KIDS STUFF INC, 10KSB, 1999-04-01

KIDS STUFF INC
10KSB, 1999-04-01
CATALOG & MAIL-ORDER HOUSES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ________ to ________

Commission File Number: 000-29334

KIDS STUFF, INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<CAPTION>
<S> <C>
Delaware 34-1843520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization (Identification No.)
</TABLE>

4450 Belden Village Street, N.W.
Suite 406
Canton, Ohio 44718
(Address of principal executive offices) (Zip Code)

Registrant's telephone number,
including area code: (330) 492-8090

Securities registered pursuant to Section 12(b) of the Act:

None
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Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value, Class A Common Stock Purchase Warrants,
Series 1 Preferred Stock, Series 1 Preferred Stock Purchase Warrants

- --------------------------------------------------------------------------------

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___.

Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in part III
of this Form 10-KSB or any amendment to this Form 10-KSB [ ].

As of March 2, 1999 at 4:00 P.M., the aggregate market value of the voting
stock held by non-affiliates, approximately 1,261,781 shares of Common Stock,
$.001 par value, was approximately $3,628,000 based on the last sale price of
$2.875 for one share of Common Stock on such date. The number of shares issued
and outstanding of the Registrant's Common Stock, as of March 2, 1999 was
3,512,856.

<PAGE>
Item 1. Description of Business

THE COMPANY

Kids Stuff, Inc. (the "Company") was incorporated under the laws of the
State of Delaware in July 1996. 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 for children ages prenatal to age three, and
consolidated its operations with those of the Company.

In November 1998, the Company opened "Kids Catalog Outlet" featuring the
Company's children clothing and other merchandise which have not been sold
through the Company's catalogs. The Company is establishing a website to
advertise and sell its products under kidstuff.net.

HISTORY OF DUNCAN HILL

The Company's principal stockholder, Duncan Hill, Inc. ("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 L. 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, a 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 with Fairchild Financial
Group, Inc. as the Managing Underwriter. All references to Havana include the
operations of its predecessor, Carey and its subsidiary, Monarch.

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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
the Company and its predecessors 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, which was incorporated by Duncan Hill in
July 1996, had no operations prior to the reorganization.

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,
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.

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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 a one-year 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 was 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. However, Havana had no pre-tax profits for 1998. This agreement has
been extended on a month-to-month basis.

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: 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

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

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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).

KIDS CATALOG OUTLET

The Company has recently leased a retail store in Canton, Ohio consisting
of approximately 3,300 square feet of space. In November 1998, the Company
completed the installation of leasehold improvements and opened the retail
store. The retail store, which is named "Kids Catalog Outlet," features the
Company's children's clothing and other merchandise which have not been sold
through the Company's catalogs.

MARKET

The Company's market for children's goods is affected by the number of
births as well as women in the work force. The Company believes that a birth
rate of an estimated 3.8 million births per year and the high percentage of
women in the work force place an emphasis on the convenience and value of
shopping by catalog. There can be no assurance that the Company is correct in
such belief.

STRATEGIES

The Company believes that its expertise in the marketing and merchandising
of children's products provides the basis for future growth by the use of the
following strategies:

EXPAND THE MEMBERSHIP OF JEANNIE'S KIDS CLUB.

Because Jeannie's Kids Club offers popular children's products for up to
60% less than other children's catalogs, the Company believes that there is a
substantial market for this type of home shopping service and an opportunity to
substantially increase the membership of Jeannie's Kids Club, which went from
inception in July 1995 to over 39,000 current members. Although

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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.

MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG.

Revenues of The Natural Baby Catalog have increased from $3,876,555 in 1992
to $6,188,586 in 1998. The Company 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. The Company believes that its future growth and profitability will
be largely dependent upon the Company's ability to develop alternative customer
acquisition programs.

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.

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. As a consequence of this competition, 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.

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

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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.

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. Substantially all 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 1998 was over 84,000 for Perfectly Safe, and over
21,000 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.

<PAGE>
In order to select those households most likely to purchase, the Company
uses a statistical modeling system. The Company believes that the application of
a statistical modeling systems increases the rate of percentage response and
profitability of The Natural Baby Catalog, although there can be no assurance
that the Company is correct in such belief.

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 1998, the catalog mailings for
Perfectly Safe and Jeannie's Kids Club were 2,933,037 and 1,369,001,
respectively.

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 during the fall/winter season. The Natural Baby Catalog
mailed approximately 2,599,934 catalogs during 1998.

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.
The Company is establishing and developing a website to advertise and sell its
products.

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 method of receipt of payment includes
major credit cards and 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 46 full-time and 2 part-time warehouse customer service
and telemarketing employees at March 1, 1999. During 1998, the Company processed
over 175,000 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.

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 23,000 square feet of leased facilities in North Canton, Ohio. Orders shipped
are individually recorded and posted through the use of barcode scanners, so
that sales records and credit card deposits

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are electronically posted. The Company's fulfillment center processed
approximately 286,000 shipments in 1996, approximately 302,000 shipments in 1997
and approximately 325,000 shipments in 1998.

INVENTORY/PURCHASING

The Company conducts its purchasing operations at its general offices in
Canton, Ohio. Each catalog contains approximately 300 products. 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 1998.

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 will be
subject to significant seasonal fluctuation. Natural Baby Products, a division
of the Company, has a seasonal increase in the fourth quarter. During 1998 and
1997, The Natural Baby Catalog sales in the fourth quarter were approximately
28% and 34% of The Natural Baby Catalog total respective 1998 and 1997 sales.

INSTITUTIONAL CREDIT FACILITY

Effective June 30, 1996, the Company assumed Duncan Hill's liability under
Duncan Hill's $800,000 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 and is secured by the assets of the
Company, Duncan Hill and Havana. The repayment of the line of credit is
guaranteed by W. Miller and Havana. The amount outstanding under the line of
credit as of March 1, 1999 is approximately $762,000. 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

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the fiscal 1997 and 1998. The line of credit agreement expired June 30, 1998 and
the Company is in the process of renegotiating with the bank.

COMPETITION

The mail order catalog and retail clothing outlet industries are highly
competitive. The Company's catalogs compete and its proposed retail clothing
outlet store intends to 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 as adjusted to reflect consolidation of
the revenues of The Natural Baby Catalog.

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 Anderson" 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.

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.

In 1995, 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,
resulting in a decrease in sales of the Perfectly Safe Catalog from $5.0 million
in 1994 to $4.7 million in 1995. During 1997, the Company identified other
mailing lists which have helped to increase the circulation and revenues of the
Perfectly Safe Catalog. The Company has not experienced

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such a reaction from its acquisition of The Natural Baby Catalog, although there
can be no assurance 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.

TRADEMARKS AND TRADE NAMES

The Company owns federally registered trademarks: "Perfectly Safe";
"Perfectly Safe, The Catalog For Parents Who Care" with logo; "Perfectly Safe
Guarantee" with logo; and, logo. The Company recently registered 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.

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. No assurances can be given that the Company will
comply with all state and federal laws affecting its business in the future.

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 March 1, 1999.

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 is
supplemented by an umbrella

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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, 1999. 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.

EMPLOYEES

As of March 1, 1998, the Company had 72 full time employees and 8 part time
employees. Of this total, 13 employees or 16% of total full-time employees, hold
positions of managers; 57 employees or 71% 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 48
employees or 60% 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.

Item 2. 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, 1999 with an option to renew for a period of one year. The
Company's warehouse and distribution center is located in North Canton, Ohio and
consists of approximately 23,000 square feet, which is leased at the monthly
rate of $13,329 through September 30, 1999, and subject to earlier termination
without penalty at the option of the lessee upon 90 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.

In August 1998, the Company entered into a lease for retail space at 4418
Belden Village Street, Canton, OH, containing approximately 3,400 square feet of
space. This lease, which amends an earlier lease, has a term expiring December
31, 2002. The Company will pay a monthly rent of approximately $2,250 commencing
30 days after the Company takes possession of the premises and the landlord
notifies the Company that the space is ready for occupancy.

The Company intends to establish and lease a new operations center of
approximately 34,000 square feet in 1999. This operation center, which is
expected to be located in or about Canton, Ohio, would include customer
relations, order entry and warehouse and distribution operations and would
replace its existing warehouse facility. Moving costs are estimated at $35,000.

Item 3. Legal Proceedings

<PAGE>
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.

Item 4. Submission of Matters to a Vote of Security Holders.

In December 1998, at the Company's Annual Meeting, the Company elected
William L. Miller, Jeanne E. Miller, Clark D. Swisher and Alfred M. Schmidt as
directors of the Company. No other matters were voted upon at the Annual
Meeting.

<PAGE>
PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

In June 1997, the Company sold Units to the public consisting of two shares
of Common Stock and eight Class A Warrants (the "1997 Units"). The 1997 Units
were quoted from June 1997 to November 1997 and the Company's Common Stock and
Class A Common Stock Purchase Warrants ("Class A Warrants") have been 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 March 26, 1999 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 $2.625 and $.3125, respectively. The following table reflects the
high and low sales prices for the Company's 1997 Units, Common Stock and Class A
Warrants for the periods indicated as reported by the NASD.
<TABLE>
<CAPTION>

1997 Units
Fiscal Year Ended December 31, 1997: HIGH LOW
----------------------------------- ---- ---
<S> <C> <C> <C>
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 5.135..............................2.375
Third Quarter 4.5................................2.125
Fourth Quarter 3.25...............................1.875
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
Third Quarter 0.813..............................0.094
Fourth Quarter .75............................... .125
</TABLE>

The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.

The Company had 16 and 1 record holders of its Common Stock and Series 1
Preferred Stock, respectively, as of March 26, 1999 as reported by its transfer
agent (American Stock Transfer & Trust Company). The foregoing does not include
beneficial

<PAGE>
holders of the Company's Common Stock which are held in "street name" (i.e.
nominee accounts such as Depository Trust Company).

No cash dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.

In March 1999, the Company completed a public offering of securities
through Fairchild Financial Group, Inc. In the offering, the Company sold
400,000 Units at the public offering price of $5.50 per Unit (the "Preferred
Units"). Each Preferred Unit consisted of one share of Series 1 Preferred Stock
and two Series 1 Preferred Stock Purchase Warrants. Commencing September 3,
2000, each share of Series 1 Preferred Stock is convertible into two shares of
Common Stock. Commencing September 3, 2000, each Preferred Warrant entitles the
holder to purchase one share of Series 1 Preferred Stock at an exercise price of
$6.00 per share until the close of business on March 3, 2002. The Preferred
Units, Series 1 Preferred Stock and Series 1 Preferred Stock Warrants commenced
trading on the OTC Electronic Bulletin Board on March 4, 1999 under the symbols,
"KDSPU," "KDSPP" and "KDSPW," respectively. As of the close of business on March
26, 1999, the closing sales prices of the Preferred Units, Series 1 Preferred
Stock and Preferred Warrants were $7.75, $7.00 and $1.0625, respectively.

Item 6. Managements' Discussion and Analysis or Plan of Operation.

RESULTS OF OPERATIONS

1998 versus 1997

Total net sales for 1998 increased $3,156,263, or 28.7%, to $14,172,864,
compared with $11,016,601 for 1997. Net sales include sales from merchandise,
Jeannie's Kids Club memberships, shipping and handling charges, and mailing list
rentals.

The increase in sales is mainly attributable to The Natural Baby Catalog,
which recorded 1998 sales of $6,188,586 compared with $3,876,555 in 1997. The
Natural baby Catalog accounted for 73% of the Company's overall sales increase.

The net sales of the Perfectly Safe Catalog increased to $4,932,732 in 1998
compared with $3,937,809 in 1997. This increase is attributable to improved
catalog merchandising which permitted a 44.8% increase in catalog circulation
from 2,933,037 catalogs mailed in 1998 compared with 2,025,375 catalogs mailed
during 1997. The increases in sales of The Natural Baby Catalog and Perfectly
Safe Catalog were partially offset by a decrease in net sales of Jeannie's Kids
Club Catalog, which decreased to $3,051,546 in 1998 compared with $3,202,237 for
1997. The circulation of Jeannie's Kids Club was reduced 4.4% to 1,369,001 in
1998, compared with circulation of 1,432,716 in 1997. Cost of sales, as a
percentage of net sales, remained fairly consistent at 61.8% for 1997 to 61.5%
for 1998.

Selling expenses, which consist of advertising and other marketing related
expenses expressed as a percentage of sales, increased from 26.9% for 1997 to
28.0%

<PAGE>
for 1998. The increase was due to higher catalog cost as a component of
advertising expense.

General and administrative expenses were $1,486,889, or 10.5% of net sales,
for 1998, and $1,077,041, or 9.8% of net sales, for 1997. Approximately 32% of
the increased administrative expense was attributable to increased wages and
related costs of employment due to business expansion. Building and occupancy
expense accounted for 21% of the increased administrative expense, and 13% of
increased administrative expenses were incurred for depreciation and
amortization of Natural Baby's mailing lists and goodwill. The above mentioned
increased costs reflect the first full year's impact of the administrative costs
of the Natural Baby Catalog acquisition, which was completed in July 1997.

Effective January 1, 1998, The Havana Group, Inc. entered into an agreement
with the Company whereby the Company provided 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, $15,300 for purchasing services and $2.40
per order processed for order fulfillment. While management believes these fees
would represent actual costs should Havana undertake to provide these services
itself, cancellation or modification of the agreement would have the impact of
altering the general and administrative expense structure of the Company.

Net loss for the year ended December 31, 1998 was $35,788, or 0.3% of net
sales, compared to a net profit of $50,097, or 0.5% of net sales for the same
period of 1997. The Company attributes this change primarily to increased
general and administrative expenses, with slightly higher than expected selling
expenses.

Liquidity and Capital Resources

At March 1, 1998, the balance of the Company's credit line was $762,000.
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.

<PAGE>
At December 31, 1998, the Company had a deficit in retained earnings of
$1,438,371, compared with a deficit of $1,402,583 at December 31, 1997. This
change resulted from the 1998 net loss of $35,788. For the year ended December
31, 1998, operating activities provided $120,094 in cash. Funds were provided by
increases in accounts payable of $724,861, decreases in accounts receivable of
$83,469, and non-cash expenses of depreciation and amortization of $181,932.
Funds were consumed by inventory increases of $536,903, increases in deferred
advertising of $155,435, and increases in prepaid expenses and other assets
totaling $142,042. For the year ended December 31, 1998, the Company's investing
activities used $351,027 in cash. Property and equipment additions used $130,035
for increases in equipment and the establishment of the "Kids Catalog outlet"
retail store. Additionally, the Company invested $220,992 in catalog development
and redesign to alter the format, appearance, design, and presentation of its
products.

For the year ended December 31, 1998, the Company's financing activities
provided $154,465 in cash. This consisted of borrowings on its line of credit in
the amount of $91,000, increases in prepaid expenses for its anticipated public
offering of $77,008, and decreases in amounts due from affiliates of $140,473.

For the year ended December 31, 1998, the combined effect of net cash
provided by operating activities of $120,094, net cash used by investing
activities of $351,027, and net cash provided by financing activities of
$154,465 decreased cash from $101,894 at December 31, 1997 to $25,426 at
December 31, 1998.

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 an increase
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
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 $101,894 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

<PAGE>
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. The remaining $300,000
was satisfied during 1998 in a non-cash transaction where Havana, a subsidiary
of Duncan Hill, issued 110,000 shares of its Series B Preferred Stock to Duncan
Hill. In return, Duncan Hill assumed a $300,000 liability due to the Company.
This $300,000 liability to the Company was used to satisfy the $300,000 debt
owed from the Company to Duncan Hill.

In order to finance 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 the Representative 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

<PAGE>
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.

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 effect of the adoption was not
material.

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
adopted SFAS No. 131 for the fiscal year ended December 31, 1998. The effect of
such adoption in 1998 was not material.

In March 1998, Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, was issued. The SOP provides
guidance on accounting for costs of computer software based on the project stage
and other criteria and is effective for financial statements for fiscal years
beginning after December 15, 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. The Company does not anticipate engaging in such transactions, but will
comply with requirements of SFAS 133 when adopted. This statement is effective
for all fiscal quarters beginning after June 15, 1999. The effect of adopting
SFAS 133 is not expected to be material.

The Company intends to meet its cash requirements over the next 12-15
months from cash generated from operations and proceeds of its recently
completed offering. The Company intends to seek to expand and/or restructure its
line-of-credit with its existing institutional lender. The Company intends to
establish a new operations center and develop and establish a website.

Year 2000 Issues

<PAGE>
Many existing computer programs use only two digits to identify a year in
the date field. There programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The Company is currently working to correct its computers and does not
believe that the expenditures will materially adversely impact the Company,
although no assurances can be given in this regard. The Company purchases its
materials from numerous vendors. While the Company has not determined whether
all its vendors will be year 2000 compliant before the problem arises,
Management believes that since it is not dependent on any major vendor, that its
operations will not be materially adversely effected by the failure of a few
vendors to timely correct the problem. However, no assurances can be given that
Management will be correct in its belief.

Forward Looking Statements and Associated Risks

This Form 10-KSB 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.

Item 7. Financial Statements

The information required by Item 8, and an index thereto commences on page
F-1, which pages follow this page.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Not applicable.

<PAGE>
PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

(a) Identification of Directors

The names, ages and principal occupations of the Company's present
directors, and the date on which their term of office commenced and expires, are
as follows:
<TABLE>
<CAPTION>
First
Term of Became Principal
Name Age Office Director Occupation

<S> <C> <C> <C> <C>
William L. Miller 62 (1) 1981 Chairman of the
Board, Chief
Executive Officer
and Principal
Financial Officer of
the Company

Jeanne E. Miller (2) 51 (1) 1982 President of the
Company

Clark D. Swisher 47 (1) 1971 Senior Vice
President of the
Employee Benefits
Division of the
Leonard-McCormick
Agency

Alfred M. Schmidt 65 (1) 1998 President of Schmidt
Group International,
Inc.
</TABLE>

(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.

(2) Mr. and Mrs. Miller are married.

(b) Identification of Executive Officers.

William L. Miller is Chairman of the Board, Chief Executive Officer,
Principal Financial Officer, Treasurer and Secretary of the Company. Jeanne E.
Miller is President of the Company.

<PAGE>
The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Subject to their contract rights to
compensation, if any, officers may be removed, either with or without cause, by
the Board of Directors, and a successor elected by a majority vote of the Board
of Directors, at any time.

WILLIAM L. MILLER, Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting 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 E.A. Carey of
Ohio, Inc. 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.

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.

ALFRED M. SCHMIDT, JR., a director of the Company since September 1998 is
President of The Schmidt Group International, Inc., direct marketing/management
consultants. Mr. Schmidt was the entrepreneur owner of New Hampton General
Store, a consumer catalog company. Mr. Schmidt was a Vice President of Hanover
House, then the first Vice President of Brooks Brothers, a national chain of
apparel specialty stores with 65 stores in the U.S. and six in Japan. Mr.
Schmidt subsequently was the first Vice President of Direct Marketing of
Bergdorf Goodman, N.Y., a designer apparel retailer, and Senior vice President
in charge of catalogs at the Franklin Mint, Franklin Center, Pennsylvania. Mr.
Schmidt finished his public career as President of Myron Manufacturing

<PAGE>
Company, a direct marketing firm selling advertising specialty products by
catalog, direct mail, and telemarketing. For the past twelve years, Mr. Schmidt
has led his company in catalog consulting with clients from Europe to the
Pacific Rim. Mr. Schmidt is a member of the Direct Marketing Association, the
1982 winner of the prestigious Henry Hoke Award and the DMA Echo Leader Award.
He was a founder of the Catalog Leader's Group. Mr. Schmidt has served on the
DMA Catalog Council, The Direct Marketing Educational Council, and the Direct
Marketing Idea Exchange. Mr. Schmidt has been a contributing writer to Catalog
Age Magazine, Catalog Business, Direct Marketing Magazine and D.M. News. Mr.
Schmidt has addressed audiences extensively in the U.S. as well as Europe and
the Far East.

Alfred M. Schmidt, Jr. is an independent director and the Company intends
to appoint a second independent director as the fifth director. There is no
assurance, however, that the Company will be able to attract a suitable
candidate at this stage of its development.

The Company intends to identify and appoint an individual who is not
affiliated with the Company as its fifth director. There is no assurance,
however, that the Company will be able to attract a suitable candidate at this
stage of its development.

Upon the appointment of an additional unaffiliated director the Board of
Directors intends to establish a Compensation Committee and an Audit Committee.
The Audit Committee, which will consist of at least a majority of directors who
are not affiliated with the Company, will among other things, make
recommendations to the Board of Directors regarding the independent auditors for
the Company, approve the scope of the annual audit activities of the independent
auditors and review audit results and have general responsibility for all
auditing related matters. The Compensation Committee will consist entirely of
directors who are not affiliated with the Company. The Compensation Committee
will review and recommend to the Board of Directors the compensation structure
for the Company's officers and other management personnel, including salary
rates, participation in incentive compensation and benefit plans, fringe
benefits, non-cash perquisites and other forms of compensation. The Committee
will also administer the Company's 1997 Long-Term Stock Incentive Plan.

Fairchild Financial Group, Inc., the Managing Underwriter of the Company's
IPO, 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 March 29, 1999, no such person has been designated.

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

<PAGE>
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.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than ten percent stockholders are required by the Commission's
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To Management's knowledge, no officer, director or person owning more than
10% of the Company's Common Stock filed any reports late during its fiscal year
ended December 31, 1997, except Alfred Schmidt filed late a Form 3 and a Form 4
for September 1998, Clark D. Switzer filed late a Form 3 and William L. Miller
and Duncan Hill, Inc. each filed late a Form 4 for March 1998.

Compensation of Directors

The Company pays its directors who are not also employees of the Company
$500 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.

<PAGE>
KIDS STUFF, INC.

FINANCIAL REPORT

F-1

<PAGE>

KIDS STUFF, INC.

CONTENTS

- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>

Page

<S> <C>
INDEPENDENT AUDITORS' REPORT F-3

FINANCIAL STATEMENTS
Balance sheet F-4 through F-5
Statements of operations F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8 through F-9
Notes to financial statements F-10 through F-22

</TABLE>

F-2

<PAGE>
Independent Auditors' Report

To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio

We have audited the accompanying balance sheet of Kids Stuff, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1998 and 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, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.

HAUSSER + TAYLOR LLP

Canton, Ohio
March 20, 1999

F-3

<PAGE>
KIDS STUFF, INC.

BALANCE SHEET

December 31, 1998
<TABLE>
<CAPTION>

ASSETS

CURRENT ASSETS
<S> <C>
Cash ......................................................... $ 25,426
Accounts receivahle .......................................... 251,544
Due from affiliates .......................................... 140,492
Inventories .................................................. 1,925,915
Deferred catalog expense ..................................... 415,027
Prepaid expenses ............................................. 166,497
----------
Total Current Assets .................................... 2,924,901

PROPERTY AND EQUIPMENT
Leasehold improvements ....................................... 35,982
Machinery and equipment ...................................... 65,765
Data processing equipment .................................... 262,474
Furniture and tixtures ....................................... 94,411
----------
458,632
Less accumulated depreciation and amortization ............... 120,212
----------
338,420
OTHER ASSETS, net of accumulated amortization

Goodwill ..................................................... l,072,905
Customer lists ............................................... 402,798
Catalog development and other ................................ 289,110
----------
1,764,813
----------

$5,028,134
==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F -4

<PAGE>
KIDS STUFF, INC.

BALANCE SHEET

December 31, 1998
<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
<S> <C>
Line of credit .......................................... $ 762,000
Accounts payable .......................................... 2,434,297
Customer advances ......................................... 5,100
Accrued expenses ........................................ 39,861
Total Current Liabilities ............................... 3,241,258

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $.001 per share,
10,000,000 shares authorized, 5,000,000
shares issued and oustanding voting,
without dividend ......................................... 5,000
Common stock - $.001 par value,
25,000,000 shares authorized,
3,512,856 shares issued and
outstanding .............................................. 3,513
Additional paid-in capital ................................ 3,216,734
Retained earnings (defcit) .............................. (1,438,371)
Total Stockholders' Equity .............................. 1,786,876

5,028,134
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5

<PAGE>
KIDS STUFF, INC.

STATEMENTS OF OPERATIONS

Years Ended December 31, l998 and 1997

1998 1997

<S> <C> <C>
SALES ...................................... $ 14,172,864 11,016,601
COST OF SALES .............................. 8,712,876 6,812,422
------------ ------------
GROSS PROFIT ............................... 5,459,988 4,204,179

SELLlNG EXPENSES ........................... 3,966,452 4,204,179
GENERAL AND ADMINISTRATIVE EXPENSES ........ 1,486,889 1,077,041
------------ ------------
INCOME FROM OPERATIONS ..................... 6,647 160,209

NET OTHER (EXPENSE) INCOME
Interest expense ......................... (60,630) (108,933)
------------ ------------
Other ...................................... 18,195 (1,179)
------------ ------------
(42,435) (110,112)

NET (LOSS) INCOME .......................... (35,788) 50,097
============ ============
BASIC AND DILUTED (LOSS) INCOME
PER SHARE ................................ $ (.01) .01
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6

<PAGE>
KIDS STUFF, INC.
STATEMENT'S OF STOCKHOLDERS' EQUITY

Years Ended December 31, l998 and 1997
<TABLE>
<CAPTION>

Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total

<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 ..... 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 LOSS ...................... -- -- -- (35,788) (35,788)
-------- -------- --------- ---------- ----------
BALANCE - DECEMBER 31, 1998 ... $ 3,513 $ 5,000 $ 3,216,734 $(1,438,371) $ 1,786,876
======== ======== ========= ========== ==========
</TABLE>

The accompanying noLes are an integral part of these Financial statements.

F-7

<PAGE>
KIDS STUFF, INC.

STATEMENTS OF CASH FLOWS

Years Ended December 31, l998 and 1997

<TABLE>
<CAPTION>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income ................................... $ (35,788) $ 50,097
Adjustments to reconcile net (loss) income to nel
cash provided by operating activities:
Depreciation and amortization ....................... 181,932 80,687
Decrease (increase) in accounts receivable ......... 83,469 (139,937)
(Increase)in inventories ............................ (536,903) (417,847)
(Increase) decrease in deferred catalog expense ..... (155,435) 203,464
(Ilncrease)in prepaid expenses ....................... (67,691) (18,254)
(Increase) in other assets .......................... (74,351) --
Increase in accounts payable, customer
advances and accrued expenses ....................... 724,861 350,245
Nct cash provided by operating activities ........... 120,094 108,455

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment and other assets (130,035) (157,023)
Amount paid for catalog development ................. (220,992) --
Decrease in prepaid amounts for
acquisition of Natural Baby Catalog business ........ -- 126,007
Purchase of Natural Baby Catalog business .......... -- (1,721,829)
Net cash (used) by investing activities ............. (351,027) (1,752,845)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit - net .................. 91,000 21,000
Sale of common stock ................................ -- 2,619,890
Purchase of common stock ........................... -- (107,143)
Sale of preferred stock ............................ -- 5,000
Payments on long-term debt - related party ......... -- (266,858)
Payment on note payable for acquisition of ........ --
Natural Baby Catalog ................................ -- (100,000)
(Increase) decrease in prepaid amounts for
public offering ..................................... (77,008) 43,782
(Decrease) in due to attiliates ..................... -- (137,070)
Decrease (increase) in due from affiliates .......... 140,473 (580,965)
Net cash provided by tinancing activities ........... $ 154,465 $ 1,497,636

</TABLE>

The accompamying notes are an integral part of these financial statements.

F-8

<PAGE>
KIDS STUFF, INC.

STATEMENTS OF CASH FLOWS

Years ended December 31, 1998 and 1997

1998 1997

<S> <C> <C>
NET (DECREASE) IN CASH ........................ $ (76,468) (146,754)
CASH - BEGINNING .............................. 101,894 248,648

CASH - ENDING ................................. 25,426 101,894

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION

Cash paid during the year for interest ...... 60,630 108,778

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 sharcs
for the purchasc of The Natural Baby Catalog $- $ 245,000

SUPPLEMENTAl, DISCLOSURE OF NON-CASH
FINANCING ACTIVITY

The Havana Group, a subsidiary of
Duncan Hill, Inc., issued
110,000 shares of its Series
B Preferred Stock to Duncan Hill ............
In return, Duncan Hill assumed a
$300,000 liability due to Kids
Stuff; Inc. This $300,000 liability
to Kids Stuff; Inc. was used to satisfy
the $300,000 debt owed from Kids Stuff;
Inc. to Duncan Hill ......................... $ 300,000 $-
</TABLE>

The accompamying notes are an integral part of these financial statements.

F-9

<PAGE>

KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS

Business Description and Summary of Significant Accounting Policies

A. Business Description - Kids Stuff, Inc. ("Kids Stuff" or the "Company")
is in the mail order business and sells to customers throughout the United
States. Duncan Hill, Inc. owns 85% of the Company's outstanding voting capital
stock as of December 31, 1998. 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. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

C. 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.
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.

D. 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, 1998. Bad debt expense was
$49,199 and $37,904 for the years ended December 31, 1998 and 1997,
respectively.

E. 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.

F. Deferred catalog expenses are costs of catalogs mailed to customers
which are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers utilize catalogs and other mail
order mailings from the Company. Catalog expense was $3,317,565 and $2,473,778
for the years ended December 31, 1998 and 1997, respectively.

F-10

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Business Description and Summary of Significant Accounting Policies (continued)

G. December 31, 1998 prepaid expenses include $77,008 relative to the
preferred stock public offering which occurred in 1999 (see Note 11).

H. 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 $46,457 and $29,541 for the years ended
December 31, 1998 and 1997, respectively.

Maintenance, repairs, and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.

I. Intangible Assets - During 1997, the Company purchased the net assets
and operations of The Natural Baby Company as discussed in Note 4. Management
has determined the fair value of the customer list acquired in that acquisition
to be $505,000. The excess purchase price over the value allocated to the
specifically identifiable assets acquired amounted to $1,148,692 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. Accumulated amortization was $102,202
and $78,187, respectively, for the customer list and goodwill as of December 31,
1998.

During 1998, the Company redesigned the Natural Baby Company, the Perfectly
Safe and the Kids Club catalogs. Costs of redesigning these catalogs totaling
$220,992 were capitalized and are being amortized over 48 months using the
straight-line method. Accumulated amortization was $6,233 as of December 31,
1998.

J. The Company developed and maintains a mailing list of customers who have
purchased merchandise in the recent past. The cost of developing, maintaining,
and updating this list is expensed in the period incurred.

K. Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the year for basic earnings
per share. Diluted earnings per share are calculated to include the dilutive
effect of stock options and warrants. The number of shares outstanding in
computing basic and diluted earnings per share for 1998 and 1997 are as follows:

F-11

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Business Description and Summary of Significant Accounting Policies (continued)
<TABLE>
<CAPTION>

1998 1997
---- ----

Actual weighted average number of common
<S> <C> <C>
shares outstanding for basic earnings per share 3,512,856 3,551,432

Effect of dilutive warrants - 768,000
------------- ----------

Weighted average assuming conversion
used for diluted earnings per share 3,512,856 4,319,432
========= =========
</TABLE>

L. 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 adopted this new standard during 1998. The effect of adoption was
not material.

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 adopted this new standard during 1998. The effect of adoption was not
material.

F-12

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Business Description and Summary of Significant Accounting Policies (continued)

Note 1. Agreement with Affiliated Company

Duncan Hill, Inc. owns 89% of the outstanding voting capital stock of the
Havana Group, Inc. (Havana). In January 1998, the Company contracted with Havana
to provide administrative, executive, and accounting services at an annual cost
of approximately $206,100 as outlined below and $2.40 per order processed.
Havana is also obligated to pay 5% of its 1998 pre-tax profits to Kids Stuff in
connection with these administrative and fulfillment services. However, Havana
had no pre-tax profits for 1998. Total costs charged to Havana in 1998 amounted
to $293,432. This agreement has been extended on a month-to-month basis.
Management believes that this is substantially the same cost that it would incur
should it procure these services itself.
<TABLE>
<CAPTION>

<S> <C>
Accounting and Payroll Services $ 34,000
Administrative 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
=======
</TABLE>

Kids Stuff had provided these services during 1997 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. The costs charged to Havana in 1997
amounted to $450,443.

F-13

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 2. Stockholders' Equity

A. Common Stock

In connection with a reorganization effective June 30, 1996, the Company
issued to its parent, Duncan Hill Co., Ltd. (the Predecessor of Duncan Hill,
Inc.), 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
Company (see Note 4).

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.
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.

F-14

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 2. Stockholders' Equity (continued)

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. 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 8.75% at December
31, 1998. The line of credit had a balance of $762,000 at December 31, 1998. 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 requires that the Company maintain
a zero balance on the credit line for a period of thirty consecutive days
sometime during the course of each year. The bank has waived the zero balance
requirement for 1998. The weighted average interest rate for the years ended
December 31, 1998 and 1997 was 9.3% and 9.4%, respectively. Due to the current
nature of the liability, the carrying amount of the line approximates fair
value. The line of credit expired June 30, 1998, and the Company is in the
process of renegotiating the agreement with the bank.

F-15

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 4. Acquisition of The Natural Baby Company

In July 1997, the Company acquired the net assets and operations of The
Natural Baby Company, a mail order retailer of children's clothing and toys. The
purchase was funded with the net proceeds of an initial public offering. The
acquisition 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

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 16,151

Customer list 505,000

Accounts payable assumed (296,211)
----------
Net assets acquired 918,137

F-16

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 4. Acquisition of the Natural Baby Company (continued)

<TABLE>
<CAPTION>
<S> <C>
Excess of the purchase price over value allocated to
specifically identifiable assets acquired $ 1,148,692
---------

Total purchase price $ 2,066,829
=========
</TABLE>

The excess of the aggregate purchase price over the value allocated to the
specifically identifiable assets acquired of $1,148,692 was recorded as
goodwill.

Note 5. Lease Commitments

Duncan Hill, Inc., the parent company of Kids Stuff, has entered into
several operating leases for retail and office space and equipment. Kids Stuff
currently makes the required lease payments and allocates a portion of the cost
to the Havana Group under the terms of the agreement discussed in Note 1. Duncan
Hill is dependent on Kids Stuff to meet monthly lease obligations. Future
minimum lease payments required by Duncan Hill, Inc. under noncancellable
operating leases for the years ending December 31 are as follows:

1999 $ 97,840
2000 81,307
2001 52,866
2002 17,604

Note 6. Income Tax

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes. The Company
files its Federal income tax return as part of a consolidated group.

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,
1998 and 1997:

F-17

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 6. Income Tax (continued)
<TABLE>
<CAPTION>
1998 1997
---- ----

Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 172,832 $ 122,529
Inventory obsolescence 11,900 37,796
-------- --------
Total deferred tax assets 184,732 160,325
Valuation allowance (22,552) (62,573)
-------- --------
Net deferred tax asset 162,180 97,752

Deferred tax liabilities:
Deferred catalog expense (141,109) (88,261)
Amortization (8,200) (4,586)
Depreciation (12,871) (4,905)
-------- ---------
Total deferred tax liabilities (162,180) (97,752)
------- --------
Net deferred income taxes $ - $ -
============= =============
</TABLE>

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's tax loss in 1998 was $173,780. The Company has net operating
loss carryforwards of approximately $508,000 as of December 31, 1998 for tax
purposes. The loss carryforwards expire in varying amounts through the year
2018.

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 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.

F-18

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 Chairman of the Board and Chief Executive
Officer of the Company and Mrs. Miller is to serve as its President. The
employment agreements provide for an annual base salary of $125,000 for Mr.
Miller and $105,000 for Mrs. Miller, subject to annual review for increase by
the Company. The employment agreements also provide for the eligibility of these
executives to receive annual cash bonuses under the Company's Incentive
Compensation Plan.

Each of the employment agreements provides a 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 or 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.

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.

F-19

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 8. Employment Agreement (continued)

Mrs. Miller also received the option to purchase 100,000 shares of the
Company's unregistered common stock as a signing bonus on October 16, 1998. The
exercise price of the options shall be $2.50 per share, and the options will
expire 10 years from the date of the grant.

Additionally, the Company granted options to two of its directors under a
non-qualified Stock Option Agreement discussed in Note 10.

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 method prescribed by
SFAS 123, the Company's net income would have been reduced by approximately
$319,000 or $.09 per share in 1998. No options vested during 1997, therefore,
there was no effect on 1997 net income.

For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted during 1998 using the Black-Scholes
option pricing model assuming no dividends, 119% volatility, an expected life of
50% of the ten-year option terms, and a risk-free interest rate of 5.0%. The
fair market value of the options granted during 1998 was $334,000. No options
have been exercised as of December 31, 1998.

The Company computed the fair value of options granted during 1997 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 6.0%. The fair market value of the options granted during 1997 was $315,000.

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 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

F-20

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 9. Incentive Plans (continued)

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 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 1998.

Note 10. Non-Qualified Stock Option Agreement

During 1998, the Company entered into a non-qualified stock option
agreement with Clark D. Swisher and Alfred M. Schmidt, Jr., directors of the
Company. Each of Mr. Swisher and Mr. Schmidt were granted the option to purchase
30,000 shares of the Company's common stock, which vest 25% on August 1, 1998
and 25% on each January 1, 1999, January 1, 2000, and January 1, 2001. The
vested options will be immediately exercisable and will expire 10 years from the
date of the agreement. The exercise price of the options is $2.50 per share of
common stock. The pro forma disclosure in Note 8 includes the effect of the
15,000 options vesting in 1998.

F-21

<PAGE>
KIDS STUFF, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 11. Subsequent Event - Public Offering

In March 1999, the Company completed a public offering of securities
through Fairchild Financial Group, Inc. in which 460,000 units were sold for
$1,960,557, net of issuance costs of $569,443. Each unit consisted of one share
of Series 1 Preferred Stock and two Series 1 Preferred Stock Purchase Warrants,
and sold for $5.50 per unit. The preferred stock and warrants are separately
transferable. Commencing September 3, 2000, each share of Series 1 Preferred
Stock is convertible into two shares of Common Stock. Commencing September 3,
2000, each Preferred Warrant entitles the holder to purchase one share of Series
1 Preferred Stock at an exercise price of $6.00 per share until the close of
business on March 3, 2002.

The proceeds of the public offering are to be used for the purchase of
inventory, accounts payable reduction, establishment of a new operations center,
web site production and development, leasehold improvements for the "Kids
Catalog Outlet" retail store, and general corporate purposes.

F-22

<PAGE>
Item 10. 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 for the past three years.
<TABLE>
<CAPTION>

SUMMARY COMPENSATION TABLE

====================================================================================================================================
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, ....... 1998 125,000 -0- 4,000 -0- -0- -0- -0-
Chief Executive
Officer
1997 125,000 -0- 4,000 -0- 100,000 -0- -0-
1996 100,000 -0- -0- -0- -0- -0- -0-
J. Miller, ....... 1998 94,000 -0- 4,000 -0- 100,000 -0- -0-
President
1997 90,000 -0- 4,000 -0- 100,000 -0- -0-
1996 65,000 -0- -0- -0- -0- -0- -0-
===

(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. W. Miller is provided
with a leased automobile by Havana with a monthly cost of approximately
$1,100 and J. Miller is provided with a leased automobile by the
Company at a monthly cost of approximately $800. The foregoing table
does not include the value of any personal use of such automobiles.

(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.

<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 1998
of each of the executive officers named in the summary compensation table above.
The Company did not grant any stock appreciation rights during 1998.

Option Grants in Last Fiscal Year

====================================================================================================================================
Potential
Realizable Value at
Assumed Annual
Individual Grants Rates of Stock Price
Appreciation
for Option Term (2)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
Granted to
Options Employees Exercise Expira-
Granted in Fiscal Price tion
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Miller .......... -0- N/A N/A N/A N/A N/A

J. Miller .......... 100,000 100% 2.50 Oct. 2008 157,000 398,000

</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.

<PAGE>
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 1998 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
Shares Unexercised In-the-Money
Acquired Options at Options
on Value FY-End (#) at Fy-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William L.. Miller -0- -0- 50,000/50,000 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Jeanne E. Miller -0- -0- 150,000/50,000 44,000/-0-

=============================================================================================================================
</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 (i.e. $2.94 per share),
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 1999. The amount of such pool with respect to any year shall be
determined subsequent to the end of that year upon the determination of the
Company's operating income for that year. Each participant in the Plan is
eligible to receive from the bonus pool an annual award of up to 50% of the
participant's base salary. Upon its establishment, the Compensation Committee
shall be responsible for recommending to the Board of Directors performance
objectives and awards for participants. Until the Compensation Committee is
established and includes at least two outside directors, no compensation will be
awarded under the Plan. W. Miller and J. Miller are expected to be the principal
participants in the Plan and they control the election of all directors. Payouts
are to be determined annually following determination of the Company's fiscal
year-end results. The Plan is subject to amendment of termination

<PAGE>
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 Form 10-KSB, 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, which the Company intends to establish after it has two
outside 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

<PAGE>
options may be granted under the Incentive Plan after March 27, 2007. However,
any options outstanding on March 27, 2007 will remain in effect in accordance
with their terms.

The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common Stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation Committee, provided however, that such expiration date shall not be
later than ten years from the date of the grant. SARS are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee's cessation of employment or
directorship, as pertains to options, discussed above.

The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the Committee may determine. All shares of Common
Stock subject to a stock award will be valued at not less than 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 Form 10-KSB, the Compensation Committee has not been
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. In October 1998, the Company and J. Miller entered
into an amended agreement. The

<PAGE>
employment agreements. as amended, provide for an annual base salary of $125,000
for W. Miller and $105,000 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. These automobiles are used almost exclusively for business
purposes. Each of these executives is also to be reimbursed for certain personal
expenses up to $6,500, 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
September 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 Form
10-KSB 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 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

<PAGE>
employment agreement. Additionally, any executive entitled to severance
compensation, above, will also be entitled to participate in any
Company-sponsored employee health benefit plan at the Company's expense, for a
maximum of eighteen months from the date of termination.

Each of 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 option vests 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. J. Miller also received options to
purchase an additional 100,000 shares at a purchase price of $2.50 per share in
October 1998. These options have a term of ten years and are immediately
exercisable.

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,
(iii) involving transactions between the Company and its affiliated companies;
and (iv) due to the relationship between W. Miller and J. Miller as husband and
wife and as directors and officers of the Company. 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

<PAGE>
disinterested directors, if any. Currently, the Company has no
disinterested directors and Duncan Hill and W. Miller control the election of
the directors.

<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth as of March 1, 1999, 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. Shares of Shares of Series A
Common Stock Preferred Stock Beneficially Owned Beneficially Owned
<TABLE>
<CAPTION>

NAME AND ADDRESS OF
BENEFICIAL OWNER(1) NUMBER PERCENT(2) NUMBER PERCENT(3)
<S> <C> <C> <C> <C>
Duncan Hill (4) 2,251,075 64.1% 5,000,000 100%

William L. Miller and Jeanne E. Miller(4) 2,401,075(5) 65.6 5,000,000(6) 100%

Clark D. Swisher (7) 7,500 .2 -0- -0-

Alfred M. Schmidt (7) 7,500 .2 -0- -0-

All Officers and Directors
as a Group (4 Persons) 2,396,075 64.4% 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. All addresses are c/o Kids Stuff, Inc.,
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio
44718.

(2) Calculated based upon 3,512,856 shares of Common Stock
outstanding without giving effect to the possible exercise of
outstanding Class A Warrants.

(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 may be deemed to beneficially own all of Duncan
Hill's shares for purposes of Rule 13d-3 of the Exchange Act
based upon their controlling ownership of its common stock.
The Millers together control approximately 68% of Duncan Hill.

(5) Includes the Miller's deemed beneficial ownership of 2,251,075
shares of Common Stock and options to purchase 150,000 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.

(7) Messrs. Swisher and Schmidt have options to purchase 30,000
shares each, which options vest in four equal annual
installments beginning in 1999. The table includes only
options vesting through January 1, 1999.

<PAGE>
Item 12. Certain Relationships and Related 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 the Representative, the Managing Underwriter of the Company's
initial public offering and this offering. There were no other affiliations or
relationships between the seven private investors and either the Company or the
Representative. The eighth investor, who was not a customer of the
Representative and has never had any relationship or affiliation with the
Representative, 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 the Representative at a repurchase
price of $.125 per share. This repurchase was required by the National
Association of Securities Dealers (the "NASD") as a condition to approving the
compensation to be received by the Representative 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.

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 the
Representative, and the third of whom was introduced by the Representative to
the Company. These three private investors are Clinthill Investments, Ltd., Kurt
Campbell and M&M Specialties, Inc. The Bridge Loan, 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 the
Representative so that the Bridge Lenders would be paid the entire $200,000 face
amount of the Bridge Loan, in cash, plus accrued interest at 8% per annum, at
the closing of 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 or Plan of Operation" 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

<PAGE>
or not the Company has agreed to pay a purchase price in excess of The
Natural Baby Catalog's fair value. However, management is of the opinion that
the purchase price paid by the Company was not in excess of the fair market
value of the National Baby Catalog. 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 or Plan of Operation" and $100,000 of the Additional Amount is
reflected in the cash payments made in July 1997 described in "Management's
Discussion and Analysis or Plan of Operation." 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.

GENERAL

Reference is made to "Business" and "Management's Discussion and Analysis
or Plan of Operation" 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.

Item 13. Exhibits and Reports on Form 8-K.

(a) Exhibits

<TABLE>
<CAPTION>
<S> <C>
1.01 Revised Form of Underwriting Agreement - 1997 Offering (5)
1.02 Revised Form of Selected Dealers Agreement - 1997 Offering (5)
1.03 Revised Form of Warrant Exercise Fee Agreement - 1997 Offering (5)
1.04 Form of Underwriting Agreement - Series 1 Preferred Stock (7)
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)
3.05 Certificate of Designation (9)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.0 Revised Form of Common Stock Purchase Warrant Agreement (5)
4.04 Revised Specimen Certificate for Common Stock Purchase Warrants (3)
4.05 Revised Form of Underwriters' Purchase Option - 1997 Offering (5)
4.06 Form of Representative's Lock-up Letter (2)
4.07 Form of Representative's Purchase Option Agreement (7)
4.08 Preferred Stock Agency Agreement (7)
4.09 Preferred Warrant Agency Agreement (7)
4.10 Specimen of Preferred Warrant (7)
4.11 Specimen of Series 1 Preferred Stock (7)

<PAGE>
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 Fairchild Financial
Group, 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 Revised Employment Agreement with Jeanne E. Miller (7)
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. (8)
10.22 Form of new Financial Consulting Agreement with Fairchild Financial
Group, Inc. (7)
10.23 Employment Agreement with William T. Evans (7)
10.24 Other Leases (7)
23.01 Consent of Hausser + Taylor LLP (7)
27.00 Revised Financial Data Schedule (9)
</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.

<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) Incorporated by reference to Form SB-2 Registration Statement, File No.
333-61463.
(8) Incorporated by reference to the Registrant's Form 10-KSB filed for its
fiscal year ended December 31, 1997.
(9) Filed herewith.

(b) Reports on Form 8-K

During the three months ended December 31, 1998, a Form 8-K was not
filed or required to be filed.

<PAGE>
SIGNATURES

Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.

KIDS STUFF, INC.

By: /s/ William L. Miller
William L. Miller,
Chief Executive Officer

Dated: Canton, Ohio
March 30, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

Signatures Titles Date

<S> <C> <C>
/s/ William L. Miller Chairman of the
William L. Miller Board, Chief Executive Officer,
Principal Financial Officer,
Treasurer and Secretary March 30, 1999

/s/ Jeanne E. Miller President and
Jeanne E. Miller Director March 30, 1999

/s/ Clark D. Swisher
Clark D. Swisher Director March 30, 1999

/s/ Alfred M. Schmidt
Alfred M. Schmidt Director March 30, 1999

</TABLE>

<ARTICLE> 5
<LEGEND>
EXHIBIT 27

FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND RELATED FOOTNOTES
THERETO, OF KIDS STUFF, INC.

</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-END> dec-31-1998
<CASH> 25,426
<SECURITIES> 0
<RECEIVABLES> 251,544
<ALLOWANCES> 0
<INVENTORY> 1,925,915
<CURRENT-ASSETS> 2,924,901
<PP&E> 458,632
<DEPRECIATION> 120,212
<TOTAL-ASSETS> 5,028,134
<CURRENT-LIABILITIES> 3,241,258
<BONDS> 0
0
5,000
<COMMON> 3,513
<OTHER-SE> 1,778,363
<TOTAL-LIABILITY-AND-EQUITY> 5,028,134
<SALES> 14,172,864
<TOTAL-REVENUES> 14,172,864
<CGS> 8,712,876
<TOTAL-COSTS> 12,679,328
<OTHER-EXPENSES> 1,486,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,630
<INCOME-PRETAX> (35,788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,788)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)

</TABLE>