ....................... 40
Selling Securityholder ................... 41
Plan of Distribution ..................... 42
Legal Matters ............................ 42
Experts .................................. 42
Index to Financial Statements ............ F-1
--------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this 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.
================================================================================
<PAGE>
================================================================================
KIDS STUFF, INC.
2,400,000 Class A
Common Stock
Purchase Warrants
To Purchase
2,400,000 Shares
---------------------
Prospectus
--------------------
\
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such
capacity who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of chancery or such other court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnify for such expenses
which the Court of Chancery or such other court shall deem proper.
Article VII, Section 7, of the By-Laws of the Company provides for
indemnification of officers, directors, employees and agents to the extent
permitted under the Delaware General Corporation Law.
The employment agreements with William L. Miller and Jeanne E. Miller each
provide for their indemnification to the full extent permitted by law.
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. The provision, however, does not affect the
availability of seeking equitable relief against a director of the Company. In
addition, the provision applies only to claims against a director arising out
of his role as a director and 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 federal securities laws.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this offering, other than
underwriting discounts and commissions, are as follows:
SEC filing fee .................................. $ 295
NASD Fees ....................................... 660
Accounting fees and expenses* ................... 20,000
Legal fees and expenses* ........................ 20,000
Blue Sky fees and expenses* ..................... 20,000
Printing and engraving* ......................... 20,000
Warrant Solicitation fees** ..................... 480,000
Miscellaneous expenses* ......................... 19,043
--------
TOTAL ............................... ......... $580,000
- ------------
* Estimated.
** Assumes all class A Warrants are solicited by VTR Capital, Inc.
The Company will bear all expenses shown above.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following shares of unregistered securities have been issued by the
Registrant since its inception. there were no underwriting discounts and
commissions paid in connection with the issuance of any of 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, and 5,000,000 shares of Series A Preferred Stock at
a value of $.001 per share.
Commencing October, 1996, the Company sold an aggregate of 1,300,000
shares of Common Stock to eight private investors for the aggregate purchase
price of $162,500. In June, 1997, the Company repurchased 857,144 of those
shares from five private investors at the same price for which the shares were
originally sold to these investors.
In October, 1996, the Company borrowed an aggregate of $200,000 from three
private investors. As originally structured, $75,000 of the face amount of the
loan was convertible upon its terms into 1,500,000 Class A Warrants.
Subsequently, the loan was restructured so that the lenders' would be repaid
the entire face amount of loan in lieu of the right to convert $75,000 of the
face amount into 1,500,000 Class A Warrants.
In July 1997, the Registrant completed its acquisition of the assets of
The Natural Baby Company, Inc. Included in the consideration paid was 70,000
unregistered shares of the Registrant's Common Stock to The Natural Baby
Company, Inc.
In each of the foregoing cases, the Company issued the above securities
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving any public offering. In addition, with respect to the second
transaction listed above, I.E., the issuance of 1,300,000 shares of Common
Stock, the Company relied upon Rule 504 promulgated under the Securities Act of
1933. The Company was not an issuer that was precluded from relying upon Rule
504 under paragraph (a) thereof and, in addition, had satisfied the terms and
conditions of Rules 501 and 502(a) by virtue of the fact that it had not
offered in excess of $1,000,000 of securities within the 12 months before the
start of and during the offering of securities under Rule 504, in reliance on
any exemption under Section 3(b), or in violation of Section 5(a) of the
Securities Act.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
1.01 Revised Form of Underwriting Agreement (5)
1.02 Revised Form of Selected Dealers Agreement (5)
1.03 Revised Form of Warrant Exercise Fee Agreement (5)
3.01 Certificate of Incorporation of the Company (1)
3.02 Certificate of Amendment of Certificate of Incorporation of the Company(1)
3.03 By-Laws of the Company(1)
3.04 Certificate of Designation of Series A Preferred Stock (2)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.03 Revised Form of Warrant Agreement (5)
4.04 Revised Specimen Certificate for Warrants (3)
4.05 Revised Form of Underwriters' Purchase Option (5)
4.06 Form of Representative's Lock-up Letter (2)
5.01 Opinion of Lester Morse P.C. (10)
10.01 Agreement to Acquire the Assets of The Natural Baby Company, Inc., (the "Acquisition
Agreement")(1)
10.02 Addendum to Acquisition Agreement (1)
10.03 Escrow Agreement under the Acquisition Agreement (1)
10.04 Form of Consulting Agreement with Jane Martin (1)
10.05 Asset Purchase Agreement between the Company and its Parent (1)
10.06 Promissory Note from the Company and its Parent (1)
10.07 Form of Bridge Loan Agreement (1)
10.08 Form of Financial Consulting Agreement with VTR Capital, Inc. (1)
10.09 Credit Facility with United National Bank and Trust Company (2)
10.10 Lease for Company's principal offices and telemarketing center (2)
10.11 Employment Agreement with William L. Miller (2)
10.12 Employment Agreement with Jeanne E. Miller (2)
10.13 Incentive Compensation Plan (2)
10.14 1997 Long-Term Stock Incentive Plan (2)
10.15 Amendment to Asset Purchase Agreement between the Company and its Parent (2)
10.16 Form of Amendment to Bridge Loan Agreement (4)
10.17 Amended Form of Stock Repurchase Agreement and Note (5)
10.18 Second Addendum to Acquisition Agreement (5)
10.19 First Addendum to Escrow Agreement (6)
10.20 Third Addendum to Acquisition Agreement (6)
10.21 Agreement with The Havana Group, Inc. (9)
23.01 Consent of Hausser + Taylor LLP (7)
23.02 Consent of Lester Morse P.C. [included in Exhibit 5.01]
27.00 Revised Financial Data Schedule (8)
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's Form SB-2 Registration
Statement, file no. 333-19423, filed with the Securities and Exchange
Commission on January 8, 1997.
(2) Incorporated by reference to the Registrant's Amendment No. 1 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on March 14, 1997.
(3) Incorporated by reference to the Registrant's Amendment No. 2 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on April 2, 1997.
(4) Incorporated by reference to the Registrant's Amendment No. 3 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on April 14, 1997.
(5) Incorporated by reference to the Registrant's Amendment No. 4 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on June 3, 1997.
II-3
<PAGE>
(6) Incorporated by reference to the Registrant's Amendment No. 5 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on June 25, 1997.
(7) Filed herewith.
(8) Previously filed in connection with reports under the Securities and
Exchange Act of 1934
(9) Incorporated by reference to the Registrant's Form 10-K filed for its
fiscal year ended December 31, 1997.
(10) To be filed by amendment.
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offering
The Company will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act");
(ii) Reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) Include any additional or changed material information on the plan
of distribution;
2. For determining liability under the 1933 Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company pursuant to the provisions referred to in Item 14 of this Registration
Statement 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 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suite or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
(c) Rule 430A
The Company will:
1. For determining any liability under the 1933 Act, treat the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of a prospectus
filed by the Company issuer under Rule 424(b)(1) or (4) or 497(h) under the
1933 Act as part of this Registration Statement as of the time the Commission
declared it effective.
2. For any liability under the 1933 Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for the securities offered in the Registration Statement, and the offering of
the securities at that time as the initial bona fide offering of those
securities.
II-4
<PAGE>
(d) Undertaking to File Post-Effective Amendment or Sticker Supplement
Under Certain Circumstances
If the Registrant becomes aware subsequent to the effective date of this
registration statement that either VTR Capital, Inc., or any other underwriter
or dealer intends to acquire securities from the Selling Security Holder in a
manner not described in the Prospectus, or if VTR Capital, Inc. waives any
lock-up agreement beyond those 400,000 shares registered for sale in the
Registration Statement, a post-effective amendment will be required to reflect
the acquisition of 10% or more of the Registrant's unrestricted securities and
a sticker supplement will be required if the amount involved falls between the
range of 5% and 10% of the Registrant's unrestricted securities.
(e) Undertaking to File Post-Effective Amendment or Sticker Supplement
Under Certain
Circumstances
If the Registrant becomes aware subsequent to the effective date of this
registration statement that either VTR Capital, Inc. or any other underwriter
or dealer intends to acquire securities from the Selling Security Holder in a
manner not described in the Prospectus, or if VTR Capital Inc. waives any
lock-up agreement beyond those 400,000 shares registered for sale in the
Registration Statement, a post-effective amendment will be required to reflect
the acquisition of 10% or more of the Registrant's unrestricted securities and
a sticker supplement will be required if the amount involved falls between the
range of 5% and 10% of the Registrant's unrestricted securities.
[THIS SPACE INTENTIONALLY LEFT BLANK]
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Canton, State of Ohio, on this 14th day of August, 1998.
KIDS STUFF, INC.
By: /s/ WILLIAM L. MILLER
-------------------------------------------
William L. Miller, Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------------------- ------------------------------------------ ----------------
<S> <C> <C>
/s/ WILLIAM L. MILLER Chairman of the Board, Chief Executive August 14, 1998
----------------------- Officer and Treasurer
William L. Miller
/s/ JEANNE E. MILLER Executive Vice President and Director August 14, 1998
-----------------------
Jeanne E. Miller
/s/ CLARK D. SWISHER Director August 14, 1998
-----------------------
Clark D. Swisher
/s/ WILLIAM T. EVANS Vice President of Finance and Operations August 14, 1998
- ------------------------
William T. Evans
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
1.01 Revised Form of Underwriting Agreement (5)
1.02 Revised Form of Selected Dealers Agreement (5)
1.03 Revised Form of Warrant Exercise Fee Agreement (5)
3.01 Certificate of Incorporation of the Company (1)
3.02 Certificate of Amendment of Certificate of Incorporation of the Company(1)
3.03 By-Laws of the Company(1)
3.04 Certificate of Designation of Series A Preferred Stock (2)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.03 Revised Form of Warrant Agreement (5)
4.04 Revised Specimen Certificate for Warrants (3)
4.05 Revised Form of Underwriters' Purchase Option (5)
4.06 Form of Representative's Lock-up Letter (2)
5.01 Opinion of Lester Morse P.C. (10)
10.01 Agreement to Acquire the Assets of The Natural Baby Company, Inc., (the "Acquisition
Agreement")(1)
10.02 Addendum to Acquisition Agreement (1)
10.03 Escrow Agreement under the Acquisition Agreement (1)
10.04 Form of Consulting Agreement with Jane Martin (1)
10.05 Asset Purchase Agreement between the Company and its Parent (1)
10.06 Promissory Note from the Company and its Parent (1)
10.07 Form of Bridge Loan Agreement (1)
10.08 Form of Financial Consulting Agreement with VTR Capital, Inc. (1)
10.09 Credit Facility with United National Bank and Trust Company (2)
10.10 Lease for Company's principal offices and telemarketing center (2)
10.11 Employment Agreement with William L. Miller (2)
10.12 Employment Agreement with Jeanne E. Miller (2)
10.13 Incentive Compensation Plan (2)
10.14 1997 Long-Term Stock Incentive Plan (2)
10.15 Amendment to Asset Purchase Agreement between the Company and its Parent (2)
10.16 Form of Amendment to Bridge Loan Agreement (4)
10.17 Amended Form of Stock Repurchase Agreement and Note (5)
10.18 Second Addendum to Acquisition Agreement (5)
10.19 First Addendum to Escrow Agreement (6)
10.20 Third Addendum to Acquisition Agreement (6)
10.21 Agreement with The Havana Group, Inc. (9)
23.01 Consent of Hausser + Taylor LLP (7)
23.02 Consent of Lester Morse P.C. [included in Exhibit 5.01]
27.00 Revised Financial Data Schedule (8)
</TABLE>
- ------------
(1) Incorporated by reference to the Registrant's Form SB-2 Registration
Statement, file no. 333-19423, filed with the Securities and Exchange
Commission on January 8, 1997.
(2) Incorporated by reference to the Registrant's Amendment No. 1 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on March 14, 1997.
(3) Incorporated by reference to the Registrant's Amendment No. 2 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on April 2, 1997.
(4) Incorporated by reference to the Registrant's Amendment No. 3 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on April 14, 1997.
<PAGE>
(5) Incorporated by reference to the Registrant's Amendment No. 4 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on June 3, 1997.
(6) Incorporated by reference to the Registrant's Amendment No. 5 to Form SB-2
Registration Statement, file no. 333-19423, filed with the Securities and
Exchange Commission on June 25, 1997.
(7) Filed herewith.
(8) Previously filed in connection with reports under the Securities and
Exchange Act of 1934
(9) Incorporated by reference to the Registrant's Form 10-K filed for its
fiscal year ended December 31, 1997.
(10) To be filed by amendment.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kids Stuff, Inc.
Canton, Ohio 44718
As independent certified public accountants for Kids Stuff, Inc., we
hereby consent to the use in this Form SB-2 Registration Statement for Kids
Stuff, Inc. of our report included herein, which as a date of February 10,
1998, relating to the balance sheets of Kids Stuff, Inc. as of December 31,
1997 and 1996, and the related statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended December
31, 1997 and to the reference to our firm under the caption "Experts" in the
Prospectus.
Hausser & Taylor LLP
Canton, Ohio
August 13, 1998
