<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from ______________________ to __________________
Commission file number 000-29334
KIDS STUFF, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1843520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio 44718
(Address of principle executive offices)
(Zip Code)
(330) 492-8090
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
As of July 25, 1998, there were 3,512,856 shares of the Registrant's Common
Stock $.001 par value issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
-1-
<PAGE>
INDEX
Balance Sheets - June 30, 1998 (Unaudited) and December 31, 1997. 3
Statements of Operations - Three Months and Six Months Ended
June 30, 1998 and 1997 (Unaudited). 5
Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 (Unaudited). 6
Notes to Financial Statements. 7
Item 2 - Management's Discussion and Analysis or Plan of Operations. 14
Signature Page
2
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Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 171,431 $ 101,894
Accounts receivable 459,248 335,013
Inventories 1,268,254 1,389,012
Deferred catalog expense 462,131 259,592
Due from affiliates 48,601 580,965
Prepaid expenses 53,835 21,798
---------- ----------
Total current assets 2,463,500 2,688,274
PROPERTY & EQUIPMENT:
Data processing equipment 231,317 207,378
Leasehold Improvements 20,013 19,909
Vehicles 9,089 9,089
Machinery and equipment 101,755 93,366
Furniture and fixtures 147,018 129,314
---------- ----------
509,192 459,056
Less accumulated depreciation 219,353 193,634
---------- ----------
289,839 265,422
OTHER ASSETS, net of accumulated amortization
Goodwill 1,092,366 1,119,425
Customer List 438,869 474,940
---------- ----------
1,531,235 1,594,365
---------- ----------
$4,284,574 $4,548,061
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
June 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion long-term debt - related parties $ -- $ 100,000
Accounts payable 1,611,227 1,617,204
Line of credit 732,000 671,000
Customer advances and other 8,491 137,193
----------- -----------
Total current liabilities 2,351,718 2,525,397
LONG-TERM DEBT-RELATED PARTIES,NET OF
CURRENT PORTION -- 200,000
STOCKHOLDERS' EQUITY:
Preferred stock 5,000 5,000
Common stock 3,513 3,513
Additional paid - in capital 3,216,734 3,216,734
Retained earnings (deficit) (1,292,391) (1,402,583)
----------- -----------
Total Stockholders' Equity 1,932,856 1,822,664
----------- -----------
$ 4,284,574 $ 4,548,061
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Kids Stuff, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 3,408,744 $ 2,044,340 $ 6,613,621 $ 3,509,881
Cost of Sales 1,947,659 1,192,778 3,949,126 2,018,172
----------- ----------- ----------- -----------
Gross Profit 1,461,085 851,562 2,664,495 1,491,709
Selling Expenses 991,074 609,324 1,760,802 1,204,165
General and Administrative
Expenses 391,344 193,077 757,585 382,520
----------- ----------- ----------- -----------
Income (Loss) From Operations 78,667 49,161 146,108 (94,976)
Other (Expense) Income - net (16,170) (15,984) (24,551) (30,803)
----------- ----------- ----------- -----------
Net Income (Loss) $ 62,497 $ 33,177 $ 121,557 $ (125,779)
=========== =========== =========== ===========
Basic and Diluted Income (Loss) Per Share $ 0.02 $ 0.01 $ 0.03 $ (0.04)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Six Months Ended June 30,
------------------------------
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 121,557 $(125,779)
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities:
Depreciation and amortization 88,848 8,841
(Increase) in accounts receivable (124,235) (65,343)
Decrease (increase) in inventories 120,758 (64,281)
(Increase) decrease in deferred catalog expense (202,539) 74,196
(Increase) in prepaid expenses (43,402) (106,126)
(Decrease) increase in accounts payable, customer
advances and other (134,679) 486,850
--------- ---------
Net cash (used) provided by operating activities (173,692) 208,358
Cash Flows From Investing Activities:
Investment in property and equipment (50,135) (70,082)
(Increase) in prepaid amounts for acquisition of
Natural Baby Catalog -- (22,846)
--------- ---------
Net cash (used) by investing activities (50,135) (92,928)
Cash Flows From Financing Activities:
Borrowings on line of credit - net 61,000 --
Sale of preferred stock -- 5,000
(Increase) in prepaid amounts for public offering -- (198,078)
(Decrease) in due to affiliates -- (137,070)
Decrease (increase) in due from affiliates 232,364 (33,930)
--------- ---------
Net cash provided (used) by financing activities 293,364 (364,078)
Net increase (decrease) in cash 69,537 (248,648)
Cash - Beginning 101,894 248,648
--------- ---------
Cash - Ending $ 171,431 $ --
========= =========
Supplemental Disclosure of Cash Flow Information
Cash Paid during the period for interest $ 29,961 $ 35,123
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 Organization and Business
A. Business Description - Kids Stuff, Inc. ("Kids Stuff" of 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.
B. Reorganization - Kids Stuff was incorporated during 1996 as a
wholly-owned subsidiary of Duncan Hill, Inc. ("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.
Note 2 Basis of Presentation
The accompanying financial statements have been prepared by the
Company. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. In the opinion of the Company's management, the
disclosures made are adequate to make the information presented not
misleading, and the financial statements contain all adjustments
necessary to present fairly the financial position as of June 30,
1998, results of operations for the three months and six months
ended June 30, 1998 and 1997, and cash flows for the six months
ended June 30, 1998 and 1997.
The results of operations for the three months and six months ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the period
and additional shares assumed to be outstanding to reflect
7
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2 Basis of Presentation (continued)
the dilutive effect of common stock equivalents. The only common stock
equivalents outstanding were the 2,400,000 Class A Warrants. Since the
effect of adding the warrants would be anti-dilutive, they are not
considered in the calculation for the periods presented. The number of
shares outstanding in computing basic and diluted earnings per share
for the three and six months ended June 30, 1998 is 3,512,856, and
3,482,496 and 3,590,647 for the three and six months ended June 30,
1997, respectively.
Note 3. New Authoritative Pronouncements
Stock-Based Compensation - The Company uses the intrinsic value-based
method for stock-based compensation to employees. As a result, this
standard does not have any effect to the Company's financial statement
other than to require disclosure of the pro forma effect on net income
(loss) of using the fair value-based method of accounting.
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.
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.
8
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 4 Contract With The Havana Group, Inc.
Effective January 1, 1998, the Company contracted with The Havana
Group, Inc.("Havana") at an annual fee of approximately $206,100
for the administrative, executive and accounting services, as
outlined below, and $2.40 per order processed by the Company for
Havana. The Company will also receive 5% of Havana's 1998 pre-tax
profit (if any) in connection with these administrative and
fulfillment services.
Accounting and Payroll Services $ 34,000
Administration and Human Resource Management 51,600
Data Processing 34,900
Office Equipment and Facilities Use 32,200
Merchandising and Marketing Services 38,100
Purchasing Services 15,300
---------
Total $ 206,100
=========
Note 5. Stockholders' Equity
A. Common Stock
In connection with the reorganization effective June 30, 1996, the
Company issued to its parent, Duncan Hill, 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 9) 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 8).
9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 5. Stockholders' Equity (continued)
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 6. Note Payable - Line of Credit
The Company 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 June 30, 1998, and had a balance of $732,000 at
June 30, 1998. The line is secured by assets of the Company, as
well as the assets of Duncan Hill and Havana. The repayment of the
facility is guaranteed by Mr. Miller, the Company's Chief Executive
Officer, and Havana. 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 during the course of each year. The bank has agreed to waive
this requirement for the loan year ended June 30, 1998. The
weighted average interest rate for the quarters ended June 30, 1998
and 1997 was 9.5% and 9.4%, respectively. Due to the current nature
of the liability, the carrying amount of the line approximates fair
value.
10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 7. Long-Term Debt - Related Parties
A. Long-term debt to related parties consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ---------
(unaudited)
<S> <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
---------- ---------
Less current portion - 100,000
---------- ---------
$ - $200,000
========== =========
</TABLE>
Duncan Hill has retired this note as payment against an inter-company
debt owed to the Company by Duncan Hill.
Note 8. 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
==========
11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 8. Acquisition of The Natural Baby Catalog (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 assume the acquisition occurred as of
January 1, 1997:
1997
-------------------
Sales 13,954,877
Net Income 298,835
Earnings per share .08
12
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 9. 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.
13
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
Kids Stuff, Inc. is a catalog merchant selling quality children's products to
consumers throughout the United States. Our business emphasizes products for
children in the age group of prenatal to three years old, and consists of three
catalogs:
* Perfectly Safe specializes in children's safety products.
* Jeannie's Kids Club offers toys and other hardgoods at discount prices
in return for an annual membership fee.
* The Natural Baby Catalog emphasizes natural clothing, diapering and
wood toys.
We acquired Perfectly Safe during January 1990 and circulated approximately
900,000 catalogs during that first year, producing net sales of $1,473,000. By
the end of 1997, sales had increased to over $3.9 million, which resulted in an
annual compound growth rate of approximately 15%. In the first six months of
1998 net sales were $2,500,771, an increase of 38% over the comparable 1997
period.
Jeannie's Kids Club was created and developed in-house, and the first catalog
was mailed during July 1995. The annual club membership is $18, and is renewed
automatically each year, subject to customer cancellation and other limitations.
In return for their membership fee, members are able to purchase products at
discount prices compared to other children's catalogs. During the year 1997, the
second full year of Kids Club operations, net sales were $3.2 million. However,
during the first six months of 1998 net sales were 13.8% less than the
comparable 1997 period, reflecting the impact of a planned reduction of 52% in
catalog circulation.
We acquired The Natural Baby Catalog on July 2,1997, using the proceeds from our
initial public offering. The Natural Baby Catalog compliments our other catalogs
and offers alternative products to parents interested in natural childbirth,
nursing products and natural fiber clothing. During 1997, The Natural Baby
Catalog generated net sales of $3.8 million in the third and fourth quarters,
and is expected to contribute substantially to our growth in 1998.
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared to the three months ended June 30,
1997.
Revenues for the quarter ended June 30, 1998 increased 67% to $3,408,744,
compared with $2,044,340 for the same period of 1997. Net profits for the second
quarter of 1998 improved to $62,497 compared with net profits of $33,177 for the
same period in 1997.
Approximately 93% of our increased revenues were attributed to The Natural Baby
Catalog. Combined revenues from our Perfectly Safe and Kids Club catalogs
increased 7% compared with 1997, producing the remainder of our overall revenue
increase.
14
<PAGE>
Cost of sales decreased from 58.4% of net sales in 1997 to 57.1% in 1998. The
change is attributable to lower shipping rates as a percentage of net sales due
to the Company increasing shipping charges to customers in reaction to the
increase imposed by United Parcel Service during February.
Selling expenses, consisting of advertising and marketing costs, were 29.1% of
net sales in the second quarter of 1998, compared with 29.8% in the second
quarter of 1997. This reduction is attributable to the Company obtaining a lower
inbound telephone rate per minute.
General and Administrative expenses increased by $198,267. As a result of the
Natural Baby acquisition, the growth of our operation has given rise to higher
support costs. Costs of outside legal and accounting services have increased
because of the compliance requirements associated with being a public company.
General and administrative costs are also affected by services we provide to
Havana, an affiliated company.
Since January 1, 1997, we have 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. We believe these fees are substantially the same as the cost of
Havana staffing these functions itself. During this quarter we've charged Havana
$72,141, including order fulfillment costs, as compared to approximately
$110,000 allocated last year.
Net income improved by $29,320 this quarter as compared to the same quarter last
year. Last year's quarter net income amounted to 1.6% of net sales, while net
income for the current quarter amounted to 1.8% of sales.
Six months ended June 30, 1998 compared to the six months ended June 30, 1997.
Revenues for the six months ended June 30, 1998 increased 88% to $6,613,621,
compared with $3,509,881 for the same period of 1997. Net income for the first
half of 1998 improved to $121,557 compared with a net loss of ($125,779) for the
same period in 1997.
Approximately 85% of our increased revenues were attributed to The Natural Baby
Catalog. Combined revenues from our Perfectly Safe and Kids Club catalogs
increased 15% compared with 1997, producing the remainder of our overall revenue
increase.
Cost of sales increased from 57.5% of net sales in 1997 to 59.7% in 1998. The
change is attributable to post holiday returns and the shipping rate increase
imposed by United Parcel Service during February. The Company increased shipping
charges to customers in the second quarter of 1998 to offset this increase.
Selling expenses, consisting of advertising and marketing costs, were 26.6% of
net sales in the first half of 1998, compared with 34.3% in the first half of
1997. This 22.4% 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 our other catalogs because of the higher average order.
Additionally, we improved the productivity of our Perfectly Safe and Kids Club
catalog mailings during the first half of 1998, which resulted in lower selling
expenses compared with the first half of 1997.
15
<PAGE>
General and Administrative expenses increased by $375,065, from 10.9% of net
sales in 1997 to 11.5% in 1998. As a result of the Natural Baby acquisition, the
growth of our operation has given rise to higher support costs. Costs of outside
legal and accounting services have increased because of the compliance
requirements associated with being a public company. General and administrative
costs are also affected by services we provide to Havana, an affiliated company.
During the first six months of 1998 we've charged Havana $141,710, including
order fulfillment costs, as compared to approximately $205,000 allocated last
year.
Liquidity and Capital Resources
At June 30, 1998, our accumulated deficit was reduced by $121,557 from December
31, 1997 because of first half earnings performance.
In addition to net earnings, cash provided by operating activities including
non-cash charges of $88,849 for depreciation and goodwill amortization. Working
capital changes used $384,097 of cash, primarily due to increased deferred
catalog expense of $202,539. Higher volume mailings of our Spring catalogs, as
compared to the last quarter of 1997, accounts for the increased deferred
expense.
At June 30, 1998, the balance on our credit line was $732,000, having borrowed
$61,000 during the first six months. Our current credit line is $800,000,
payable on demand. The line is secured by the assets of Kids Stuff, The Havana
Group and Duncan Hill, and is guaranteed by our CEO. The interest rate is 1%
over prime.
With respect to financing activities, there was a decrease in both amounts due
from affiliates and note payable to affiliates of $232,364. The decrease in
amounts due from affiliates relates to payments received for past and current
administrative support and fulfillment services we provided to Havana. The note
payable was due to Duncan Hill, and the note was offset against amounts payable
by Duncan Hill to the Company.
Overall, we expect to be able to meet our cash needs through ongoing operations
and existing credit facilities.
Forward Looking Statements and Associated Risks
This Form 10-QSB contains forward looking statements which reflect management's
current views and estimates of future economic circumstances, industry
conditions, company performance and financial results. These forward looking
statements are based largely on our expectations and are subject to a number of
risks and uncertainties, many of which are beyond our control, such as
competition or possible future changes to state sales tax laws. Actual results
could differ materially from these forward looking statements because of changes
in the children's mail order catalog industry, availability or prices of goods,
credit availability, printers' schedules or availability, and other factors. Any
changes in such assumptions or factors could produce significantly different
results.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this report:
27. Financial Data Schedule
(b) No report on form 8-K was filed during the second quarter of
1998.
17
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Kids Stuff, Inc.
Date: 8/14/98 /s/ William Miller
-------------------------- -------------------------------
William Miller, CEO
Date: 8/14/98 /s/ William Evans
-------------------------- -------------------------------
William Evans, VP of Finance
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED FOOTNOTES THERETO, OF KIDS STUFF, INC.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 171,431 171,431
<SECURITIES> 0 0
<RECEIVABLES> 459,248 459,248
<ALLOWANCES> 0 0
<INVENTORY> 1,268,254 1,268,254
<CURRENT-ASSETS> 2,474,865 2,274,865
<PP&E> 509,191 509,191
<DEPRECIATION> 219,352 219,352
<TOTAL-ASSETS> 4,295,939 4,295,939
<CURRENT-LIABILITIES> 2,351,718 2,351,718
<BONDS> 0 0
0 0
5,000 5,000
<COMMON> 3,513 3,513
<OTHER-SE> 1,935,708 1,935,708
<TOTAL-LIABILITY-AND-EQUITY> 4,295,939 4,295,939
<SALES> 2,744,551 5,247,330
<TOTAL-REVENUES> 3,408,744 6,613,621
<CGS> 1,947,659 3,949,126
<TOTAL-COSTS> 2,938,733 5,709,928
<OTHER-EXPENSES> 396,300 752,175
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,214 29,961
<INCOME-PRETAX> 62,497 121,557
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 62,497 121,557
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 62,497 121,557
<EPS-PRIMARY> .02 .03
<EPS-DILUTED> .02 .03
</TABLE>
