As filed with the Securities and Exchange Commission on April __, 2000
Registration No. 333-____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 ON
FORM S-3 REGISTRATION STATEMENT ON
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
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KIDS STUFF, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 5961 34-1843520
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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Kids Stuff, Inc.
7835 Freedom Avenue, N.W.
North Canton, Ohio 44720
(Address of principal place of business)
William L. Miller, Chief Executive Officer
Kids Stuff, Inc.
7835 Freedom Avenue, N.W.
North Canton, Ohio 44720
1 (330) 492-8090
(Name, address, and telephone number of principal executive offices and
agent for service)
Copies to:
Steven Morse, Esq.
Lester Morse P.C.
111 Great Neck Road
Great Neck, New York 11021
(516) 487-1446
(516) 487-1452 (Fax)
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement: From time to time after the
effective date of this Registration Statement, as determined by the Registrant.
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If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Proposed maximum
maximum aggregate
Title of Securities to be Amount to be offering price offering Amount of
registered registered(1) per share (2) price(2) registration fee
Common stock, par value
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$.001 per share 270,000 shares $2.30 $621,000 $172.64(3)
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(1) Includes the resale of 270,000 shares of Common stock, par value $.001
per share, which are issuable upon exercise of a like number of Common stock
Purchase Options.
(2) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. The prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Dated April __, 2000
Prospectus
KIDS STUFF, INC.
270,000 Shares of Common stock
In a private transaction on January 6, 2000, we issued options to
purchase our common stock at $.54 per share to National Financial Communications
Corp., a consultant. Under this prospectus, the consultant as Selling Security
Holder is offering the resale of shares of our common stock that it may purchase
upon exercising the options. The Selling Security Holder's plan of distribution
is described under "Selling Security Holder." The expenses of this offering,
estimated at $40,000 are being paid by us.
Our common stock is quoted on the OTC Electronic Bulletin Board and
traded under the symbol "KDST."
Our principal executive offices are located at 7835 Freedom Avenue
N.W., North Canton, Ohio 44720, and our telephone number is (330) 492-8090.
See "Risk Factors" beginning on page 5 for a discussion of certain
material factors that you should consider in connection with an investment in
our common stock.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _________, 2000
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TABLE OF CONTENTS
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Where You Can Find More Information.............................................................2
Prospectus Summary..............................................................................3
Risk Factors....................................................................................4
Use of Proceeds.................................................................................7
Dividend Policy.................................................................................7
Market Information..............................................................................7
Management's Discussion and Analysis
and Results of Operations......................................................................9
Business.......................................................................................14
Management.....................................................................................23
Executive Compensation.........................................................................26
Security Ownership of Certain Beneficial
Owners an Management..........................................................................33
Certain Transactions...........................................................................34
Selling Security Holder........................................................................35
Description of Securities......................................................................37
Unregistered Shares Eligible for
Immediate and Future Sales..................................................................40
Legal Matters..................................................................................41
Experts........................................................................................41
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information
with the Securities and Exchange Commission. Our SEC filings are available to
the public over the Internet at the SEC's web site at http://www.sec.gov. You
may also read and copy any document we file at the SEC's public reference rooms
in Washington D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
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PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It
may not contain all the information that is important to you. To understand this
offering fully, you should carefully read the entire prospectus and documents
incorporated by reference.
Kids Stuff, a Delaware corporation, is a specialty direct marketer
which publishes four catalogs and maintains a web site which emphasizes
children's hardgood products from prenatal to age three. Our publications are
"Perfectly Safe," "Jeannie's Kids Club," "The Natural Baby," and "Little Feet."
Our web site is accessible at www.kidsstuff.com or on Yahoo!(R) Shopping
(http://shopping.yahoocom) a popular one-stop Internet shopping service and part
of Yahoo!(R)s branded network of global Internet properties. We also maintain a
retail store for the sale of products not sold through our catalogs and web
site. Our principal executive offices are located at 7835 Freedom Avenue N.W.,
North Canton, OH 44720; our telephone number is (330) 492-8090.
The Offering
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Common stock to be resold by
Selling Security Holder
upon exercise of Options 270,000 Shares
Common stock outstanding
before offering 3,520,856 Shares
Securities to be outstanding after the offering assuming all options to purchase
270,000 shares granted to Selling Security Holder are exercised but not
including 470,000 shares of common stock subject to outstanding stock options
held by our officers, directors and employees. :
Common Stock 3,790,856 shares
Class A Common Stock Purchase Warrants 2,400,000 warrants
Series A Non-Convertible Preferred Stock 5,000,000 shares
Series 1 Preferred Stock 460,000 shares
Series 1 Preferred Stock Purchase Warrants 920,000 warrants
Common Stock Purchase Options 470,000 options
OTC Bulletin Board Symbols:
Common stock KDST
Class A Warrants KDSTW
Series 1 Preferred Stock KDSPP
Series 1 Preferred Warrants KDSPW
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RISK FACTORS
Before you invest in our common stock, you should be aware that there
are various risks, including those described below. You should carefully
consider these risk factors together with all of the other information included
in this prospectus before you decide to purchase shares of our common stock.
We have a history of losses and limited profitability.
Except for a net income of $48,059 and $50,097 for 1999 and 1997,
respectively, we incurred net losses of $35,788, $521,640 and $536,992 for 1998,
1996 and 1995, respectively. We can not guarantee that we will have future
profitability.
We may need additional capital.
Kids Stuff expects to make significant cash outlays for the foreseeable
future to fund our growth and to meet Kids Stuff's debt obligations. If our cash
from operations is less than projected, we will require additional equity or
debt financing in amounts that could be substantial. The type, timing and terms
of financing we may select will depend upon our cash needs, the availability of
other financing sources and the prevailing conditions in the financial markets.
We cannot guarantee that we will be able to find any such sources at any given
time on favorable terms.
There are risks associated with increases in postage and paper.
Postal rates and paper costs affect the cost of our order fulfillment
and catalog and promotional mailings. We rely heavily on the rate structure of
the United States Postal Service and strive for discounts for bulk mailings.
Like others in the catalog industry, Kids Stuff passes along a significant
portion of our shipping and handling expense, but does not pass along costs of
preparing and mailing catalogs and other promotional materials. In recent years,
the Postal Service has increased its rate for both the mailing of catalogs and
packages. In January 1995 and January 1999, the Postal Service increased the
postage rate paid by Kids Stuff by approximately 14% and 3%, respectively. Since
1994, United Parcel Service has annually increased its rates. The price of paper
is dependent upon supply and demand in the marketplace. From January 1993
through December 1995, the price of paper available to us increased 95%,
resulting in increased catalog production costs and contributing to operating
losses in 1995. Any future significant increases in postal rates or paper costs
could have a material adverse effect on our business, financial condition and
results of operation.
We need to obtain new customers to maintain our growth.
We rely on catalog circulation as the principal method of acquiring new
customers for our catalogs by exchanging, renting and/or purchasing mailing
lists. Recently, we have opened a retail store to feature our children's
clothing and other merchandise which have not been sold through our catalogs and
a web site for the retail sale of our products. We are dependent upon obtaining
new customers through these sales efforts to replace customers whose children
have outgrown the
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usefulness of our products. Our business is subject to the risk that these
efforts to obtain new customers will be unsuccessful and/or cost prohibitive.
Our business is subject to possible change of state sales tax laws.
Under current law, catalog retailers are permitted to make sales in
states where they do not have a physical presence without collecting sales tax.
The United States Congress has the power to change these laws. Since 1987,
legislation has been introduced periodically in 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 our products in those states and eliminate whatever competitive
advantage we may currently enjoy with respect to in-state competitors in terms
of sales taxation, as well as increasing the administrative and overhead costs
in connection with the collection of such sales tax.
Our business is subject to regulatory risks.
Our 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 our
advertising and trade practices and the Consumer Product Safety Commission has
issued regulations governing the safety of the products which we sell in our
catalogs. We cannot guarantee that the rules and regulations of the foregoing
commissions will continue to support our operations as we presently conduct them
and plan to conduct them in the future.
Our business is subject to intense competition.
Our mail order catalog , retail clothing outlet and Internet businesses
are highly competitive. These operations compete with other mail order catalogs,
retail stores and web sites, including those operated by department stores,
specialty stores, discount stores and mass merchants. Many of our competitors
have greater financial, distribution and marketing resources than us. We cannot
guarantee that Kids Stuff will be able to compete effectively with existing and
potential competitors.
We are dependent upon our key personnel.
We are dependent on the efforts of William L. Miller, Chief Executive
Officer, Jeanne E. Miller, President, and a group of employees with technical
and business knowledge regarding catalogs and operations. If we lose the
services of one or more of these individuals, it could materially and adversely
affect our business and our future prospects. Although we maintain $1,000,000
key man life insurance on each of William L. Miller and Jeanne E. Miller, such
insurance may not be adequate to protect Kids Stuff from a loss of their
services. Our future success will also depend on our ability to attract and
retain additional management and key personnel required in connection with the
growth and development of our business. If we fail to retain or attract such key
personnel, there could be a material adverse impact on our business, financial
condition and operations.
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Our business is subject to possible conflicts of interest involving William L.
Miller as Chief Executive Officer of Kids Stuff and other related companies.
William L. Miller is Chief Executive Officer of both The Havana Group, Inc.
and Duncan Hill, Inc., a principal stockholder of both Kids Stuff and Havana.
Conflicts of interest could potentially develop as follows:
o to the extent that Mr. 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,
o involving competition for business opportunities,
o involving transactions between Kids Stuff and Mr. Miller and/or his
affiliated companies, and
o due to the relationship between Mr. Miller and Jeanne Miller as
husband and wife and as directors of Kids Stuff.
Kids Stuff has not adopted any procedure for dealing with such
conflicts of interest, except that Kids Stuff's board of directors has adopted a
policy that all new transactions between Kids Stuff and Duncan Hill, Havana or
any other affiliated company must be approved by at least a majority of our
disinterested directors.
Employment contracts of two executive officers contain potential adverse
severance compensation.
Employment contracts of William L. Miller and Jeanne E. Miller contain
severance compensation to be paid to them in all instances other than the
executive's termination for cause. The minimum amount of such severance will be
equal to the sum of the executive's salary and bonus paid in the year preceding
the year when such severance is to be paid. The maximum amount of such severance
is equal to the base severance multiplied by 2.99. The payment of any severance
compensation under any of the two employment agreements within the foreseeable
future would likely have a materially adverse impact upon Kids Stuff.
We are dependent upon our data processing and telephone system.
Our ability to effectively promote products, manage inventory,
efficiently purchase, sell and ship products, and maintain cost-effective
operations are each dependent upon the accuracy, capability and proper
utilization of our data processing and telephone systems. We will need to
enhance the capacity and capabilities of these systems from time to time to
support our anticipated growth and remain competitive. Our telemarketing,
customer service and management information systems functions are housed in a
single facility located at our headquarters. We have a disaster recovery program
through our computer and telephone systems vendors. We also create a back-up
tape for off-site storage of our customer list and computer information.
However, a significant disruption or loss affecting the telephone or computer
systems or any significant damage to our headquarters could have a material
adverse effect on our business.
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All stockholders matters are controlled by Duncan Hill.
Duncan Hill, Inc. owns over 80% of our outstanding voting capital stock. As
a result, Duncan Hill will remain in a position to effectively elect all of our
directors and control our affairs and policies.
There is a limited public market for our common stock.
Our common stock is traded in the OTC Electronic Bulletin Board under the
symbol "KDST" and there is a limited public market for our common stock. We
cannot guarantee that a liquid and established public market for our common
stock will develop. If an established market does not develop, the market price
and liquidity of our common stock may be adversely affected. Future sales of
substantial amount of our common stock, or the perception that such sales may
occur, could adversely affect the value of our common stock and could impair our
ability to raise additional capital in the future through the sale of equity
securities.
USE OF PROCEEDS
The expenses of this offering are estimated to cost $40,000. These expenses
are being paid by us. Except for the exercise price of $.54 per share that may
be received by us upon the exercise of options, we will not receive any proceeds
from the Selling Security Holder's resale of the shares of common stock issuable
upon exercise of options.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock since the
date of our inception. We intend to retain any earnings to support the growth
and development of our business and we have no present intention of paying
dividends on our common stock in the foreseeable future. On April 6, 2000, we
declared a dividend on its Series 1 Preferred Stock of $.403 per share to record
holders on the close of business on April 7, 2000 payable on April 28, 2000 in
our common stock on the basis of .2264 of a share of common stock for each share
of Series 1 Preferred Stock.
MARKET INFORMATION
In June 1997, we sold units to the public consisting of two shares of
common stock and eight Class A Warrants. Our common stock and Class A Common
Stock Purchase Warrants have been quoted since June 1997 on the OTC Electronic
Bulletin Board of the National Association of Securities Dealers, Inc. under the
symbols "KDST" and "KDSTW, respectively." Each Class A Warrant entitles the
holder to purchase one share of Common stock at an exercise price of $5.00 per
share until the close of business on June 26, 2002. As of April 17, 2000 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 $1.1875 and $.16, respectively. The
following table reflects the high and low sales prices for our Common stock and
Class A Warrants for the periods indicated as reported by the NASD.
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Common stock
High Low
---- ---
Fiscal Year Ended December 31, 1998:
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First Quarter $6.50........................... $3.63
Second Quarter 5.14.............................2.38
Third Quarter 4.50.............................2.13
Fourth Quarter 3.25..............................1.88
Fiscal Year Ended December 31, 1999:
-----------------------------------
First Quarter $4.00........................... $2.63
Second Quarter 3.50............................1.75
Third Quarter 2.25.............................1.00
Fourth Quarter 2.25...............................44
Class A Warrants
Fiscal Year Ended December 31, 1998:
-----------------------------------
First Quarter $2.25.. ........................$ .25
Second Quarter 1.75..............................50
Third Quarter .81.............................09
Fourth Quarter .75............................ .13
Fiscal Year Ended December 31, 1999:
-----------------------------------
First Quarter $ .94.. ........................$ .22
Second Quarter .75 ............................19
Third Quarter .38............................ .13
Fourth Quarter .28..............................06
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The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.
In March 1999, we completed a public offering of securities through
Fairchild Financial Group, Inc. In the offering, we sold 600,000 Units at the
public offering price of $5.50 per Unit . 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 February 29, 2000, the closing
sales prices of the Series 1 Preferred Stock and Preferred Warrants were $3.75
and $.84, respectively.
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Preferred Units
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Fiscal Year Ended December 31, 1999: HIGH LOW
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March 1999 $9.25..............................$7.00
Second Quarter 8.88............................. 7.75
Preferred Stock
Fiscal Year Ended December 31, 1999: HIGH LOW
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March 1999 $7.00..............................$6.00
Second Quarter 7.38.............................. 6.75
Third Quarter 7.13...............................4.81
Fourth Quarter 6.25...............................1.00
Preferred Warrants
Fiscal Year Ended December 31, 1999: HIGH LOW
-----------------------------------
March 1999 $1.13..............................$1.00
Second Quarter 1. 25.............................. .88
Third Quarter 1.50............................... .47
Fourth Quarter 1.44.................................06
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The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.
We had 17 and 3 record holders of its Common stock and Series 1
Preferred Stock, respectively, as of April 6, 2000 as reported by its transfer
agent (American Stock Transfer & Trust Company). The foregoing does not include
beneficial holders of our common stock which are held in "street name" (i.e.
nominee accounts such as Depository Trust Company).
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1999 versus 1998
Our total net sales for 1999 increased $2,557,087, or 18.0%, to
$16,729,951, compared with $14,172,864 for 1998. 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 1999 sales of $6,833,300 compared with $6,188,586 in 1998. The
Natural baby Catalog accounted for 25% of our overall sales increase.
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The net sales of the Perfectly Safe Catalog increased to $6,100,254 in 1999
compared with $4,932,732 in 1998. This increase is attributable to improved
catalog sales which permitted a 4.4% decrease in catalog circulation from
2,804,194 catalogs mailed in 1999 compared with 2,933,037 catalogs mailed during
1998 while increasing the sales per catalog ratio. 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
$2,833,292 in 1999 compared with $3,051,546 for 1998. Cost of sales, as a
percentage of net sales, decreased from 61.5% for 1998 to 60.1% for 1999.
Selling expenses, which consist of advertising and other marketing related
expenses of Kids Stuff expressed as a percentage of sales, increased from 28.0%
for 1998 to 29.7% for 1999. The increase was due to higher catalog cost as a
component of our advertising expense.
General and administrative expenses were $1,603,808, or 9.6% of net sales,
for 1999, and $1,486,889, or 10.5% of net sales, for 1998. The decrease in
administrative expense was attributable to decreased wages and related costs of
employment due to company cost control measures.
Effective January 1, 1998, our affiliate, The Havana Group, Inc. entered
into an agreement with us whereby we 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 had the impact
of altering our general and administrative expense structure.
Total costs charged to Havana in 1999 and 1998 amounted to $225,086 and
$293,432, respectively. At January 1, 1999, the agreement was modified and
extended on a month-to-month basis as Havana began to incur direct costs for its
administrative functions. Havana pays us an accounting, data processing, and
administrative charge of $15,000 per year plus $1.75 per order processed for
shipment for warehouse services. Havana was also obligated to pay 5% of its 1999
pretax profits to us in connection with these services, however Havana had no
pre-tax profits for 1999. This agreement is still in effect, but Havana has
started providing some of these services directly themselves.
Our net profit for the year ended December 31, 1999 was $48,059 or 0.3% of
net sales, compared to a net loss of $35,788, or 0.3% of net sales for the same
period of 1998. We attribute this change primarily to decreased general and
administrative expenses, with slightly lower than expected cost of sales.
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Liquidity and Capital Resources
In March 1999, we completed a public offering of securities through
Fairchild Financial Group, Inc. In the offering, Kids Stuff sold 460,000 Units
at the public offering price of $5.50 per Unit. Each Preferred Unit consisted of
one share of Series 1 Preferred Stock and two Series 1 Preferred Stock Purchase
Warrants. Kids Stuff realized net proceeds of approximately $1,950,000 from this
Offering.
In July 1999 Kids Stuff obtained a new credit facility from Bank One, N.A.
Bank One extended a 24 month revolving credit line in the amount of $500,000,
bearing interest at prime plus 1%. Additionally, Bank One extended a 60 month
term loan to Kids Stuff for $300,000, bearing interest at 8.78%. Kids Stuff's
previously outstanding $800,000 line of credit was retired with the proceeds of
the new borrowings. The new loans are secured by the assets of Kids Stuff, a
third mortgage on Kids Stuff's real estate, cross collateralization of life
insurance on the lives of Mr. And Mrs. Miller, and carry unconditional and
unlimited guarantees of Mr. William Miller and Mrs. Jeanne Miller.
In July 1999, Kids Stuff finalized an agreement to purchase a building
located in North Canton, Ohio, which will serve as the office and warehouse
facilities for Kids Stuff and Duncan Hill and temporary facilities for Havana.
The purchase price of the building was $2,200,000. The purchase was partially
financed through a commercial real estate loan from Bank One, N.A. in the amount
of $1,690,000. The loan has a 20 year amortization period with an expiration
date of July 7, 2009, and carries a variable interest rate based upon the 30 day
LIBOR plus 2.75%. The rate of interest at September 30, 1999 was 8.78%. The loan
is secured by a first mortgage on Kids Stuff's real estate, guaranteed by Duncan
Hill, Inc., Mr. William Miller and Mrs. Jeanne Miller, and is cross
collateralized with assignment of life insurance.
At December 31, 1999, Kids Stuff had a deficit in retained earnings of
$1,390,312, compared with a deficit of $1,438,371 at December 31, 1998. This
change resulted from the 1999 net profit of $48,059. For the year ended December
31, 1999, operating activities provided $10,346 in cash. Funds were provided by
a decrease in other assets of $74,351 and non-cash expenses of depreciation and
amortization of $337,180. Funds were consumed by inventory increases of
$119,090, increases in deferred advertising of $325,398, decreases in accounts
payable, customer advances and accrued expenses of $245 and increases in
accounts receivable of $6,030. For the year ended December 31, 1999, Kids
Stuff's investing activities used $2,823,856 in cash. Property and equipment
additions used $2,570,643 for increases in equipment, website development, and
the purchase of corporate office warehouse complex. Additionally, Kids Stuff
invested $253,213 in catalog development and redesign to alter the format,
appearance, design, and presentation of its products.
For the year ended December 31, 1999, Kids Stuff's financing activities
provided $3,647,515 in cash. This consisted of borrowings on long-term debt of
$2,740,000 and the sale of Preferred Stock of $1,950,915, partially offset by
repayments on its line-of-credit in the amount of $262,000, amounts paid for
deferred financing fees of $102,624, and increases in amounts due from
affiliates of $93,898.
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For the year ended December 31, 1999, the combined effect of net cash
provided by operating activities of $10,346, net cash used by investing
activities of $2,823,856, and net cash provided by financing activities of
$3,647,515 increased cash from $25,426 at December 31, 1998 to $859,431 at
December 31, 1999.
At December 31, 1998, Kids Stuff 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, customer advances and accrued expenses 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, Kids Stuff'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,
Kids Stuff 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, Kids Stuff'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.
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 effect of adopting SOP98-1
was not 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. Kids Stuff 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 was not material.
Kids Stuff intends to meet its cash requirements over the next 12-15
months from cash generated from operations and proceeds of its March 1999
completed offering.
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Year 2000 Issues
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 recent upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. We corrected our computers and the expenditures did not
materially adversely impact us.
Forward Looking Statements and Associated Risks
This prospectus contains forward looking statements which reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and the financial results. These
forward-looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, many of which are beyond our 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.
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BUSINESS
HISTORY OF DUNCAN HILL
Perfectly Safe, Inc. was formed by Duncan Hill, Inc., a principal
stockholder of Kids Stuff in 1990 under Ohio law for the purpose of publishing
The Perfectly Safe Catalog, which was acquired from Jeanne Miller, an executive
officer and director of Kids Stuff, 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.
Effective June 30, 1996, Kids Stuff succeeded to the catalog business
of Jeannie's Kids Club and Perfectly Safe, Inc. as a result of a reorganization
in which Kids Stuff acquired from Duncan Hill, Inc. the assets and liabilities
of Perfectly Safe, which was dissolved. Kids Stuff, which was incorporated by
Duncan Hill in July 1996, had no operations prior to the reorganization.
Effective June 30, 1996, Kids Stuff also acquired from Duncan Hill,
Inc. the assets used by Duncan Hill to perform the telemarketing, order
fulfillment, data processing and administrative functions, so that Kids Stuff
could perform those functions itself. Kids Stuff 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 Kids Stuff 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 Kids Stuff, and in return,
certain costs were allocated by Kids Stuff 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, Inc. and the aforementioned Duncan Hill assets acquired by
Kids Stuff was $2,613,404.
In July 1997, Kids Stuff acquired the net assets and operations of The
Natural Baby Catalog from The Natural Baby Company, Inc., a mail order retailer
of children's clothing and toys at a total purchase price of $2,066,829. This
acquisition was funded with the net proceeds of Kids Stuff's initial public
offering and was accounted for as a purchase.
Kids Stuff's Operations
Kids Stuff 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," Kids
Stuff 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, Kids Stuff has
published over 20 million Perfectly Safe catalogs and helped childproof over
350,000 homes.
During July, 1995 Kids Stuff 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.
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In July 1997, Kids Stuff acquired The Natural Baby Catalog, 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).
In September 1999, Kids Stuff introduced a new catalog called "Healthy
Feet" offering over 1,200 selections and sizes of shoes, with an emphasis on
ages birth to age six. To support this new venture, Kids Stuff, Inc. mailed
402,000 catalogs to its target audiences. Healthy Feet, a "kids shoe catalog"
features quality shoes from brands such as Sketchers, Converse, Keds and Bear
Feet.
KIDS CATALOG OUTLET
Kids Stuff has recently leased a retail store in Canton, Ohio
consisting of approximately 3,300 square feet of space. In November 1998, Kids
Stuff completed the installation of leasehold improvements and opened the retail
store. The retail store, which is named "Kids Catalog Outlet," features Kids
Stuff's children's clothing and other merchandise which have not been sold
through Kids Stuff's catalogs.
MARKET
Kids Stuff's market for children's goods is affected by the number of
births as well as women in the work force. Kids Stuff 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 Kids Stuff is correct in such belief.
STRATEGIES
Kids Stuff 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, Kids Stuff 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 there are costs associated with acquiring
the initial $18 membership fee, the $18 annual renewal of such membership is
approximately 90% profit to Kids Stuff. 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. Kids Stuff intends to continue its
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 $6,833,299 in
1999. Kids Stuff will endeavor to maintain continuity in the merchandising and
marketing of this catalog.
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CUSTOMER ACQUISITION PROGRAMS. In the past, Kids Stuff has relied upon
catalog circulation as the sole method to acquire new customers. Recently, Kids
Stuff has established a web site as described herein to attract new customers
and increase sales.
CATALOG ACQUISITIONS. Kids Stuff believes that, because of the cost
driven pressures to consolidate, there may be opportunities to acquire other
children's niche catalogs. Kids Stuff, 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 Kids Stuff to access certain
profitable mailing lists following Kids Stuff's introduction of Jeannie's Kids
Club, and the decision of Kids Stuff 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
Kids Stuff's ability to more efficiently obtain new customers through
substantially reduced catalog mailings.
MERCHANDISING
Through its Perfectly Safe Catalog, Kids Stuff emphasizes quality and
safety and provides full price merchandise tested by Kids Stuff and backed by a
full satisfaction warranty. The Perfectly Safe Catalog currently consists of 40
pages containing approximately 250 products, principally hardgoods,
approximately 55% 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 Kids Stuff's
founders, Jeanne Miller, the author of "The Perfectly Safe Home."
During 1995, Kids Stuff used its merchandise expertise in children's
products to launch its Jeannie's Kids Club Catalog. The target market selected
by Kids Stuff 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 40
pages containing approximately 250 products.
The Natural Baby Catalog emphasizes alternative hard and softgood
products for babies and their parents. The catalog is 48 pages and contains
approximately 350 products, all of which are natural fiber, non-toxic and
environmentally safe. Approximately 30% of The Natural Baby Catalog product line
is exclusive or private label products.
The ratio between hardgoods to softgoods contained in Kids Stuff'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. Kids Stuff
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
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<PAGE>
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 Kids Stuff's merchandising team feels will appeal to the
demographics of the intended catalog customer.
In September 1999, Kids Stuff introduced a new catalog called "Healthy
Feet" offering over 1,200 selections and sizes of shoes, with an emphasis on
ages birth to age six. To support this new venture, Kids Stuff, Inc. mailed
approximately 402,000 catalogs to its target audiences. Healthy Feet, a "kids
shoe catalog" features quality shoes from brands such as Sketchers, Converse,
Keds and Bear Feet.
MARKETING
Kids Stuff 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. Kids Stuff's market for its catalog is primarily
from prenatal to age three. Kids Stuff 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. (Non-member buyers
are not entitled to purchase Jeannie's Kids Club merchandise at a discount.)
Kids Stuff also rents mailing lists which meet Kids Stuff's criteria from
outside sources, which consist of independent list compilers, as well as
directly from other children's catalogs. Kids Stuff's present cost of renting
mailing lists is $.10 per household per use. Kids Stuff believes that The
Natural Baby Catalog's mailing list rentals are primarily from certain other
children's catalogs based upon a proven history of recent mail order purchases.
In order to select those households most likely to purchase, Kids Stuff
uses a statistical modeling system. Kids Stuff 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 Kids Stuff is correct in such belief.
Kids Stuff 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 1999, the catalog mailings for
Perfectly Safe and Jeannie's Kids Club were 2.8 million and 1.5 million,
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 4.2 million catalogs during 1999.
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In September 1999, Kids Stuff introduced a new catalog called "Healthy
Feet" offering over 1,200 selections and sizes of shoes, with an emphasis on
ages birth to age six. To support this new venture, Kids Stuff mailed 402,000
catalogs to its target audiences. Healthy Feet, a "kids shoe catalog" features
quality shoes from brands such as Sketchers, Converse, Keds and Bear Feet.
Due to a continuing increase in catalog advertising costs and the
relatively short customer life, Kids Stuff believes that it can no longer afford
to use catalog mailings as the sole method of customer name acquisition. Kids
Stuff has established a website to advertise and sell its products.
CUSTOMER SERVICE AND TELEMARKETING
Kids Stuff derives the vast majority of its revenue through orders
placed over the telephone and emphasizes superior customer service and
friendliness in its sales representatives. Kids Stuff's method of receipt of
payment includes major credit cards and checks. Kids Stuff'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 Kids Stuff will issue call tags to
pick up merchandise shipped in error and will send a corrected shipment.
Kids Stuff employs 45 full-time and 5 part-time warehouse customer
service and telemarketing employees at March 1, 2000. During 1999, Kids Stuff
processed over 444,000 telephone orders, catalog requests and service
requirements. Kids Stuff also processes orders, catalog requests and service
requests for Havana Group, Inc., an affiliate of Kids Stuff. In January 1998,
Kids Stuff contracted with Havana to provide Havana with administrative,
executive, and accounting services at an annual cost of approximately $206,100
as outlined below and $2.40 per order processed. Havana was 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 1999 and 1998 amounted to $225,086
and $293,432, respectively. At January 1, 1999, the agreement was modified and
extended on a month-to-month basis as Havana began to incur direct costs for its
administrative functions. Havana's pay to Kids Stuff an accounting, data
processing, and administrative charge of $15,000 per year plus $1.75 per order
processed for shipment for warehouse services. Havana is also obligated to pay
5% of its 1999 pretax profits to Kids Stuff in connection with these services,
however Havana had no pre-tax profits for 1999. This agreement is still in
effect, but Havana has started providing some of these services directly
themselves.
FULFILLMENT AND DELIVERY
Kids Stuff's fulfillment and delivery objective is to provide excellent
customer service within a low cost structure. Its fulfillment operations consist
of 30,000 square feet of owned 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 are electronically posted. Kids
Stuff's fulfillment center processed approximately 357,000 shipments and 325,000
shipments in 1999 and 1998, respectively.
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INVENTORY/PURCHASING
Kids Stuff conducts its purchasing operations at its general offices in
North Canton, Ohio. Each catalog contains several hundred 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 Kids
Stuff's inventory.
PRODUCT SOURCING
Kids Stuff acquires products for resale in its catalogs from numerous
domestic vendors. No single source supplied more than 10% of Kids Stuff's
products in 1999.
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. Kids Stuff'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 Kids Stuff, has a seasonal increase in the fourth quarter. During 1999, 1998
and 1997, The Natural Baby Catalog sales in the fourth quarter were
approximately 46%, 28% and 34% of The Natural Baby Catalog total respective
1999, 1998 and 1997 sales.
COMPETITION
The mail order catalog and retail clothing outlet industries are highly
competitive. Kids Stuff's business competes with other mail order catalogs and
retail stores, including department stores, specialty stores, discount stores,
mass merchants and website stores. Many general and specialty catalog
competitors, as well as retail and website stores, have substantially greater
financial, distribution and marketing resources than Kids Stuff. There are
numerous website stores, general and specialty catalogs selling infants' and
children's items. However, based upon type of goods offered, Kids Stuff
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 Kids Stuff, even as adjusted to reflect consolidation of the revenues of
The Natural Baby Catalog.
Other mail order catalogs for children's hardgood products which Kids
Stuff 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 Kids Stuff.
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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 Kids Stuff believes are competitors of The Natural Baby
Catalog to a lesser extent are "Playclothes," "After the Stork," "Talbot's
Kids," "Spiegel Children's Clothing," "Brights Creek," "Gymboree," "Eddie Bauer
Children's Fashions," and "Spiegel Kids." Kids Stuff 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, Kids Stuff 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,
Kids Stuff, 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, Kids Stuff identified
other mailing lists which have helped to increase the circulation and revenues
of the Perfectly Safe Catalog. Kids Stuff has not experienced 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
Kids Stuff owns federally registered trademarks: "Perfectly Safe";
"Perfectly Safe, The Catalog For Parents Who Care" with logo; "Perfectly Safe
Guarantee" with logo; and, logo. Kids Stuff 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, Kids Stuff
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 Kids Stuff as a result of
having such trademarks and trade names or that Kids Stuff will be able to afford
the expenses of any complex litigation which may be necessary to enforce the
proprietary rights.
REGULATORY MATTERS
Kids Stuff'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 Kids
Stuff's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which
Kids Stuff sells in its catalogs. No assurances can be given that Kids Stuff
will comply with all state and federal laws affecting its business in the
future.
Due to increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services. The
growth and development of the electronic commerce market may call for
initiatives for more stringent
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consumer protection laws that may impose additional burdens on companies
conducting on-line business. Additionally, taxation of Internet use or
electronic commerce transactions may be imposed. Any regulation imposing fees
for Internet use or electronic commerce transactions could result in a decline
in the use of the Internet and the viability of Internet commerce, which could
have a material adverse effect on Kids Stuff's business.
Under current law, catalog retailers are permitted to make sales in
states where they do not have a physical presence without collecting sales tax.
Kids Stuff 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 Kids Stuff's products in
those states and eliminate whatever competitive advantage that Kids Stuff may
currently enjoy with respect to in-state competitors in terms of sales taxation,
as well as increasing the administrative and overhead costs to Kids Stuff 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 Kids Stuff. Kids Stuff has no claims or regulatory matters in
process or pending as of April 1, 2000.
PRODUCT LIABILITY INSURANCE
Since 1990, Kids Stuff's parent, Duncan Hill, has carried product
liability insurance for Kids Stuff and Havana. The current coverage is $1
million per occurrence with an aggregate limit of $2 million. The policy is
supplemented by an umbrella liability policy providing coverage of an additional
$1 million per occurrence, $2 million aggregate. The policies are carried by
Duncan Hill, with Kids Stuff and Havana as named insureds. The policies are
issued for a period of one year and are currently in effect through September
17, 2000. Kids Stuff may, in the future, procure the same coverage in its name,
alone. Although Kids Stuff 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 Kids Stuff in the
future. An uninsured successful claim against Kids Stuff 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 Kids Stuff.
EMPLOYEES
As of January 1, 2000, Kids Stuff had 77 full time employees and 10
part time employees. Of this total, 13 employees or 15% of total full-time
employees, hold positions of managers; 56 employees or 64% of the total, hold
hourly paid positions. The largest single segment of Kids Stuff's employment is
in direct labor involving order entry, customer service, and distribution, where
47 employees or 54% of total Company employment is involved. The work force is
non-union, and Kids Stuff does not anticipate a union presence in the
foreseeable future.
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DESCRIPTION OF PROPERTY.
Kids Stuff's principal offices, telemarketing center and warehouse are
located in North Canton, Ohio. Kids Stuff purchased this facility in July 1999
at a purchase price of $2,200,000. The facility consists of approximately 39,000
square feet of space.
In August 1998, Kids Stuff 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. Kids Stuff will pay a monthly rent of approximately $2,250
commencing 30 days after Kids Stuff takes possession of the premises and the
landlord notifies Kids Stuff that the space is ready for occupancy.
LEGAL PROCEEDINGS
In the normal course of business, Kids Stuff may be involved in various
legal proceedings from time to time. Presently, however, Kids Stuff is not a
party to any litigation, whether routine or incidental to its business, or
otherwise.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information both included and incorporated by reference in this
prospectus may contain forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. This information
may involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially different
from future results, performance or achievements expressed or implied by any
forward- looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend," or "project" or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that these projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors, including the risk factors described above and elsewhere in
this prospectus. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
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MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of Kids
Stuff are set forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
William L. Miller (1) 63 Chairman of the Board of Directors,
Chief Executive Officer, Principal
Financial and Accounting Officer,
Secretary
Jeanne E. Miller (1) 52 President, Director
Clark D. Swisher 47 Director
Alfred M. Schmidt 66 Director
Debra P. Gibbs 46 Director
- ------------------
</TABLE>
(1) W. Miller and J. Miller are husband and wife.
The term of office for each of Kids Stuff's directors is one year until
their respective successors are elected and shall qualify. Executive officers
serve at the pleasure of the Board of Directors.
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.
(c) Business Experience
WILLIAM L. MILLER, Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting Officer, Treasurer and Secretary of Kids
Stuff since its formation in July 1996. Mr. Miller serves as Chairman of the
Board, President and Chief Executive Officer of The Havana Group, Inc., a
company that sells tobacco and accessory products 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,
Inc. 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
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JEANNE E. MILLER has been a director of Kids Stuff since July 1996, and its
President since January 1998. Previously, she served as Executive Vice President
of Kids Stuff 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, Inc. 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 Kids Stuff since July 1996 and a director
of The Havana Group, Inc. since March 2000. 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, Inc. since 1995.
ALFRED M. SCHMIDT, JR., a director of Kids Stuff 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 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.
DEBRA P. GIBBS, a director of Kids Stuff since September 1999, received her
Masters of Law and Taxation in May 1980 from the University of Miami School of
Law and her J.D. Degree in February 1979 from the Ohio Northern University, Ada,
Oho. From 1980 to 1983, she was employed as an attorney by Aluminum Company of
America in their corporate tax/legal department. From 1983 to 1985, she was
employed as an attorney by Firestone Tire & Rubber Company, Akron, Ohio in their
tax department. From 1986-1999, she has performed various volunteer work and
raised her children. During the past five years, she has not been associated
with any firms outside of her volunteer work.
The Board of Directors has recently established a Compensation Committee
and an Audit Committee consisting of Alfred M. Schmidt, Jr. and Debra P. Gibbs.
The Audit Committee will,
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<PAGE>
among other things, make recommendations to the Board of Directors regarding the
independent auditors for Kids Stuff 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
consists of Alfred M. Schmidt, Jr. and Debra P. Gibbs. The Compensation
Committee reviews and recommends to the Board of Directors the compensation
structure for Kids Stuff'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
also administers Kids Stuff's 1997 Long-Term Stock Incentive Plan.
Kids Stuff's Certificate of Incorporation contains a provision
eliminating the personal monetary liability of directors to the extent allowed
under the General Corporation Law of the State of Delaware. Under the provision,
a stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as a director or not, if he is also an officer, his role
as an officer or in any other capacity or to his responsibilities under any
other law, such as the federal securities laws. The provision, however, does not
affect the availability of seeking equitable relief against a director of Kids
Stuff. In addition, Kids Stuff's Bylaws provide that Kids Stuff 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 may be permitted to directors,
officers and controlling persons of Kids Stuff pursuant to the foregoing
provisions, or otherwise, Kids Stuff 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 of 1933 and is, therefore,
unenforceable.
Compensation of Directors
Kids Stuff pays its directors who are not also employees of Kids Stuff
$500 for each meeting attended and reimburses such directors for travel and
other expenses incurred by them in connection with attending Board of Directors
meetings. Directors are eligible to participate in 1997 Stock Incentive Plan.
26
<PAGE>
EXECUTIVE COMPENSATION
The following table provides a summary compensation table with respect
to the compensation of William Miller, Kids Stuff's Chief Executive Officer
(CEO), and Jeanne Miller, Kids Stuff's President for the past three years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Number of Payouts sation
Position Year Salary ($) Bonus ($) ($) (1) ($) (2) Options (3) ($) ($)
William Miller,
Chief Executive
Officer
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 125,000 -0- 44,000 -0- 100,000 -0- -0-
1998 125,000 -0- 4,000 -0- -0- -0- -0-
1997 125,000 -0- 4,000 -0- 100,000 -0- -0-
Jeanne Miller,
President 1999 105,000 -0- 4,000 -0- 200,000 -0- -0-
1998 94,000 -0- 4,000 -0- 100,000 -0- -0-
1997 90,000 -0- 4,000 -0- -0- -0- -0-
</TABLE>
(1) A total of $40,000 was paid to Miller in 1999 as compensation for his
loan guarantees. Does not include the value of leased automobiles used
almost exclusively for Kids Stuff's business or key man life insurance
on the lives of each of William Miller and Jeanne Miller in the amount
of $1,000,000, payable to Kids Stuff in the event of death. William
Miller is provided with a leased automobile by The Havana Group, Inc.
with a monthly cost of approximately $1,100 and Jeanne Miller is
provided with a leased automobile by Kids Stuff 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 Kids Stuff's Common stock and
5,000,000 shares of Kids Stuff's Series A Preferred Stock issued to
Duncan Hill, Inc. in connection with a reorganization.
(3) See "Employment Contracts" for a description of these options. Options
granted in 1999 include the cancellation of all options granted in past
three years and regrant of an equal number, thereby lowering the
exercise price to $1.33 per share.
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<PAGE>
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
The information provided in the table below provides information with
respect to individual grants of Kids Stuff's stock options during fiscal 1999 of
each of the executive officers named in the summary compensation table above.
Kids Stuff did not grant any stock appreciation rights during 1999.
Option Grants in Last Fiscal Year
Potential
Realizable Value at
Assumed Annual
Individual Grants Rates of Stock Price
Appreciation
for Option Term (2)
(a) (b) (c) (d) (e) (f) (g) (h)
--- --- --- --- --- --- ---
% of
Total
Options/
Granted to
Options Employees Exercise Expira-
Granted in Fiscal Price tion
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C> <C>
William Miller 100,000 22 1.33 10/16/08 79,000 152,000
Jeanne Miller 200,000 44 1.33 01/01/07 90,000 206,000
</TABLE>
(1) The percentage of total options granted to Kids Stuff's employees in
fiscal year is based upon options granted to officers, directors and
employees.
(2) The potential realizable value of each grant of Kids Stuff'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.
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<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 Kids Stuff's stock option during fiscal 1999 by each
of the executive officers named in the summary compensation table and the fiscal
year end value of Kids Stuff's unexercised options.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
--- --- --- --- ---
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options at FY- Options
on Value End (#) at Fy-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C> <C>
William L.. Miller -0- -0- 75,000/25,000 -0-
Jeanne E. Miller -0- -0- 275,000- /25,000 -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 Kids Stuff's
options at exercise or fiscal year end (i.e. $46 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. Kids Stuff's Incentive Compensation Plan
(the "Plan") is designed to motivate employee participants to achieve Kids
Stuff's annual strategic goals. Eligibility for participation in the Plan is
limited to the executive officers of Kids Stuff, and such other employees of
Kids Stuff as may be designated by the Board of Directors from time to time. The
amount of such plan with respect to any year shall be determined subsequent to
the end of that year upon the determination of Kids Stuff's operating income for
that year. Each participant in the Plan is eligible to receive from the bonus
plan an annual award of up to 50% of the participant's base salary. The
Compensation Committee is responsible for recommending to the Board of Directors
performance objectives and awards for participants. William Miller and Jeanne
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 Kids Stuff's fiscal year-end results. The Plan is
subject to amendment of termination at any time, but no such action may
adversely affect any rights or obligations with respect to any awards
theretofore made under the Plan. As of the date of this prospectus, compensation
has been paid under the Plan.
1997 STOCK INCENTIVE PLAN. Under the plan which was adopted in 1997 and
amended on September 21, 1999, the compensation committee of the Board of
Directors, may grant stock incentives to key employees and the directors of Kids
Stuff pursuant to which a total of 400,000 shares of Common stock may be issued;
provided, however, that the maximum amount of Common
29
<PAGE>
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 Kids Stuff, 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. The plan is not subject to any of the provisions of the Employee
Retirement Income Security Act of 1974.
Options granted under the plan may be either incentive stock options,
which qualify for special tax treatment under Section 422 of the Internal
Revenue Code, or nonstatutory stock options, which do not qualify. Incentive
stock options may only be granted to persons who are employees of Kids Stuff.
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 Kids Stuff's capital stock 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 Kids Stuff 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 the date determined
by the compensation committee. Each option shall be exercised in full or in
part. Options are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the life of the employee or director
only by him or her. No options may be granted under the plan after March 27,
2007. However, any options outstanding on March 27, 2007 will remain in effect
in accordance with their terms.
The plan also provides for the granting of stock appreciation rights
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 stock appreciation right 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. Stock appreciate rights 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 stock
appreciation rights 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 stock awards through
issuances of shares of common stock in payment of certain incentive
compensation, subject to such conditions and
30
<PAGE>
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 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 plan will remain in effect until such time as it is terminated by
the Board of Directors. The 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.
The compensation committee consists of Debra P. Gibbs and Alfred M.
Schmidt, Jr. The committee has granted options to purchase 80,000 shares of Kids
Stuff's Common stock as of April 1, 2000.
EMPLOYMENT AGREEMENTS
Kids Stuff has entered into separate five-year employment agreements
with William Miller and Jeanne Miller, effective January 1, 1997, pursuant to
which William Miller is serving as Chief Executive Officer of Kids Stuff and
Jeanne Miller served as its Executive Vice President. In January 1998, Kids
Stuff elected Jeanne Miller President of Kids Stuff. In October 1998, Kids Stuff
and Jeanne Miller entered into an amended agreement. The employment agreements.
as amended, provide for an annual base salary of $125,000 for William Miller and
$105,000 for Jeanne Miller, subject to annual review for increase by Kids Stuff.
The employment agreements also provide for the eligibility of these executives
to receive annual cash bonuses under Kids Stuff's Incentive Compensation Plan
discussed above. Each of these executives is provided with automobiles, at Kids
Stuff's expense, for their exclusive use, the make and model of which is to be
mutually agreed upon by the executive and Kids Stuff, 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. Each of
these executives is also entitled to participate in any employee benefit plan
which Kids Stuff may create in the future. Kids Stuff 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 William Miller and five times the base salary of Jeanne
Miller. (As of December 31, 1999, Kids Stuff has not issued such insurance for
William Miller and/or Jeanne Miller, but intends to do so). Pursuant to the
employment agreements, each of these executives has agreed not to compete with
Kids Stuff during employment and for a period of one year following termination
of employment and has further agreed to maintain as confidential, Kids Stuff's
proprietary information.
31
<PAGE>
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, Kids Stuff, in the case
of William 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 Jeanne 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 Kids
Stuff's material breach of the employment agreement or upon Kids Stuff's
reduction of the executive's responsibilities, duties, functions or dignity of
position resulting from a change of control, or otherwise. Assuming that
severance payments were due to each of the executive officers as of the date of
the Prospectus under the immediately preceding sentence, the amount of the
severance payment to each of William Miller and Jeanne 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 William Miller, a successor chief executive officer is hired with
William Miller's consent to replace William Miller prior to the expiration of
the term of his employment agreement. Additionally, any executive entitled to
severance compensation, above, will also be entitled to participate in any
Company-sponsored employee health benefit plan at Kids Stuff's expense, for a
maximum of eighteen months from the date of termination.
Each of William Miller and Jeanne Miller was granted under their
respective employment agreements an option to purchase 100,000 shares of Kids
Stuff'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 Kids Stuff. The vested options will be
immediately exercisable and will expire on January 1, 2007. Miller also received
immediately vested and exercisable options to purchase an additional 100,000
shares in October 1998. All of the options granted to Mr. and Mrs. Miller were
canceled in September 1999 and were regranted at an exercise price of $1.33 per
share on almost identical terms as the original options.
William Miller is permitted under his agreement to devote such time to
managing the affairs of the various other Duncan Hill, Inc. entities as he deems
appropriate, and to retain any compensation that he receives from those entities
for providing those services.
Kids Stuff also provides William Miller and Jeanne Miller and all other
employees with health insurance on a non-discriminatory basis. Kids Stuff
provides 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 Kids Stuff's
Board of Directors may, in its sole discretion, determine.
32
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
William Miller is a co-founder, Chairman of the Board of Directors and
Chief Executive Officer of The Havana Group, Inc., Duncan Hill, Inc. and Kids
Stuff. William Miller's employment agreement with Kids Stuff provides that he
shall be permitted to devote such time to managing Duncan Hill and Havana as he
deems appropriate. Accordingly, William Miller will not be devoting his
full-time attention to managing the operations of Kids Stuff. Thus, conflicts of
interest could potentially develop (i) to the extent that William 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 Kids Stuff and its affiliated companies; and (iv) due to the
relationship between William Miller and Jeanne Miller as husband and wife and as
directors and officers of Kids Stuff. Kids Stuff has not adopted any procedure
for dealing with such conflicts of interest, except that Kids Stuff's Board of
Directors has adopted a policy that all new transactions between Kids Stuff and
Duncan Hill, Inc., Havana or any other affiliated company must be approved by at
least a majority of Kids Stuff's disinterested directors.
33
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 31, 2000, certain
information with respect to the beneficial ownership of Common stock and Series
A Preferred Stock by each person or entity known by Kids Stuff to be the
beneficial owner of 5% or more of such shares, each officer and director of Kids
Stuff, and all officers and directors of Kids Stuff as a group.
<TABLE>
<CAPTION>
Shares of Shares of Series A
Common stock Preferred Stock
Beneficially Owned Beneficially Owned
NAME AND ADDRESS OF
BENEFICIAL OWNER(1) NUMBER PERCENT(2) NUMBER PERCENT(3)
<S> <C> <C> <C> <C> <C>
Duncan Hill, Inc. (4) 2,188,075 62.2% 5,000,000 100%
William L. Miller and Jeanne E. Miller (4)(5) 2,438,075 64.7 5,000,000(6) 100
Clark D. Swisher (7) 15,000 * -0- -0-
Alfred M. Schmidt (7) 15,000 * -0- -0-
Debra P. Gibbs (8) 15,000 * -0- -0-
All Officers and Directors
as a Group (5 Persons) 2,483,075 65.1% 5,000,000(6) 100%
</TABLE>
* Represents less than one percent of the outstanding shares.
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934. Accordingly,
except as noted, all of Kids Stuff'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 beneficiall owned. All
addresses are c/o Kids Stuff, Inc.,7835 Freedom Avenue N.W., North Canton, OH
44720.
(2) Calculated based upon 3,520,856 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, Inc.'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 Millers' deemed beneficial ownership of 2,188,075 shares of
Common stock and options to purchase 250,000 shares.
(6) Represents the Millers' deemed beneficial ownership of 5,000,000 shares
of Series A Preferred Stock, the record holder of which is Duncan Hill, Inc.
34
<PAGE>
(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 April 20, 2000.
(8) Debra P. Gibbs has options to purchase 30,000 shares, which options
will vest in four equal installments on September 21, 1999, January 1, 2000,
January 1, 2001 and January 1, 2002. The table includes only options vesting
through April 20, 2000.
CERTAIN TRANSACTIONS
Since 1997, Kids Stuff has provided administrative and fulfillment
services to Havana. During 1997, all fulfillment services were contracted and
paid by Kids Stuff and charged to Havana based on the actual cost. All
administrative costs were allocated between Kids Stuff 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 Kids Stuff and Havana based on the same method and percentages as
described above.
Effective January 1, 1998, Havana entered into an agreement with Kids
Stuff whereby Kids Stuff 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. Kids
Stuff will also provide fulfillment services to Havana at a cost of $2.40 per
order processed. Kids Stuff calculated these fees based on actual 1997 costs.
Management believes these fees would represent actual costs should Havana
undertake to provide these services itself. Havana is also obligated to pay Kids
Stuff an amount equal to 5% of Havana's 1998 pre-tax profits as additional
consideration for Kids Stuff providing administrative and fulfillment services
to Havana. Total costs charged to Havana in 1998 amounted to $293,432. At
January 1, 1999, the agreement was modified and extended on a month- to-month
basis as Havana began to incur direct costs for its administrative functions.
Havana pay to Kids Stuff an accounting, data processing, and administrative
charge of $15,000 per year plus $1.75 per shipment for warehouse services.
Havana is also obligated to pay 5% of its 1999 pretax profits to Kids Stuff in
connection with these services; however, Havana did not have any pre-tax profits
in 1999. In March 2000, Havana opened a new facility in North Canton, Ohio and
began to directly perform certain of the above functions.
Reference is made to "Business" for a description of various related
party transactions involving Kids Stuff, The Havana Group, Inc. and Duncan Hill,
Inc. It is the policy of Kids Stuff that future transactions with affiliates
will be on terms no less favorable than could be obtained from unaffiliated
parties.
In July 1999 Kids Stuff obtained a new credit facility from Bank One,
N.A. Bank One extended a 24 month revolving credit line in the amount of
$500,000, bearing interest at prime plus
35
<PAGE>
1%. Additionally, Bank One extended a 60 month term loan to Kids Stuff for
$300,000, bearing interest at 8.78%. Kids Stuff's previously outstanding
$800,000 line of credit was retired with the proceeds of the new borrowings. The
new loans are secured by the assets of Kids Stuff, a third mortgage on Kids
Stuff's real estate, cross collateralization of life insurance on the lives of
Mr. And Mrs. Miller, and carry unconditional and unlimited guarantees of Mr.
William Miller and Mrs. Jeanne Miller.
In July 1999, Kids Stuff finalized an agreement to purchase a building
located in North Canton, Ohio, which will serve as the office and warehouse
facilities for Kids Stuff and Duncan Hill and temporary facilities for Havana.
The purchase price of the building was $2,200,000. The purchase was partially
financed through a commercial real estate loan from Bank One, N.A. in the amount
of $1,690,000. The loan has a 20 year amortization period with an expiration
date of July 7, 2009, and carries a variable interest rate based upon the 30 day
LIBOR plus 2.75%. The rate of interest at September 30, 1999 was 8.78%. The loan
is secured by a first mortgage on Kids Stuff's real estate, guaranteed by Duncan
Hill, Inc., Mr. William Miller and Mrs. Jeanne Miller, and is cross
collateralized with assignment of life insurance.
On September 21, 1999, we canceled 360,000 options previously granted
to executive officers and directors and issued an equal number of replacement
options for the purpose of lowering the exercise price of all options to the
then fair market value of $1.33 per share.
On January 6, 2000, Kids Stuff agreed to issue 4,000 shares to each of
Lester Morse and Steven Morse for legal services rendered. On the same date, we
engaged National Financial Communications Corp. as a consultant to develop,
implement and maintain an ongoing program to increase the investment community's
awareness of our activities and to stimulate the investment community's interest
in us. For their services, we agreed pursuant to a consultant agreement, to pay
National $7,000 per month and grant options to purchase 270,000 shares at an
exercise price of $.54 per share. The options shall expire three years
subsequent to the termination of service of the consulting agreement. We had the
right to terminate the agreement on or before April 6, 2000 and to cancel
one-half of the options granted to National. This right was not exercised by
Kids Stuff. The registration statement of which this prospectus is a part, was
filed pursuant to certain registration rights granted under the agreement. The
exercise price of the options was determined by negotiations between Kids Stuff
and National Financial Communications Corp. Among the factors considered in
determining the price were our financial condition and prospects, the industry
in which we are engaged, certain financial and operating information of
companies engaged in activities similar to those of Kids Stuff and the general
market condition of the securities markets. Such price does not necessarily bear
any relationship to any established standard or criteria of value based upon
assets, earnings, book value or other objective measures.
SELLING SECURITY HOLDER
The Registration Statement of which this Prospectus forms a part
includes the resale of 270,000 shares issuable upon exercise of options by
National Financial Communications Corp. as the Selling Security Holder. Sales of
such securities or even the potential of such sales at any time may have an
adverse effect on the market prices of the securities offered hereby.
36
<PAGE>
The following table sets forth the beneficial ownership of the Common
Stock issuable upon exercise of the options of Kids Stuff held by the Selling
Security Holder prior to the Offering and after the offering, assuming all of
the common stock issuable upon exercise of the options are sold.
<TABLE>
<CAPTION>
Percent of Common Stock
Name of Beneficial Owner Common Stock Owned Owned %
Prior to After Prior to After
Offering(1) Offering Offering Offering
National Financial
<S> <C> <C> <C> <C>
Communications Corp. 270,000 -0- 7.1 0
</TABLE>
National Financial Communications Corp. is not affiliated with Kids
Stuff in any capacity, has had no business relationship with Kids Stuff at any
time and has not owned any of Kids Stuff's securities beneficially or of record
prior to the offering other than the options to purchase 270,000 shares of
Common Stock.
The securities offered hereby may be sold from time to time directly by
the Selling Security Holder. Alternatively, the Selling Security Holder may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Security Holder may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Security Holder in connection with such sales of securities. The Selling
Security Holder and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act of 1933 with
respect to the shares offered, and any profits realized or commissions received
may be deemed underwriting compensation. As of the date of this Prospectus, the
Selling Security Holder has advised Kids Stuff that it does not have any current
or future plans, proposals, agreements, arrangements or understandings with
respect to engaging in transactions with respect to the shares.
At the time a particular offer of the shares of Common Stock issuable
upon exercise of options is made by or on behalf of the Selling Security Holder,
to the extent required, a supplemented or amended prospectus will be distributed
which will set forth the number of the shares of Common Stock being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid (or the method in which the
purchase price will be determined) by any underwriter for the shares of Common
Stock purchased from the Selling Security Holder and any discounts, commissions
or concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public, if applicable.
37
<PAGE>
Under the Securities Exchange Act of 1934, as amended, and the
regulations thereto, any person engaged in a distribution of the shares of
Common Stock offered by the Selling Security Holder may not simultaneously
engage in market-making activities with respect to such securities of Kids Stuff
during the applicable "cooling off" period (up to 5 days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Security Holder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation, Regulation M, in connection with transactions in such securities,
which provisions may limit the timing of purchase and sales of the shares by the
Selling Securities Holder.
DESCRIPTION OF SECURITIES
PREFERRED STOCK
Our Board of Directors has the authority, without further action by our
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of our Common stock and could have
the effect of delaying, deferring or preventing a change in control of us. We
have no present plans to issue any shares of Preferred Stock other than the
outstanding Series A Preferred Stock and Series 1 Preferred Stock discussed
below.
SERIES A PREFERRED STOCK
We have issued and outstanding 5,000,000 shares of Series A Preferred
Stock, $.001 par value, all of which are owned by Duncan Hill, Inc.. The holders
of the Series A Preferred Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The Series A
Preferred Stock and the Common stock held by Duncan Hill, Inc. will enable it
and William L. Miller and Jeanne Miller, Chief Executive Officer and President
of Kids Stuff, respectively, to maintain control of us. 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 Kids Stuff, each share
of Series A Preferred Stock has a liquidation preference of $.001 per share.
SERIES 1 PREFERRED STOCK
As of the date of this prospectus, Kids Stuff has issued and
outstanding 920,000 shares of Series 1 Preferred Stock with the following
rights, preferences and privileges:
Dividends. Each Series 1 Preferred Share is entitled to
cumulative annual dividends of $.495 (i.e. 9% of the liquidation
preference per share) payable on the last business day of April of each
year commencing April 2000 with a record date to be fixed annually by
our Board of Directors subsequent to year end and prior to April 30th
of each year. The first dividend payment shall be pro rated for the
period from the date of issuance until December 31, 1999. Unpaid
dividends will accumulate and be paid before payment of dividends on
our Common stock. We may, at our option, pay dividends in shares of
Common stock, in lieu of cash. Shares used for such purpose will be
valued at the average closing sales price of our Common stock on the
OTC Electronic Bulletin Board, NASDAQ
38
<PAGE>
or an Exchange during the ten trading days ending on the tenth day
before the dividend payment date.
Conversion. Commencing September 3, 2000, each Series 1
Preferred Share is convertible into two shares of Common stock. In lieu
of the issuance of fractional shares, all amounts will be rounded-up to
the nearest whole number.
Redemption. Commencing September 3, 2000, the Series 1
Preferred Shares are redeemable at our option, on not less than 30
days' prior written notice to registered holders at the redemption
price of $7.20 per share plus accumulated dividends.
Voting Rights. Preferred Shares are entitled to one vote per
share voting together with the Common stock as one class, except as
otherwise provided by the Delaware Corporation Law.
Preference on Liquidation. The Series 1 Preferred Stock will
be entitled to a preference on liquidation equal to $5.50 per share
plus accumulated unpaid dividends.
No Sinking Fund. We are not required to provide for the
retirement or redemption of the Series 1 Preferred Shares through the
operation of a sinking fund.
The conversion ratio, redemption price and liquidation preference per
share are subject to adjustment to protect against dilution in the event of
preferred stock splits, combinations, subdivisions and reclassifications.
PREFERRED WARRANTS
Commencing September 3, 2000 and expiring March 3, 2002 (the
"Expiration Date"), each outstanding Preferred Warrant entitles the registered
holder to purchase one share of our Series 1 Preferred Stock at an exercise
price of $6.00 per share. Preferred Warrants may be exercised by surrendering to
the warrant agent the Preferred Warrants and the payment of the exercise price
in United States funds by cash or certified or bank check. No fractional shares
of Series 1 Preferred Stock will be issued in connection with the exercise of
Preferred Warrants. Upon exercise, we will pay to the holder the value of any
such fractional shares based upon the market value of the Series 1 Preferred
Stock at such time. We are required to keep available a sufficient number of
authorized shares of Series 1 Preferred Stock for issuance to permit exercise of
Preferred Warrants.
In the event that we notify the holders of Series 1 Preferred Stock of
our intention to redeem the Series 1 Preferred Stock, we shall after giving the
holders of Preferred Warrants at least 30 days prior written notice,
contemporaneously redeem Preferred Warrants at $1.20 per Warrant, subject to the
holders right to exercise Preferred Warrants and convert the underlying Series 1
Preferred Stock during such notice period. In the event a holder of Preferred
Warrants fails to exercise Preferred Warrants prior to their expiration,
Preferred Warrants will expire and the holder thereof will have no further
rights with respect to Preferred Warrants. A holder of Preferred Warrants does
not have any rights, privileges or liabilities as a stockholder of Kids Stuff.
In the event of the liquidation, dissolution or winding up of Kids Stuff,
holders of Preferred Warrants are not entitled to participate in the
distribution of our assets. The exercise price of Preferred Warrants and the
number of shares issuable upon exercise of Preferred Warrants will be subject to
adjustment to protect against dilution in the event of Preferred Stock
dividends, Preferred Stock splits,
39
<PAGE>
combinations, subdivisions and reclassifications. Purchasers of Preferred
Warrants will have the right to exercise Preferred Warrants to purchase shares
of Series 1 Preferred Stock only if a current prospectus relating to such shares
is then in effect and only if the shares are qualified for sale under the
securities laws of the jurisdictions in which the various holders of Preferred
Warrants reside.
COMMON STOCK
Kids Stuff has 25,000,000 shares of authorized Common stock. As of the
date of this prospectus, we have 3,520,856 shares of Common stock issued and
outstanding.
Holders of Common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Subject to preferences that are applicable to any
then outstanding Preferred Stock, holders of Common stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of a
dissolution, liquidation or winding-up of Kids Stuff, holders of Common stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common stock have no right to convert their Common stock into
any other securities. The Common stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common stock. All outstanding shares of Common stock are duly authorized,
validly issued, fully paid and nonassessable.
CLASS A WARRANTS
Commencing June 26, 1998 and expiring June 26, 2002, each Warrant
entitles the registered holder to purchase one share of Common stock at an
exercise price of $5.00 per share. Class A Warrants may be exercised by
surrendering to the warrant agent the Class A Warrants and the payment of the
exercise price in United States funds by cash or certified or bank check. No
fractional shares of Common stock will be issued in connection with the exercise
of Class A Warrants. Upon exercise, we will pay to the holder the value of any
such fractional shares based upon the market value of our Common stock at such
time. We are required to keep available a sufficient number of authorized shares
of Common stock for issuance to permit exercise of the Class A Warrants.
We may redeem the Class A Warrants at a price of $.05 per Warrant at
any time after they become exercisable and prior to their expiration by giving
not less than 30 days' written notice mailed to our record holders if the
closing bid price of the Common stock has been at least $14.40 on each of the 20
consecutive trading days ending on the 5th day prior to the date on which the
notice of redemption is given. In the event a holder of Class A Warrants fails
to exercise the Class A Warrants prior to the expiration date of the Class A
Warrants, the Class A Warrants will expire and the holder thereof will have no
further rights with respect to the Class A Warrants. A holder of Class A
Warrants will not have any rights, privileges or liabilities as a stockholder of
Kids Stuff. In the event of the liquidation, dissolution or winding up of Kids
Stuff, holders of the Class A Warrants are not entitled to participate in the
distribution of our assets. The exercise price of the Class A Warrants and the
number of shares issuable upon exercise of the Class A Warrants will be subject
to adjustment to protect against dilution in the event of stock dividends, stock
splits, combinations, subdivisions and reclassifications. No assurance can be
given that the market price of our Common stock will exceed the exercise price
of the Class A Warrants at any time during the exercise period. Purchasers of
the Class A Warrants will have the right to exercise the Class A Warrants to
purchase shares of Common stock only if a current prospectus relating to such
shares is then in effect and only
40
<PAGE>
if the shares are qualified for sale under the securities laws of the
jurisdictions in which the various holders of the Class A Warrants reside.
OPTIONS
We have issued to National Financial Communications Corp. options to
purchase 270,000 shares exercisable at a price of $.54 per share. The options
are subject to dilution to protect against stock splits, stock dividends,
combinations and the like. The options shall expire three years from the
termination of our consulting agreement with National. We have granted the
Underwriter of our 1997 public offering an option to purchase 60,000 shares of
Common stock at $9.90 per share until the close of business on June 26, 2002,
and the Underwriter of our 1999 public offering a warrant to purchase 40,000
units at a price of $9.075 per Unit. Each unit consists of one share of Series 1
Preferred Stock and two Series 1 Preferred Warrants exercisable at $9.90 per
share. The holders of the aforesaid securities have certain rights to demand
that we register the securities with the Securities and Exchange Commission
under the Securities Act of 1933 for a period of five years after issuance. In
this respect, the Registration Statement of which this Prospectus is a part
includes the resale of the 270,000 shares.
Transfer Agent and Registrar
The transfer agent, registrar and Warrant Agent for Kids Stuff's
securities is American Stock Transfer & Trust Company, 40 Wall Street, New York,
NY 10005.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
Duncan Hill, Inc. owns 2,188,075 shares of our Common stock and
5,000,000 shares of our Series A Preferred Stock. These securities are
restricted securities as that term is defined by Rule 144 of the Securities Act
of 1933, as amended. Such securities may only be sold in compliance with the
provision of Rule 144 unless otherwise registered by us. The possible or actual
future sales of the restricted securities under Rule 144 may have an adverse
effect on the market price of our common stock. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated),
including persons who may be deemed to be affiliates of us as that term is
defined under the Securities Act, is entitled to sell within any three-month
period a number of shares beneficially owned for at least one year that does not
exceed the greater of one percent of the then-outstanding shares of Common stock
or the average weekly trading volume in the Common stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about us. However, a person who is not an affiliate
and has beneficially owned such shares for at least two years is entitled to
sell such shares without regard to the volume, manner of sale or notice
requirements. No predictions can be made as to the effect, if any, that future
sales of shares under Rule 144 or the availability of shares for sale will have
on the then-prevailing market, if any. Sales of substantial amounts of our
Common stock pursuant to Rule 144 or otherwise may adversely affect the then-
prevailing market price of our Common stock.
41
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon
for us by Lester Morse P.C., Suite 420, 111 Great Neck Road, Great Neck, NY
11021.
EXPERTS
The financial statements and any schedules of Kids Stuff incorporated
by reference in this prospectus have been audited by Hausser + Taylor, LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports incorporated in this prospectus by reference, and are
incorporated in this prospectus in reliance upon such reports given upon the
authority of that firm as experts in accounting and auditing.
42
<PAGE>
KIDS STUFF, INC.
FINANCIAL REPORT
<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. (a
subsidiary of Duncan Hill, Inc.) as of December 31, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1999 and 1998. 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, 1999, and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
Canton, Ohio
March 24, 2000
F-3
<PAGE>
KIDS STUFF, INC.
BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 859,431
Accounts receivable 257,574
Due from affiliates 234,390
Inventories 2,045,005
Deferred catalog expense 740,425
Prepaid expenses 170,871
---------
Total current assets 4,307,696
PROPERTY AND EQUIPMENT
Land 214,000
Building and improvements 2,026,172
Leasehold improvements 34,074
Machinery and equipment 86,901
Data processing equipment 401,182
Website development 132,891
Furniture and fixtures 126,211
---------
3,021,431
Less accumulated depreciation and amortization 206,652
---------
2,814,779
OTHER ASSETS, net of accumulated amortization
Goodwill 1,015,805
Catalog development and other 368,995
Customer lists 330,655
Deferred financing fees 82,055
1,797,510
---------
$ 8,919,985
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
KIDS STUFF, INC.
BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C>
Line of credit $ 500,000
Current portion of long-term debt 157,000
Accounts payable 2,352,318
Customer advances 15,302
Accrued expenses 111,393
---------
Total current liabilities 3,136,013
LONG TERM DEBT, net of current portion 1,998,122
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Preferred stock, $.001 per share, 10,000,000 shares
authorized:
Series A, 5,000,000 shares issued and outstanding,
voting, without dividend 5,000
Series 1, 460,000 shares issued and outstanding, voting, aggregate
liquidation of $2.53 million plus
cumulative unpaid dividends of $227,700 460
Common stock - $.001 par value, 25,000,000 shares
authorized, 3,512,856 shares issued
and outstanding 3,513
Additional paid-in capital 5,167,189
Retained earnings (deficit) (1,390,312)
---------
Total stockholders' equity 3,785,850
---------
$ 8,919,985
=========
</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, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
SALES $ 16,729,951 $ 14,172,864
COST OF SALES 10,051,665 8,712,876
---------- ----------
GROSS PROFIT 6,678,286 5,459,988
SELLING EXPENSES 4,968,552 3,966,452
GENERAL AND ADMINISTRATIVE EXPENSES 1,603,808 1,486,889
---------- ----------
INCOME FROM OPERATIONS 105,926 6,647
NET OTHER (EXPENSE) INCOME
Interest expense (132,649) (60,630)
Other 74,782 18,195
---------- ----------
(57,867) (42,435)
---------- ----------
NET INCOME (LOSS) $ 48,059 $ (35,788)
========== ==========
BASIC AND DILUTED INCOME (LOSS)
PER SHARE AFTER CONSIDERING
PREFERRED STOCK CUMULATIVE
DIVIDENDS $ (0.05) $ (0.01)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1998 $ 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
NET PROCEEDS FROM THE
ISSUANCE OF 460,000
PREFERRED SHARES IN
PUBLIC OFFERING - 460 1,950,455 - 1,950,915
NET INCOME - - - 48,059 48,059
--------- --------- ----------- ------------- ------------
BALANCE - DECEMBER 31, 1999 $ 3,513 $ 5,460 $ 5,167,189 $ (1,390,312) $ 3,785,850
========= ========= =========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ...................................... $ 48,059 $ (35,788)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................... 337,180 181,932
Loss on disposal of assets ...................... 5,893 --
(Increase) decrease in accounts receivable ...... (6,030) 83,469
(Increase) in inventories ....................... (119,090) (536,903)
(Increase) in deferred catalog expense .......... (325,398) (155,435)
(Increase) in prepaid expenses .................. (4,374) (67,691)
Decrease (increase) in other assets ............. 74,351 (74,351)
(Decrease) increase in accounts payable, customer
advances and accrued expenses ................ (245) 724,861
----------- ----------
Net cash provided by operating activities .................. 10,346 120,094
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment and other assets .. (2,570,643) (130,035)
Amount paid for catalog development .................... (253,213) (220,992)
----------- ----------
Net cash (used) by investing activities .................... (2,823,856) (351,027)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments) borrowings on line of credit - net ......... (262,000) 91,000
Borrowing on long-term debt ............................ 2,740,000 --
Payments on long-term debt ............................. (584,878) --
Amounts paid for deferred financing fees ............... (102,624)
Sale of preferred stock ................................ 1,950,915 --
(Increase) in prepaid amounts for public offering ...... -- (77,008)
(Increase) decrease in due from affiliates ............. (93,898) 140,473
----------- ----------
Net cash provided by financing activities .................. $ 3,647,515 $ 154,465
----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 834,005 $ (76,468)
CASH - BEGINNING 25,426 101,894
------- --------
CASH - ENDING $ 859,431 $ 25,426
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for interest $ 122,163 $ 60,630
======= ========
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 accompanying 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 80% of the Company's outstanding
voting capital stock as of December 31, 1999. Perfectly Safe, a division of
the Company, primarily sells children's safety products for use up to age
3. Jeannie'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.
Little Feet, a division of the Company, sells shares primarily for children
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. The carrying values of the Company's long-term
obligations approximate their fair value. In accordance with Statement of
Financial 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, 1999. Bad debt
expense was $58,300 and $49,199 for the years ended December 31, 1999 and
1998, 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 $4,163,448
and $3,317,565 for the years ended December 31, 1999 and 1998,
respectively.
F-10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Business Description and Summary of Significant Accounting Policies (continued)
During 1999, the Company changed its amortization estimates relating
to deferred catalog expenses in order to better reflect expenses relating
to catalog sales.
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 forty years. Depreciation expense amounted to $88,391 and $46,457
for the years ended December 31, 1999 and 1998, 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. 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
$174,345 and $135,287, respectively, for the customer list and goodwill as
of December 31, 1999.
During 1999 and 1998, the Company redesigned the Natural Baby Company,
the Perfectly Safe and the Kids Club catalogs. Costs of redesigning these
catalogs totaling $417,696 were capitalized and are being amortized over 48
months using the straight-line method. Accumulated amortization was
$102,566 as of December 31, 1999.
During 1999, the Company designed the Little Feet catalog. Cost of
designing this catalog totaling $39,283 were capitalized and will be
amortized over 48 months using the straight-line method commencing in the
first quarter of 2000.
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.
F-11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Business Description and Summary of Significant Accounting Policies (continued)
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 weighted average
number of shares outstanding in computing basic and diluted earnings per
share for 1999 and 1998 were 3,512,856. There were no dilutive effects of
any other outstanding securities in 1999 or 1998. Cumulative dividends
incurred on the Series 1 preferred stock of $227,700 were deducted from
1999 net income in the calculation of earnings per share.
L. New Authoritative Pronouncements
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 adopted this
new standard during 1999. The effect of adopting SFAS 133 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. The Company adopted this new
statement in 1999. The effect of adopting SOP 98-1 was not material.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying accepted accounting
principles to revenue recognition issues in financial statements. This
statement is effective for all fiscal quarters beginning in the second
quarter of 2000. The Company is evaluating the effect the adoption may have
on the Company's results of operations and financial position.
F-12
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (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 1999 and
1998 pre-tax profits to Kids Stuff in connection with these
administrative and fulfillment services. However, Havana had
no pre-tax profits for 1999 or 1998. At January 1, 1999, the
agreement was modified and extended on a month-to-month basis
as Havana began to incur direct costs for its administrative
functions. Havana currently pays to the Company accounting,
data processing, and administrative charges of $15,000 per
year plus shipment and warehouse services on a per order
basis. Total costs charged to Havana in 1999 and 1998 amounted
to $225,086 and $293,432, respectively. 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>
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.
F-13
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2. Stockholders' Equity (continued)
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.
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.
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.
In March 1999, the Company completed a public offering (see
Note 11) in which 460,000 shares of Series 1 Preferred Stock
were issued. The holders of the Series 1 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 1 Preferred Stock is redeemable at the option of
the Company at a price of $7.20 per share commencing September
3, 2000. Each share is convertible into two shares of common
stock at the option of the holder, commencing September 3,
2000. Each share receives a cumulative annual dividend of
$0.495, or 9.0% of the liquidation preference per share,
payable in cash or common stock at the option of the Company.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, each
share of Series 1 Preferred Stock has a liquidation preference
of $5.50 per share. Dividends in arrears on the Series 1
Preferred Stock amount to $.45 per share or $227,700 in
aggregate at December 31, 1999.
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 a $500,000 line of credit from Bank One
which is payable on demand, bearing interest payable monthly
at the bank's prime lending rate plus 1%, for an effective
rate of 9.25% at December 31, 1999. The line of credit had a
balance of $500,000 at December 31, 1999. The line is secured
by assets of the Company and expires July 2001. The repayment
of the facility is guaranteed by Mr. William L. Miller, the
Company's Chief Executive Officer, and Mrs. Jeanne E. Miller,
the Company's President. Due to the current nature of the
liability, the carrying amount of the line approximates fair
value. The line of credit is guaranteed by Havana and Duncan
Hill, Inc.
At December 31, 1998, the Company had an $800,000 line of
credit from United Bank, payable on demand, bearing interest
at the bank's prime rate plus 1% for an effective rate of
8.75%. The line of credit had a balance of $762,000 as of
December 31, 1998. The United Bank line of credit was paid off
during 1999.
F-15
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 4. Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31:
1999 1998
---- ----
<S> <C> <C> <C>
Bank One - $300,000 term loan, secured by the Company's
accounts receivable, inventory, and equipment, and the
personal residence of the President and CEO, payable in
monthly install- ments of $6,213, including interest of 8.7%
on the first $250,000 and 5.78% on the remaining
balance, maturing July 2004. $ 279,383 $ -
Bank One - $1,690,000 commercial real estate loan, secured by
a first lien on the Company's land and real estate, and an
assignment of key man life insurance on the lives of the
Company's President and CEO, principal payable in monthly
installments of $7,131, plus interest at a variable interest
rate based on the 30 day LIBOR plus 2.75% (9.2% at December
31, 1999), balloon
payment due July 2009. 1,125,739 -
Stark Development Board Finance Corporation - $750,000 note,
secured by a second lien of the Company's land and real
estate, guaranteed by Duncan Hill, Havana, and the Company's
President and CEO, bearing interest at 7.3%,
maturing December 2019. 750,000 -
---------- ---------
2,155,122 -
Less current portion 157,000 -
---------- ---------
$ 1,998,122 $ -
========= =========
</TABLE>
Scheduled principal repayments on long-term debt for each of
the next five years are:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
2000 $ 157,000
2001 160,900
2002 167,500
2003 174,700
2004 149,200
Thereafter 1,345,822
</TABLE>
F-17
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 4. Long-Term Debt (continued)
The Company incurred interest expense of $132,700 and $60,630
for the years ended December 31, 1999 and 1998, respectively.
The Stark County Development Board Finance Corporation loan
contains various covenants including that the Company will not
declare or pay any dividend on any capital stock of the
Company without the prior written consent of the lender.
The Bank One loan agreements contain covenants regarding
certain financial statement amounts, ratios and activities of
the Company. At December 31, 1999, the Company was in
compliance with all such covenants.
Note 5. Lease Commitments
Duncan Hill, Inc., the parent company of Kids Stuff, has
entered into several operating leases for retail 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:
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, 1999 and 1998:
F-17
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 6. Income Tax (continued)
<TABLE>
<CAPTION>
1999 1998
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 330,974 $ 172,832
Inventory obsolescence - 11,900
-------- --------
Total deferred tax assets 330,974 184,732
Valuation allowance (25,606) (22,552)
-------- --------
Net deferred tax asset 305,368 162,180
Deferred tax liabilities:
Deferred catalog expense (251,745) (141,109)
Amortization (19,015) (8,200)
Depreciation (34,608) (12,871)
-------- --------
Total deferred tax liabilities (305,368) (162,180)
------- -------
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 1999 was $344,158. The Company has
net operating loss carryforwards of approximately $973,000 as
of December 31, 1999 for tax purposes. The loss carryforwards
expire in varying amounts through the year 2019.
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 Mr. William L. Miller and Mrs. 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.
During 1999, the Company cancelled the 200,000 options granted
to Mrs. Miller as described in the two preceding paragraphs.
The Company concurrently issued 200,000 options to Mrs. Miller
exercisable at $1.33 per share. The fair value of the options
granted to Mrs. Miller was $228,000, as calculated using the
Black-Scholes option pricing model assuming no dividends, 123%
volatility, an expected life of five years, and a risk-free
interest rate of 6.0%
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
$338,100 or $.09 per share in 1999 and $319,000 or $.09 per
share in 1998.
The Company computed the fair value of options granted during
1999 using the Black-Scholes option pricing model assuming no
dividends, 123% volatility, an expected life of 50% of the
ten-year option terms, and a risk-free interest rate of 6.0%.
The fair value of options granted during 1999 was $302,100,
including the options issued to Mrs. Miller in replacement of
cancelled options.
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 value of options granted during 1998 was $334,000. No
options have been exercised as of December 31, 1999.
F-20
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 9. Incentive Plans
A. Incentive Compensation Plan
The Company maintains 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.
F-21
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 9. Incentive Plans (continued)
The amount of such pool with respect to any year shall be
determined subsequent to the end of that year upon the
determination of the Company's operating income for that year.
Each participant in the Plan is eligible to receive from the
bonus pool an annual award of up to 50% of the participant's
base salary. There were no awards in 1998 or 1999.
B. Stock Incentive Plan
The Company maintains a Stock Incentive Plan (Incentive Plan).
Under the Incentive Plan, the Compensation Committee of the
Board of Directors may grant stock incentives to key employees
and the directors of the Company pursuant to which a total of
400,000 shares of Common Stock may be issued; provided,
however, that the maximum amount of Common Stock with respect
to which stock incentives may be granted to any person during
any calendar year shall be 20,000 shares, except for a grant
made to a recipient upon the recipients initial hiring by the
Company, in which case the number shall be a maximum of 40,000
shares. These numbers are subject to adjustment in the event
of a stock split and similar events. Stock incentive grants
may be in the form of options, stock appreciation rights,
stock awards or a combination thereof. No stock incentives
were granted under the Incentive Plan in 1998 or 1999.
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 1999 and 1998.
F-22
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 11. 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 $1,950,915, net of issuance costs
of $579,085. 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-23
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended,
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such capacity
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of Chancery or such
other court shall deem proper. Article VII, Section 7, of the By-Laws of Kids
Stuff provides for indemnification of officers, directors, employees and agents
to the extent permitted under the Delaware General Corporation Law.
The employment agreements with William L. Miller and Jeanne E. Miller
each provide for their indemnification to the full extent permitted by law. Kids
Stuff's Certificate of Incorporation contains a provision eliminating the
personal monetary liability of directors to the extent allowed under the General
Corporation Law of the State of Delaware. Under the provision, a stockholder is
able to prosecute an action against a director for monetary damages only if he
can show a breach of the duty of loyalty, a failure to act in good faith,
intentional misconduct, a knowing violation of law, an improper personal benefit
or an illegal dividend or stock repurchase, as referred to in the provision, and
not "negligence" or "gross negligence" in satisfying his duty of care. The
provision, however, does not affect the availability of seeking equitable relief
against a director of Kids Stuff. In addition, the provision applies only to
claims against a director arising out of his role as a director and not, if he
is also an officer, his role, as an officer or in any other capacity or to his
responsibilities under any other law, such as federal securities laws.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Shown below are estimates of the approximate amount of the fees and
expenses we have incurred in connection with this offering.
<TABLE>
<CAPTION>
Securities and Exchange Commission registration fee
<S> <C>
and miscellaneous expenses....................................................................$ 2,000.00
Legal and accounting fees........................................................................35,000.00
Printer's fees and expenses.................................................................... 3,000.00
-----------
Total $ 40,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following shares of unregistered securities have been issued by the
Registrant since its inception. there were no underwriting discounts and
commissions paid in connection with the issuance of any of said securities.
In connection with the reorganization effective June 30, 1996, the
Registrant issued to its parent, Duncan Hill , Inc. 2,400,000 shares of Common
Stock at a value of $.125 per share, and 5,000,000 shares of Series A Preferred
Stock at a value of $.001 per share.
Commencing October, 1996, Kids Stuff sold an aggregate of 1,300,000
shares of Common Stock to eight private investors for the aggregate purchase
price of $162,500. In June, 1997, the Registrant repurchased 857,144 of those
shares from five private investors at the same price for which the shares were
originally sold to these investors.
In October, 1996, the Registrant borrowed an aggregate of $200,000 from
three private investors. As originally structured, $75,000 of the face amount of
the loan was convertible upon its terms into 1,500,000 Class A Warrants.
Subsequently, the loan was restructured so that the lenders' would be repaid the
entire face amount of loan in lieu of the right to convert $75,000 of the face
amount into 1,500,000 Class A Warrants.
In July 1997, the Registrant completed its acquisition of the assets of
The Natural Baby Company, Inc. Included in the consideration paid was 70,000
unregistered shares of the Registrant's Common Stock to The Natural Baby
Company, Inc.
In each of the foregoing cases, Kids Stuff issued the above securities
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving any public offering. In addition, with respect to the second
transaction listed above, i.e., the issuance of 1,300,000 shares of Common
Stock, Kids Stuff relied upon Rule 504 promulgated under the Securities Act of
1933. Kids Stuff was not an issuer that was precluded from relying upon Rule 504
under paragraph (a) thereof and, in addition, had satisfied the terms and
conditions of Rules 501 and 502(a) by virtue of the fact that it had not offered
in excess of $1,000,000 of securities within the 12 months before the start of
and during the offering of
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<PAGE>
securities under Rule 504, in reliance on any exemption under Section 3(b), or
in violation of Section 5(a) of the Securities Act.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
<S> <C> <C>
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 of Series 1 Preferred Stock (9)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.03 Revised Form of 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)
5.01 Opinion of Lester Morse P.C. (11)
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)
II-3
<PAGE>
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 Other Leases (7)
10.24 Amendment to 1997 Long Term Stock Incentive Plan (10)
10.25 Agreement with National Financial Communications Corp.
23.01 Consent of Hausser + Taylor LLP (11)
23.02 Consent of Lester Morse P.C. (11)
27.00 Revised Financial Data Schedule (10)
</TABLE>
-----------
<TABLE>
<CAPTION>
<S> <C>
(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.
(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) Incorporated by reference to the Registrant's Form 10-KSB filed for its
fiscal year ended December 31, 1998.
(10) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended
December 1, 1999
(11) Filed herewith.
</TABLE>
ITEM 28. UNDERTAKINGS.
(a) RULE 415 OFFERING
Kids Stuff will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
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<PAGE>
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act").
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution;
2. For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of Kids Stuff
pursuant to the provisions referred to in Item 14 of this Registration Statement
or otherwise, Kids Stuff 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. In the event
that a claim for indemnification against such liabilities (other than the
payment by Kids Stuff of expenses incurred or paid by a director, officer or
controlling person of Kids Stuff in the successful defense of any action, suite
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Kids Stuff will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) RULE 430A
Kids Stuff will:
1. For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by Kids Stuff issuer under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
2. For any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering of those securities.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of North Canton, State of Ohio, on this 20th day of April , 2000.
KIDS STUFF, INC.
By: /s/ WILLIAM L. MILLER
- ------------------------------
William L. Miller, Chairman of the Board
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- --------------------------- --------------
<S> <C> <C>
/s/ WILLIAM L. MILLER Chairman of the Board, April 20, 2000
- -------------------------------- Chief Executive Officer
William L. Miller Treasurer, Secretary and
Chief Financial and
Accounting Officer
/s/ JEANNE E. MILLER Executive Vice President April 20, 2000
- --------------------------------- and Director
Jeanne E. Miller
/s/ CLARK D. SWISHER Director April 20, 2000
- ---------------------------------
Clark D. Swisher
/s/Alfred Schmidt
- --------------------------- Director April 20, 2000
Alfred Schmidt
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
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 of Series 1 Preferred Stock (9)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.03 Revised Form of 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)
5.01 Opinion of Lester Morse P.C. (11)
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 Other Leases (7)
<PAGE>
10.24 Amendment to 1997 Long Term Stock Incentive Plan (10)
10.25 Agreement with National Financial Communications Corp.
23.01 Consent of Hausser + Taylor LLP (11)
23.02 Consent of Lester Morse P.C. (11)
27.00 Revised Financial Data Schedule (10)
</TABLE>
-----------
<TABLE>
<CAPTION>
<S> <C>
(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.
(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) Incorporated by reference to the Registrant's Form 10-KSB filed for its
fiscal year ended December 31, 1998.
(10) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal year ended
December 1, 1999
(11) Filed herewith.
</TABLE>
EXHIBIT 5.01
LEGAL OPINION
Kids Stuff, Inc. April 20, 2000
7835 Freedom Avenue, N.W.
North Canton, Ohio 44720
Re: Pre-Effective Amendment No. 1 to
Form S-3 Registration Statement on Form SB-2
of Kids Stuff, Inc.
-------------------
Gentlemen:
You have requested our opinion as counsel for Kids Stuff, Inc., a
Delaware corporation (the "Company"), in connection with Pre-Effective Amendment
No. 1 to Form S-3 Registration Statement on Form SB-2 (the "Registration
Statement") filed by the Company with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933 (the "Act') with respect to
shares (the "Shares") of Common Stock, par value $.001 per share, of the Company
which may be issued pursuant to the exercise of options to purchase 270,000
shares of the Company's Common Stock.
We have examined such corporate records and other documents and have
made such examination of law as we have deemed relevant in connection with this
opinion. Our examination of matters has been limited to the Delaware General
Corporation Law.
Based upon the foregoing, we advise you that in our opinion each
authorized but unissued Share issued by the Company in accordance with the terms
of the Option, will be legally and validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name therein
under the caption "Legal Matters" in the Prospectus of the Registration
Statement.
Very truly yours,
LESTER MORSE P.C.
Steven Morse
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
Kids Stuff, Inc.
North Canton, OH 44720
As independent certified public accountants for Kids Stuff, Inc., we
hereby consent to the use in this Pre-Effective Amendment No. 1 to Form S-3
Registration Statement on Form SB-2 for Kids Stuff, Inc. of our report included
herein, which has a date of March 24, 2000, relating to the balance sheets of
Kids Stuff, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, cash flows, and stockholders' equity for each of the three years in
the period ended December 31, 1999 and to the reference to our firm under the
caption "Experts" in the Prospectus.
/s/ Hausser + Taylor LLP
Hausser + Taylor LLP
North Canton, Ohio
April 20, 2000
