HAT WORLD CORP, SB-2, 1999-06-16

HAT WORLD CORP
SB-2, 1999-06-16

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999

REGISTRATION NO. _______

160 PAGES IN THIS REGISTRATION

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

HAT WORLD CORPORATION
(Exact name of issuer as specified in charter)

Minnesota 5699 46-0452694
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Class- Identification No.)
incorporation or ification Code Number)
organization)

4912 S. Minnesota Avenue
Sioux Falls, South Dakota 57108
(605) 336-0551
(Address of principal executive office
and place of business)

Charles Clayton
527 Marquette
Minneapolis, MN 55402
(612) 338-3738
(Name and address of agent for service)

Copies to:

Harold M. Golz Ward E. Terry, Jr.
EBI Securities Corporation Clanahan, Tanner, Downing & Knowlton, P.C.
6300 S. Syracuse Way, Suite 645 730 17th Street, Suite 500
Englewood, CO 80111 Denver, CO 80202
((303) 694-0295 (720) 359-9500

Approximate date of commencement
of proposed sale to public
as soon as practicable after effective date

If any of the securities being registered on this Form pursuant to Rule
462(b), check the following box. [ ]

<PAGE>

If any of the securities being registered on this Form pursuant to Rule
462(c), check the following box. [ ]

If any of the securities being registered on this Form pursuant to Rule
462(d), check the following box. [ ]

If any of the securities being registered on this Form pursuant to Rule
434, check the following box. [ ]

CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------
Title of Proposed Amount of
each class Maximum Registration
Securities Aggregate Fee
to be Offering
Registered Price (1)
- ------------------------------------------------------------------------------

Common Stock $.01 par value (2) $11,902,500 $3,511.24

Total $3,511.24

(1) Estimated solely for the purpose of calculating the amount of the
registration fee.

(2) Includes shares that the representative of the underwriters has the option
to purchase from Hat World Corporation to cover over-allotments, if any, equal
to 15% of the initial shares.

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.

<PAGE>

Prospectus
Subject to completion, dated June ____, 1999

1,150,000 Shares

Hat World Corporation

[LOGO] HAT WORLD(TM)

Common Stock

This is our initial public offering. We are offering all of the 1,150,000
shares. We estimate that the share price will be $7.00 to $9.00. No public
market currently exists for our shares.

We plan to apply to have our shares approved for listing on the Nasdaq
National Market, with the symbol "HATS."

INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.

Per Share Total
--------- -----
Public offering price $ $
Underwriting discounts $ $
Proceeds to Hat World $ $

Solely to cover any over-allotments, we have granted the representative of
the underwriters a 60-day option to purchase up to 172,500 additional shares of
common stock on the same terms.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY REPRESENTATION TO THE CONTRARY.

EBI SECURITIES CORPORATION

Prospectus dated June 15, 1999

The information contained in this prospectus is not complete and may
change. A registration statement relating to these shares has been filed with
the Securities and Exchange Commission. We may not sell these shares until the
registration statement is effective. This prospectus is not an offer to sell
these shares and we are not soliciting an offer to buy these shares in any state
where the offer or sale is not permitted.

<PAGE>

(PHOTOS OF A TYPICAL STOREFRONT WILL BE INCLUDED IN THIS SECTION, AND A MAP OF
STORE LOCATIONS ON THE INSIDE BACK COVER.)

Hat World Corporation is a specialty retailer of sports related headwear.
Our primary products are baseball-style caps with licensed logos of professional
and college sports teams. This includes baseball, football, basketball, hockey,
soccer, and motorsports. We also have branded, lifestyle, fashion and novelty
hats, hat accessories, and related products. We currently have 75 stores in 20
states.

Our web site address is "hatworld.com;" however, the information on the
site is not a part of this prospectus.

We intend to furnish stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each year.

"Hat World" and the Hat World logos are trademarks of Hat World
Corporation. We have applied for federal registration of two of these
trademarks.

<PAGE>

HAT WORLD CORPORATION PROSPECTUS

INTRODUCTION

Please read this prospectus carefully. It describes our business, products,
services and finances. We have prepared this prospectus so that you will have
information necessary to make an investment decision.

You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of the prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.

PROSPECTUS DELIVERY OBLIGATIONS

Until ______,1999 (25 days after the date of this prospectus) all dealers
making transactions in the common stock, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.

TABLE OF CONTENTS

Page
----
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 6
Additional Information...................................................... 13
Use of Proceeds............................................................. 14
Dividend Policy............................................................. 14
Capitalization.............................................................. 15
Dilution.................................................................... 16
Selected Financial Data..................................................... 17
Management's Discussion..................................................... 18
Business.................................................................... 22
Management.................................................................. 36
Certain Transactions........................................................ 43
Principal Shareholders...................................................... 44
Description of Stock........................................................ 45
Shares Eligible for Future Sale............................................. 47
Underwriting................................................................ 48
Legal Matters............................................................... 50
Experts..................................................................... 50
Index to Financial Statements............................................... F-1

<PAGE>

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PROSPECTUS SUMMARY

OUR BUSINESS

We are a leading specialty retailer of sports related headwear. Our stores
offer a large selection of licensed, baseball-style caps featuring logos of
college and professional sports teams such as baseball, basketball, football,
hockey, and motorsports. Our stores are located primarily in enclosed malls in
the eastern half of the continental United States. At the date of this
prospectus, we had 75 stores in 20 states with the average store occupying 675
square feet and contributing approximately $500 in sales per-square-foot.
Annualized, we sell between 10,000 and 50,000 hats at each store. To date our
strategy has been to open stores in middle market cities, many near college
campuses, where we can best serve our target market, the young adult between 12
and 35 years old. This strategy has enabled us to be profitable each year since
we opened our first store in 1995. Our current strategy also includes opening
stores in larger urban areas.

OUR MERCHANDISING STRATEGY

We have developed a merchandising strategy that differentiates us from many
other retailers of sports related headwear. Our merchandising strategy is to:

* offer a wide variety of hats that appeal both to the national market
and to the specific interests in each of the local markets;
* offer distinctive quality headwear in both adjustable and fitted
sizes;
* maintain a large variety of products which are constantly changing;
* monitor fluctuations in demand and identify popular new teams or
individual sports related trends;
* create a friendly, sports-oriented shopping environment;
* price our products competitively and offer a frequent buyer program;
* present our merchandise in a visually appealing manner to create a
colorful, attractive atmosphere;
* open stores in high traffic locations;
* utilize a kiosk concept for permanent or temporary locations when a
traditional store space is not a viable option; and
* operate an e-commerce Internet site with an up-to-date on-line catalog
of our entire product assortment.

Our typical store offers a selection of approximately 5,000 hats, which
includes many different team logos, styles, colors, fabrics, materials, and
fitted sizes. We constantly work with our vendors so that we can provide our
customers the highest quality products and the latest fashions in fitted and
adjustable headwear and accessories. While each of our stores carry a core of
similar merchandise, the balance of our merchandise is customized to meet the
demands of local consumers. We believe that our ability to merchandise to
specific or local sporting or

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1
<PAGE>

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community interests and to promptly adapt to the changing fortunes of sports
celebrities and teams differentiates us from our competitors.

Portions of our product assortment are seasonal. For example, sales of
headwear with football team logos are naturally stronger during the fall
football season. Customer interest fluctuates with the notoriety of a player,
team or sport; therefore, we carry some items all year, some items seasonally,
and some items we order on short notice depending on a particular team's
performance. Our inventory management systems help us monitor the sales patterns
of each store on a daily basis to better satisfy local demand and to efficiently
manage inventory. This enables us to quickly add fast-selling items and reduce
slow-moving items. Our success depends on our ability to offer a broad selection
of high-demand sports headwear.

We create a sports-oriented, friendly environment. We do this by presenting
our products in a visually appealing way and by hiring sports-fans as
salespeople. Our target market is attracted to our stores due to our product
selection, presentation and store locations. Our store employees are sports
enthusiasts and are able to talk about the latest sporting events. This helps
promote the demand for our products, encourages our customers to browse for
longer periods of time, and assists our employees in delivering quality customer
service.

The price of our headwear typically ranges between $15 and $25, which is an
affordable purchase for our target market. In addition, we promote customer
loyalty through our Passport Club, a frequent buyer card. To obtain membership
to this program, our customers buy their first hat at the regular price and pay
an additional $3 for the club membership. Thereafter, membership provides for a
lifetime discount, from the regular price, of 20% on hats and 10% on other
items.

Our prompt responsiveness to changes in consumer interests satisfies the
strong impulse or trend-setting buyer because we have the hot product demanded
by these buyers. This segment of the market is often willing to pay the full
retail price for leading-edge products. For less impulsive, price-conscious
consumers, the Passport Club aims to satisfy their need for a bargain. We
believe this dual-marketing strategy maximizes returns from each end of the
market spectrum. The Passport Club has approximately 81,000 members.

We have two alternatives to our traditional store format - a kiosk and a
web site. We presently operate two kiosks which each occupies 100 to 200 square
feet. Our flexible kiosk design allows for larger or smaller units. We intend to
use a kiosk where traditional store space is not available or economically
justifiable.

In April 1999, we opened our Internet site, www.hatworld.com, as an
informational web site. By mid June 1999, we intend to have upgraded the site to
sell products on-line to site visitors. We expect our web site to serve as a
profit center as well as information source for tracking geographical changes in
consumer preferences.

Historically, our stores have been opened in middle-market locations, often
near colleges and universities. Since we are not typically a destination store,
we prefer high traffic mall locations

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2
<PAGE>

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

where shopping in our stores is convenient for our target market. We have
developed strong relationships with shopping mall leasing firms for a number of
reasons:

* we are a desirable mall tenant because we generate high sales
per-square-foot;
* other tenants welcome us because we are generally not a threat to
their sales;
* specialty headwear retailers have recently become recognized as a
standard tenant group for malls;
* the relative uniqueness of our area of specialty makes our concept
less intrusive to the existing sales patterns in many malls;
* our store design and store size requirements are flexible which
facilitates our use of a variety of locations not often viewed as
desirable by potential tenants with more rigid store designs;
* we have a reputation for paying rent promptly and accurately; and
* our growth while maintaining profitability has also brought us the
attention of mall management firms looking to fill spaces with
reliable, professional tenants.

OUR GROWTH STRATEGY

We opened our first store in 1995 and followed with 4 store openings in
1996. We opened 13 stores in 1997, and 35 stores in 1998. At the date of this
prospectus, we have opened 22 new stores in 1999, for a total of 75 stores. We
intend to open 38 additional stores in the remainder of 1999 and add 70 stores
in each of the next two years. Our future expansion will come from opening new
stores and through acquisitions. In the US, we have identified 1,800 potential
shopping mall locations, 200 strip center locations, 25 airports, and 25 outlet
centers that would be suitable for a traditional store. Additionally, our kiosk
format enables us to open stores in malls where a traditional space is not
readily available or where a traditional space is not justified. A kiosk may
serve to establish our store in a mall, giving us priority for a traditional
space when it becomes available. We intend to generate sales, gauge domestic and
international interest in new headwear, and to communicate with our frequent
buyer club members through our Internet web site.

ABOUT HAT WORLD CORPORATION

Our operating subsidiary was incorporated in Minnesota on June 1, 1995. Our
operating company executives and distribution center are located in
Indianapolis, Indiana. On April 26, 1999, we incorporated our holding company,
also in Minnesota. The office for our holding company executives, investor
relations and financial and accounting departments is at 4912 South Minnesota
Avenue, Sioux Falls, South Dakota 57108. Our telephone number is (605) 336-0551.

FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," estimates," "anticipates,"
"intends," "plans," and similar expressions. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors, including all the risks discussed in "Risk Factors" and
elsewhere in this prospectus.

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3
<PAGE>

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

THE OFFERING

Common stock offered by Hat World..... 1,150,000 shares

Common stock to be outstanding
after this offering.............. 4,293,446 shares

Use of Proceeds....................... To open and operate additional stores,
to pay short-term indebtedness and a
bridge loan, to make complementary
acquisitions or investments, and for
working capital and other general
corporate purposes.

Proposed Nasdaq National Market
symbol........................... HATS

The number of shares of common stock to be outstanding after this offering does
not include:
* 433,500 shares that would be issued upon the exercise of stock options
outstanding under our 1999 Stock Option Plan at a weighted average exercise
price of $5.61 per share;
* 446,500 additional shares that have been reserved for issuance and may be
granted under such plan;
* up to 40,000 shares issuable upon the exercise of a warrant that we have
agreed to issue after the offering as partial consideration for a loan
guarantee. The warrant will be for two years and will have an exercise
price equivalent to 125% of the initial public offering price per share;
and
* 115,000 shares issuable upon the exercise of warrants to be issued to the
representative of the underwriters of this offering. The warrants are to be
exercisable for a period of four years commencing one year after the
effective date of the offering and shall be exercisable at 120% of the
initial public offering price per share.

ABOUT THIS PROSPECTUS

Unless otherwise indicated, all information in this prospectus assumes that
the representative of the underwriters does not exercise its over-allotment
option or its warrants and that no other person exercises any other outstanding
option or warrant.

This summary highlights some information from this prospectus and may not
contain all the information that is important to you.

Unless the context requires otherwise, the "Company," "Hat World," "we,"
"us," and "our" in this prospectus refer to Hat World Corporation, including its
subsidiary, Hat World, Inc.

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

4
<PAGE>

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SUMMARY FINANCIAL DATA

The following table summarizes the financial data for our business. Please
see our audited and unaudited financial information beginning on page F-1.

<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------- -----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 3,761,107 $ 10,975,102 $ 1,191,441 $ 3,023,721
Gross profit 2,054,081 6,077,172 634,105 1,630,715
Income (loss) from operations 480,674 1,014,493 (85,250) (463,678)
Income (loss) before income taxes 470,858 1,008,269 (80,693) (473,787)
Provision (benefit) for income taxes 195,300 365,700 (36,312) (189,515)
------------ ------------ ------------ ------------

Net income (loss) $ 275,558 $ 642,569 $ (44,381) $ (284,272)
============ ============ ============ ============

Earnings(loss) per share, basic $ 0.13 $ 0.23 $ (0.02) $ (0.09)
============ ============ ============ ============
Earnings(loss) per share, diluted $ 0.13 $ 0.22 $ (0.02) $ (0.09)
============ ============ ============ ============

Weighted average shares outstanding 2,074,902 2,820,890 2,545,816 3,143,446
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
--------------------------------- ----------------------------
SELECTED OPERATING DATA: 1995 1996 1997 1998 1998 1999
--------------------------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Number of stores:
Opened during period 1 4 13 35 3 7
Closed during period 0 0 0 0 0 0
Open at end of period 1 5 18 53 21 62
Comparable store sales increases N/A N/A 6.4% 12.4% 14.5% 5.4%
Net sales increases N/A 778% 300% 192% 302% 154%
</TABLE>

<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Actual As adjusted
-------------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments $ 12,224 $ 8,016,224
Working capital 594,850 8,598,850
Total assets 8,067,964 16,071,964
Stockholders' equity 5,091,224 13,095,224
</TABLE>

The as adjusted column reflects our receipt of the estimated net proceeds from
the sale of 1,150,000 shares of common stock at an assumed initial public
offering price of $8.00 per share, after deducting underwriting discounts and
other estimated offering expenses.

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5
<PAGE>

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS.

IF ANY OF THE EVENTS DESCRIBED IN THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE MATERIALLY
ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

WE HAVE A LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE UNCERTAINTIES OF A
YOUNG COMPANY.

We have been in business since 1995. We have a limited operating history by
which you can evaluate our likelihood of success or failure. Our business plan
is based on certain assumptions made without the benefit of a lengthy operating
history.

WE HAVE AN AGGRESSIVE EXPANSION STRATEGY, WHICH MAKES MANAGEMENT OF GROWTH
CRITICAL IN OUR FUTURE SUCCESS.

We intend to pursue an expansion strategy involving opening more stores
than we have in recent years, and our future operating results will depend to a
substantial extent upon our ability to open and operate new stores successfully.
Failure or difficulty with opening new stores on a timely basis would materially
adversely affect our business, results of operations and financial performance.
We cannot assure you that our new stores, when opened, will be profitable or
achieve sales or profitability levels comparable to our existing stores.

We will also enter certain new markets in new regions and larger urban
areas that may present competitive and merchandising challenges that are
different from those that we have encountered in our existing markets. Our
ability to open new stores on a timely basis will depend upon a number of
factors. These include:

* the ability to properly identify and enter new markets,
* locate suitable store sites,
* negotiate acceptable lease terms,
* access adequate inventory,
* secure capital resources and financing, construct or refurbish sites,
* hire, train and retain skilled managers and personnel, and
* manage other factors, many of which will be beyond our control.

We cannot assure you that we will be able to effectively or successfully
manage our growth.

WE ARE DEPENDENT ON KEY PERSONNEL AND THE ABILITY TO HIRE ADDITIONAL PERSONNEL.

Our success depends in large part on our ability to attract, motivate and
retain highly qualified management and personnel. Competition for such personnel
is generally strong and we cannot assure you that we will be able to attract and
retain the personnel necessary for the development and operation of our
business. We are heavily dependent upon the continued services of our present
officers and directors. They have the major responsibility for review of
opportunities and implementing our growth plans. Consequently, the loss of
services of any or all

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<PAGE>

of these persons would have an adverse effect on our operations. We have no key
man life insurance on any of our officers or directors.

WE FACE INTENSE COMPETITION FROM A LARGE VARIETY OF RETAILERS THAT SELL SIMILAR
MERCHANDISE.

Our business is highly competitive. We compete with a large variety of
stores and retailers that carry the same type of merchandise we sell. Many
competitors are larger than us and have access to significantly greater
financial, marketing and other resources. It is uncertain that our stores can
compete on the basis of merchandise quality and selection, price, visual appeal
of the merchandise and the convenience of the store location. We cannot assure
you that we will continue to be able to compete successfully against existing or
future competition. Our expansion into the markets served by our competitors,
entry of new competitors or expansion of existing competitors into our markets
could have a material adverse effect on our business, financial condition and
results of operations.

WE MAY HAVE DIFFICULTY IN JUDGING CONSUMER PREFERENCES; WE COULD EXPERIENCE
REDUCED SALES, EXCESS INVENTORY AND LOWER MARGINS.

All of our products are subject to changing consumer preferences. Consumer
preferences and demand could shift to types of headwear other than those sold by
us. Any shift could have a material adverse effect on our operating results. Our
future success will depend on our ability to anticipate and respond to changes
in consumer preferences. We can not assure you that we will be able to
anticipate or respond to changes on a timely basis, or at all. Our failure to
anticipate and respond to changing consumer preferences could lead to lower
sales, excess inventory and lower margins, any of which could have an adverse
effect on our business, financial condition and results of operations.

OUR SUCCESS IS DEPENDENT UPON MAINTAINING GOOD VENDOR RELATIONSHIPS AND
MANAGEMENT OF OUR INVENTORY.

We buy significant amounts of our products from 5 vendors with whom we have
no long-term purchase commitments or exclusive contracts. If we experience
problems with respect to vendor fulfillment and retention or if any of our key
vendors experience business interruptions, we may have difficulty in obtaining
desired merchandise on acceptable terms. Our results of operations could be
adversely affected by a disruption in purchases from any of our vendors, any of
which could discontinue selling to us at any time.

WE RELY ON ACCURATE AND TIMELY DATA FROM OUR COMPUTER INFORMATION SYSTEMS.

Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Our principal computer center and
communications systems are located at our operations headquarters in
Indianapolis, Indiana. Any systems interruptions that cause malfunctions or
result in slower response times could result in losses of data and revenue. Any
of these losses could materially and adversely affect our business, financial
condition and operating results. Interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar events.
We do not presently have a formal disaster recovery plan and our insurance may
not be sufficient to cover losses from these events.

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In addition, we rely on our existing management information systems for
operating and monitoring all major aspects of our business, including sales,
warehousing, distribution, purchasing, inventory control, merchandise planning
and replenishment, as well as various financial functions. Any failure by us to
upgrade such systems or unexpected difficulties encountered with such systems as
our business expands, or in general any disruption in these systems, could
adversely affect our results of operations and financial performance.

DUE TO THE SEASONAL NATURE OF OUR REVENUES, PROFITABILITY IS SIGNIFICANTLY
DEPENDENT ON THE FOURTH QUARTER.

We have experienced, and expect to continue to experience, substantial
seasonal fluctuations in our sales and operating results, which are typical of
many mall-based specialty retailers and common to most retailers generally. Due
to the importance of the fall selling season, which includes Thanksgiving and
Christmas, the fourth calendar quarter has historically contributed, and is
expected to continue to contribute, a substantial majority of our operating
income and net income for the entire year. We expect this pattern to continue
during the current fiscal year and anticipate that in subsequent years the
fourth quarter will continue to contribute disproportionately to our operating
results, particularly during November and December. Any factors negatively
affecting our business during the fourth quarter in any year, including
unfavorable economic conditions, could have a material adverse effect on our
financial condition and results of operations.

Our quarterly results of operations may also fluctuate significantly as a
result of a variety of other factors, including, among other things, the timing
and pre-opening expenses of new store openings, the relative proportion of new
stores to mature stores, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays and changes in our product mix. The market value of our
common stock will likely vary significantly in response to changes in our
quarterly results of operations.

OUR LEASE OBLIGATIONS ARE SIGNIFICANT AND ERRORS BY US IN SITE SELECTION COULD
BE COSTLY.

We operate all our stores in leased locations. We determine and negotiate
the rental rates based on our estimates of future store performance, which is
based on a number of assumptions. These assumptions could be wrong or the
conditions on which they are based could change during the term of a lease.

WE CURRENTLY HAVE A REGIONAL MARKET CONCENTRATION AND ARE SUBJECT TO REGIONAL
CONDITIONS.

Most of our stores are located in the eastern half of the continental
United States. Our current expansion plans anticipate that many of our new
stores will be located in the states where we already have operations or in
contiguous states. Consequently, our results of operations are more subject to
regional economic conditions, weather conditions, demographic and population
changes and other factors specific to a particular region than are the
operations of more geographically diverse competitors. In addition, changes in
such regional factors, which reduce the appeal of our stores and merchandise to
local consumers, could have a material adverse effect on our business, results
of operations and financial condition.

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We expect to open new stores in certain markets, in which we are already
operating, which could adversely affect the financial performance at existing
stores within those markets.

ECONOMIC CONDITIONS AND FLUCTUATIONS IN CONSUMER SPENDING COULD ADVERSELY AFFECT
OUR RETAILING OPERATIONS.

Our sales are also subject to a number of factors relating to consumer
spending, including general economic conditions affecting disposable consumer
income such as employment, business conditions, interest rates, the level of
consumer debt and taxation. A weak retail environment would adversely affect our
sales. We cannot assure you that purchases of hats will not decline during
economic recessions or that a prolonged recession will not have a material
adverse effect on our business, financial condition and results of operations.
In addition, economic downturns during the fourth quarter could adversely affect
us to a greater extent than if such downturns occurred at other times of the
year.

OUR COMPARABLE STORE SALES RESULTS MAY BE NEGATIVELY IMPACTED BY ECONOMIC
CONDITIONS AND OTHER FACTORS.

Numerous factors affect comparable store sales results, including among
others, weather conditions, retail trends, the retail sales environment,
economic conditions and our success in executing our business strategy. Our
comparable store sales results have experienced monthly fluctuations. In
addition, we anticipate that opening new stores in existing markets may result
in decreases in comparable store sales for existing stores in such markets. We
cannot assure you that comparable store sales for any particular period will not
decrease in the future. Variations in our comparable store sales results could
cause the market price of our common stock to fluctuate significantly and could
have a material adverse effect on us.

IF CUSTOMER TRAFFIC IN MALLS DECREASES THEN OUR OPERATING RESULTS WILL ALSO
DECREASE.

Substantially all of our existing stores are located in enclosed malls. As
a result, we must rely, in part, on the ability of mall anchor tenants and other
tenants to generate customer traffic in the vicinity of our stores. Our future
operating results will also depend on many other factors that are beyond our
control, including the overall level of mall traffic and general economic
conditions affecting consumer confidence and spending.

We cannot assure you that enclosed shopping malls will continue to attract
a sufficient number of shoppers for our business or that the malls in which we
have stores will continue to attract strong anchors or a sufficient number of
shoppers for our business.

WE ARE DEPENDENT ON FOREIGN-SOURCED MERCHANDISE, WHICH COULD BE ADVERSELY
AFFECTED BY SUCH FACTORS AS CHANGES IN FOREIGN TRADE PRACTICES AND ECONOMIC
CONDITIONS.

Some of our vendors are importers of merchandise manufactured by or for
them in the Far East. Risks involved in buying products manufactured abroad
include fluctuations in the value of currencies, and increases in customs duties
and related fees resulting from position changes by the United States Customs
Service. They are also subject to import controls and trade barriers (including
the unilateral imposition of import quotas), loss of most-favored- nation
trading status, restrictions on the

9
<PAGE>

transfer of funds, work stoppages, negative publicity from certain work or trade
practices and economic uncertainties.

Changes in foreign governments, regulations and political stability may
cause disruption of trade from the countries in which the suppliers of our
vendors are located.

FAILURE TO PROTECT TRADEMARKS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS WILL
ADVERSELY IMPACT OUR COMPETITIVENESS.

We seek to protect our rights, but our efforts may be inadequate and may
not prevent others from claiming violations by us of their proprietary rights.
The unauthorized misappropriation of our proprietary rights could have a
material, adverse effect on our business, financial condition and operating
results. Trade secret, copyright and trademark laws offer only limited
protection. Further, we may not be able to use our U.S. trademarks in other
countries where we may expand or trademark, copyright and trade secret
protection may not be available in those countries. Policing unauthorized use of
our proprietary information is difficult. If we resort to legal proceedings to
enforce our proprietary rights, the proceedings could be burdensome and
expensive and the outcome could be uncertain.

We may also be subject to claims alleging infringement by us of third party
proprietary rights. If we were to discover that any of our products infringed
third party rights, we may not be able to obtain permission to use such rights
on reasonable terms. This inability may require us to expend significant
resources to make our products non-infringing or to discontinue the use of such
products. Any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Further, a party making such a claim could
secure a judgment that requires us to pay substantial damages or that prevents
us from using or selling our products. Any of these events could have a
material, adverse effect on our business, financial condition and operating
results.

WE MAY MAKE ACQUISITIONS OR INVESTMENTS IN OTHER BUSINESSES THAT WILL EXPOSE US
TO NEW RISKS OR UNCERTAINTIES.

We may acquire or make investments in additional complementary businesses,
technologies, services or products if appropriate opportunities arise. This
acquisition and investment strategy has the following risks:

* we may not be able to identify suitable acquisition or investment
candidates at reasonable prices;
* we may make errors in determining which business opportunities are
complementary or appropriate;
* we may not be able to successfully integrate services, products or
personnel of any acquisition or investment into our operations;
* acquisitions and investments may cause a disruption in our ongoing
business, distract our management and other personnel and make it difficult
to maintain our standards, controls and procedures;
* we may acquire unknown liabilities in these acquisitions or investments;
* costs associated with these acquisitions, including the amortization of
intangible assets, will adversely affect profitability; and
* we may acquire companies or make investments in markets in which we have
little experience.

10
<PAGE>

WE MAY ENCOUNTER INTERNET REGULATORY UNCERTAINTIES IN OUR ATTEMPT TO
ESTABLISH ONLINE SALES.

Few laws or regulations are currently directly applicable to certain
activities on the Internet. However, new laws and regulations may be adopted
because of the Internet's popularity and growth in such areas as:

* online content;
* user privacy;
* taxation;
* access charges;
* linkage fees;
* copyrights;
* characteristics and quality of products and services, and
* consumer protection.

Such government regulation may impose additional burdens on our business.
They may also impede the growth in Internet use and thereby decrease the demand
for our products and services via the Internet.

Additionally, US and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their marketplace impact. Any new
legislation or regulation regarding the Internet, or application of existing
laws and regulations, to the Internet, could affect us.

WE MAY NOT BE ABLE TO OBTAIN THE MOST DESIRABLE WEB SITE ADDRESSES FOR OUR
BUSINESS.

We currently hold various Internet web site addresses related to our
business. We may not be able to prevent third parties from acquiring web site
addresses that are similar to our addresses, which could materially and
adversely affect our business, financial condition and operating results.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of web site addresses. The regulation of web site addresses in the
United States and foreign countries is subject to change. As a result, we may
not be able to acquire or maintain relevant web site addresses in all countries
where our services and products are made available through the Internet.
Furthermore, the relationship between regulations governing such addresses and
laws protecting trademarks is unclear.

OUR CURRENT DIRECTORS AND EXECUTIVE OFFICERS WILL CONTROL A MAJORITY OF THE
OUTSTANDING COMMON STOCK UPON COMPLETION OF THIS OFFERING.

After this offering, the officers and directors will control a minimum of
63% of the outstanding common stock. As a result, we may be able to exercise a
controlling influence over matters requiring approval of our shareholders,
including the election of directors, and over the business and affairs of our
company. Investors in this offering will not be able to exercise control. This
would include determinations with respect to mergers and other business
combinations, and the acquisition and disposition of our assets.

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS.

We expect to use the proceeds to open new stores and for working capital
and other corporate expenses. We may also use a portion of the net proceeds for
acquisitions and investments. We also plan to repay short-term indebtedness and
a bridge loan. Management will have broad discretion in applying the net
proceeds of this offering.

11
<PAGE>

You will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds.

WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.

We have never paid a cash dividend on our common stock. To the extent that
income is derived from our operations, it is likely that it will be used
entirely to fund growth, rather than being distributed to our shareholders. The
timing and payment of any other distributions are left entirely to our
discretion. Cash distributions of any kind are unlikely to occur, although we
may elect to make tax-free issuances of additional shares in the form of stock
splits or stock dividends. We cannot assure you that a stock split or dividend
will occur.

WE MAY NEED AND BE UNABLE TO OBTAIN ADDITIONAL CAPITAL.

We cannot assure you that we will be able to achieve our goals without
additional capital or that we will be able to raise the additional capital. Even
if additional capital is obtained, we cannot assure you that we will be able to
achieve our goals with additional capital, or that any new capital, if
available, will be on favorable terms.

INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.

The initial public offering price per share will exceed the net tangible
book value per share. Investors purchasing shares in this offering will suffer
immediate and substantial dilution of their investment.

FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.

The market price of our common stock could fall if our shareholders sell
substantial amounts of common stock (including shares issued on the exercise of
outstanding options) in the public market following this offering. These sales
might also make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate.

OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED.

There has never been a public market for our common stock. We cannot
predict the extent to which a trading market will develop or how liquid that
market might become. The initial public offering price has been determined by
negotiations between Hat World and the representative of the underwriter and may
not be indicative of prices that will prevail in the trading market.

OUR STATE OF INCORPORATION HAS RULES THAT DISCOURAGE TAKEOVERS, WHICH COULD
DEPRESS OUR STOCK PRICE.

Our company is incorporated in Minnesota, and Minnesota law could make it
more difficult for a third party to acquire us if opposed by us, even if a
change in control would be beneficial to our stockholders. These laws might
discourage, delay or prevent a change of control of Hat World or a change in our
management. These provisions could also limit the price that investors or a
potential acquirer might be willing to pay in the future for shares of common
stock.

12
<PAGE>

OUR STOCK PRICE MAY BE VOLATILE.

The general stock market and the market for small companies have been
highly volatile. Accordingly, the market price of our common stock is likely to
be volatile. Investors may not be able to resell their shares of our common
stock following periods of volatility because of the adverse reaction by the
market to such volatility. We cannot assure you that our stock will trade at the
comparative levels to other retail company shares or that the trading prices and
price earnings or price revenue ratios will be sustained. Factors that could
cause such volatility may include, among other things:

* actual or anticipated variations in quarterly operating results;
* new sales formats or new products or services;
* changes in financial estimates by securities analysts;
* conditions or trends in retailing;
* changes in the market valuations of other retail companies;
* announcements by us or our competitors or significant acquisitions,
strategic partnerships or joint ventures;
* additions or departures of key personnel;
* and sales of common stock and imbalances between the supply and demand for
shares on any given day.

Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed, with the Securities and Exchange Commission, Washington, DC,
a Registration Statement on Form SB-2 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, the exhibits and schedules.
For further information, about our common stock and us, please refer to the
Registration Statement, exhibits and schedules. Statements made in this
Prospectus as to the contents of any contract, agreement or other documents
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.

The Registration Statement, exhibits and schedules may be inspected without
charge and copied at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material may be obtained at prescribed rates from such
offices upon the payment of the fees proscribed by the SEC.

The Securities and Exchange Commission maintains a web site that contains
registration statements, reports, proxy and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address for the web site is http://www.sec.gov.

13
<PAGE>

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of
approximately $8,004,000 or $9,204,950 if the representative exercises its
over-allotment option in full. Each of these amounts is based upon an assumed
initial public offering price of $8.00 per share.

We expect to use the net proceeds of this offering for the following
purposes:

* to repay approximately $3.5 million in debt consisting of short-term
indebtedness of approximately $1.5 million and a bridge loan of $2.0
million which were used to fund the opening of new stores;

* to fund the expansion of new stores after the offering, estimated at
$2.5 million, which would increase to $3.0 million if the
over-allotment option is exercised in full;

* to make complementary acquisitions or investments, estimated at $1.5
million, which would increase to $2.2 million if the over-allotment
option is exercised in full; and

* for working capital and other general corporate purposes, estimated at
$.5 million.

We have not identified specific uses for all of the proceeds from this
offering, and management will have broad discretion over their use and
investment. As noted above, we may acquire or invest in complementary
businesses, management information systems and other technologies, services or
products and a portion of the net proceeds may be used for such acquisitions or
investments. However, we currently have no understandings, commitments or
agreements for any material acquisition or investment.

Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing investment grade securities.

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock.

We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.

14
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented:

* on an actual basis; and
* on an as-adjusted basis to reflect our receipt of the estimated net
proceeds from the sale of 1,150,000 shares of common stock at an
assumed initial public offering price of $8.00 per share, after
deducting underwriting discounts and estimated offering expenses.

<TABLE>
<CAPTION>
March 31, 1999
---------------------------
Actual As Adjusted
----------- -----------
<S> <C> <C>
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,143,446 shares issued and outstanding;
4,293,446 shares issued and outstanding as adjusted......... $ 31,436 $ 42,936

Additional paid in capital....................................... 4,383,230 12,375,730

Retained earnings................................................ 676,558 676,558
----------- -----------

Shareholders' Equity (Total Capitalization)...................... $ 5,091,224 $13,095,224
=========== ===========
</TABLE>

We expect there will be 4,293,446 shares of common stock outstanding after
this offering. In addition to the shares outstanding after the offering, we may
issue additional shares of common stock under the following plans and
arrangements:

* 433,500 shares issuable upon the exercise of stock options outstanding
under the 1999 Stock Option Plan at a weighted average exercise price
of $5.61 per share;

* 446,500 shares available for issuance under the same Plan;

* up to 40,000 shares issuable upon the exercise of a warrant that we
have agreed to issue after the offering as partial consideration for a
loan guarantee. The warrant will be for two years after the effective
date of the offering and will have an exercise price equivalent to
125% of the initial public offering price per share; and

* 115,000 shares issuable upon the exercise of warrants to be issued to
the representative of the underwriters of this offering. The warrants
are to be exercisable for a period of four years commencing one year
after the effective date of the offering and shall be exercisable at
120% of the initial public offering price per share.

15
<PAGE>

DILUTION

As of March 31, 1999, the net tangible book value was $5,085,066 or $1.62
per common share. Net tangible book value per common share represents the amount
of our total tangible assets less total liabilities, divided by the number of
common shares outstanding.

After giving effect to the sale of the 1,150,000 shares of common stock
offered at an assumed initial public offering price of $8.00 per share, and
after deducting the underwriting discounts and estimated offering expenses
payable by us, our as adjusted net tangible book value at March 31, 1999 would
have been $3.05 per share. This represents an immediate increase in the as
adjusted net tangible book value of $1.43 to existing stockholders and an
immediate dilution in as adjusted net tangible book value of $4.95 per share to
purchasers of common stock in this offering. Dilution per share represents the
difference between the price per share paid by public investors and the as
adjusted net tangible book value per share at March 31, 1999. The following
table illustrates this per share dilution as of March 31, 1999.

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $ 8.00
Net tangible book value before the offering........................... $ 1.62
Increase to existing shareholders after offering...................... 1.43
-------

As adjusted net tangible book value per share after the offering........... 3.05
-------

Dilution per share to new investors........................................ $ 4.95
=======
</TABLE>

The following tables set forth, as of March 31, 1999, after giving effect
to the sale of the number of common shares, and without adjustment for
commissions and other expenses related to this offering, the number and
percentage of shares of common stock purchased from the Company, the amount and
percentage of cash consideration paid and the average price per share paid by
the new investor pursuant to this offering and by existing shareholders.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------------- ------------------------ Average Price
Number Percent Amount Percent Per Share
-------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 3,143,446 73% $ 4,414,666 22% $ 1.40
New investors............. 1,150,000 27% 9,200,000 68% $ 8.00
--------- -------- ------------ --------

Total................ 4,293,446 100% $ 13,614,666 100%
========= ======== ============ ========
</TABLE>

See "Capitalization" for information about shares issuable and reserved for
stock options and warrants that would also effect dilution.

16
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-1. The
statements of operations data are set forth below for the periods ended December
31, 1997 and 1998 and the three months ended March 31, 1998 and 1999. These
figures are derived from and qualified by reference to our financial statements
included elsewhere in this prospectus. The results are not necessarily
indicative of results to be expected for any future period

Net income (loss) $ 275,558 $ 642,569 $ (44,381) $ (284,272)
============ ============ ============ ============

Weighted average shares outstanding 2,074,902 2,820,890 2,545,816 3,143,446
</TABLE>

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements as a result of certain factors,
including those set forth under "risk factors" and elsewhere in this prospectus.
The following discussion and analysis should be read in conjunction with
"selected financial data," and the financial statements and notes thereto,
appearing elsewhere in this prospectus.

GENERAL

Our operating company, Hat World, Inc. was incorporated on June 1, 1995. We
made this company a subsidiary of a new holding company, Hat World Corporation,
which was incorporated on April 26, 1999. We have generated net income each year
that we have been in business, and sales and net income have grown each year.

Our annual sales increases have been mainly due to having more stores each
year. Total same store sales have also increased since inception. Price
increases have been much less a factor in the sales increases.

RESULTS OF OPERATIONS

From the calendar year ended December 31, 1996 to December 31, 1998 our net
sales increased at a compounded annual rate of 341.5%. Net income increased from
$53,632 in 1996 to $642,569 in 1998.

FIRST QUARTER OF 1999 COMPARED TO FIRST QUARTER OF 1998

The number of our stores increased to 62 from 21.

NET SALES. Net sales increased by $1,832,280, or 154%, to $3,023,721 for
the quarter ended March 31, 1999 compared to $1,191,441 for the quarter ended
March 31, 1998. This increase in net sales was due to the addition of 41 new
stores and a same-store sales increase of 5.4%.

COST OF SALES. Cost of sales, increased by $835,670, or 150%, to $1,393,006
for the quarter ended March 31, 1999 compared to $557,336, in 1998. Principal
reasons for this increase were the rise in the number of stores and the volume
of merchandise sold. As a percentage of net sales, cost of sales decreased to
46.1% in 1999 compared to 46.8% in 1998. The decrease, as a percentage of sales,
was due to our increasing buying power to negotiate lower prices from vendors,
which resulted in higher maintained markups.

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<PAGE>

OPERATING EXPENSES. Operating expenses increased by $1,375,038, or 191%, to
$2,094,393 in 1999 from the 1998 level of $719,355. This increase was due to the
increased cost of opening and operating the additional stores.

Rent and common area maintenance expenses are included in operating
expenses, are relatively fixed in nature, and remained relatively stable as a
percent of sales from 1999 compared to 1998.

Depreciation and amortization increased by $44,580, or 242%, to $63,036 in
1999 from the 1998 level of $18,456. This increase was primarily due to the
investment in 41 new stores.

OTHER. Due to the decrease in cash levels attributed to new store financing
and the existence of short-term debt, interest expense exceeded interest income
for the first quarter of 1999 compared to the first quarter of 1998. As a
percentage of sales, interest income, net and other income, were immaterial for
both quarters.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

The number of our stores increased to 53 from 18.

NET SALES. Net sales increased by $7,213,995, or 192%, to $10,975,102 for
the year ended 1998 compared to $3,761,107 for the year ended 1997. This
increase in net sales was due to the addition of 35 new stores, a same-store
sales increase of 12.4% and an 8.7% increase in the average unit retail price in
all stores.

COST OF SALES. Cost of sales increased by $3,190,904, or 187%, to
$4,897,930 in 1998 compared to $1,707,026 in 1997. Principal reasons for this
increase were the rise in the number of stores and the volume of merchandise
sold. As a percentage of net sales, these expenses decreased to 44.6% in 1998
compared to 45.4% in 1997. The decrease, as a percentage of sales, was due to
our increasing buying power to negotiate lower prices from vendors, which
resulted in higher maintained markups.

OPERATING EXPENSES. Operating expenses increased by $3,489,272, or 222%, to
$5,062,679 in 1998 from the 1997 level of $1,573,407. This increase was due to
the cost of opening and operating the additional stores. As a percentage of net
sales, these expenses increased to approximately 46.1% in 1998 compared to 41.8%
in 1997. The increase in selling, general and administrative expenses as a
percentage of sales is primarily attributable to the increased staff needed to
open the 35 new stores as well as additional staff needed to maintain product
flow to the additional stores, a 194% gain from 1998 compared to 1997.

Rent, rent support and the cost of the merchandising department, which are
included in operating expenses and are relatively fixed in nature, and remained
relatively stable as a percent of sales from 1998 compared to 1997.

19
<PAGE>

Depreciation and amortization increased by $323,216, or 234%, to $461,233
in 1998 from the 1997 level of $138,017. This increase was primarily due to the
investment in 35 new stores, and the remodeling of 3 stores.

OTHER. Due to the decrease in cash levels attributed to new store financing
and the existence of long-term debt, interest expense exceeded interest income
in 1998. As a percentage of sales, interest income, net and other income, were
immaterial for both 1998 and 1997.

INCOME TAXES. Income taxes increased by $170,400 to $365,700 in 1998
compared to $195,300 in 1997. Our effective tax rate decreased 5.2% from 1998
compared to 1997.

LIQUIDITY AND CAPITAL RESOURCES

Our operations have historically provided cash flow which, together with
our credit facilities and equity financing, have provided adequate liquidity to
meet our operational needs. Cash and cash equivalents, including short-term
investments, totaled $433,354 at the end of 1998.

Net cash provided by operating activities amounted to ($348,572) in 1998
compared to $556,330 in 1997. The decrease in 1998 was primarily due to
additional inventory purchased to support the 35 new locations in 1998 and
anticipated store openings for early 1999. Our current ratio, current assets
over current liabilities, was 1.96 for 1998 and 1.52 for 1997.

At the end of 1998, we had available a $650,000 credit line with a bank to
finance our working capital requirements. This facility was to mature on May 31,
1999; however, in March 1999 we obtained a $3,500,000 credit line with a
different bank. On April 21, 1999, we received an additional $2,000,000 credit
line with the new bank, in the form of a bridge loan. This bridge loan is
guaranteed by Bluestem Capital Partners I. For the guarantee, we will pay
Bluestem an additional interest payment of 4% over the bank rate plus a warrant
to buy additional shares. The warrant is for the purchase of up to 40,000 shares
of our common stock at 25% over the initial public offering price. The number of
shares is to be prorated to the amount of the line used and is expected to be
the full 40,000 shares. The warrant is exercisable for two years following the
effective date of the offering.

At the end of 1998, we increased our investment in inventories to
$2,682,854, or 246%, from the 1997 balance of $775,701. The increase in
inventories was due to our opening and operating 35 additional stores in 1998
compared to 1997, a 194% increase. It was also due to inventory purchases made
near the end of 1998 for new store openings planned for early 1999. As a result,
inventory turnover decreased from 3.5x in 1997 to 2.9x in 1998. We believe
inventories are appropriate given the increase in the number of stores and the
level of sales currently being achieved.

During 1998, we continued to expand and remodel our store base. Significant
capital projects included the opening of 35 new stores and remodeling
approximately 3 stores. Funds expended for capital improvements totaled
$3,072,226 in 1998 compared to $969,805 in 1997. In the year ending December 31,
1999, capital expenditures are expected to be approximately

20
<PAGE>

$6,800,000 as we continue to invest in our store base, technology, and
enhancements to our new distribution facility.

YEAR 2000 COMPLIANCE

We may realize exposure and risks if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. We expect to resolve Year
2000 compliance issues primarily through normal upgrades of our software or by
replacing existing software with Year 2000 compliant applications. The cost of
these upgrades or replacements is included in our capital expenditure budget and
is not expected to be material to our financial position or operating results.
However, we cannot assure you that such upgrades and replacements can be
completed on schedule or within estimated costs or will successfully address our
Year 2000 compliance issues.

We use software and hardware developed by third parties both for our
network and internal information systems. We are currently conducting an
analysis to determine the extent to which vendors and suppliers have Year 2000
issues. If they are not yet Year 2000 compliant, we are asking them to provide a
description of their plans to become compliant.

Based on our work and assessments to date, we believe future costs relating
to the Year 2000 issue will not have a material impact on our consolidated
financial position, results of operations or cash flows.

IMPACT OF INFLATION

Inflation has not affected us, as we have generally been able to pass along
inflationary increases in our costs through increased sales prices.

RECENT ACCOUNTING PRONOUNCEMENTS

In Fiscal 1997, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which establishes
new guidelines for the calculation of earnings per share. Basic earnings per
share have been computed by dividing net income by the weighted-average number
of shares outstanding during the period. Diluted earnings per share have been
computed assuming the exercise of stock options, as well as their related income
tax effects. Earnings per share for all periods have been restated to reflect
the provisions of this Statement.

21
<PAGE>

BUSINESS

OUR COMPANY

We are a specialty retailer of sports related headwear. We believe that our
stores carry the largest and most complete selection of quality licensed and
branded baseball-style hats in the markets we serve. Our products are emblazoned
with logos representing the major sports teams in both the professional and
college leagues such as baseball, basketball, football, and motorsports. We also
sell branded, lifestyle, fashion and novelty caps, featuring cartoon and other
characters, seasonal caps such as stocking caps and golf caps, cap accessories
such as cap pins, cap-bill benders, cap racks and cleaning products. In
addition, we sell other sports related merchandise such as decorative license
plates and posters.

We opened our first store on November 3, 1995, in Lafayette, Indiana. We
grew to 5 stores in 1996, to 18 in 1997, to 53 stores in 1998 and to 75 stores
at the date of this prospectus. Our stores can be found primarily in enclosed
malls where our core customer, the young adult between the ages of 12 and 35,
shops frequently. Through our efficient store operations, focus on customer
service, and relationships with key vendors and mall developers, we believe that
we have grown to be the second largest sports-headwear specialty retailer in the
US and have been profitable annually since inception.

Hat World Corporation is a holding company that was incorporated in
Minnesota on April 26, 1999, in anticipation of this offering. We believe that
our holding company structure benefits us as we grow, especially if we acquire
other companies or operations. The holding company presently has only one active
operating subsidiary, Hat World, Inc., which was incorporated in Minnesota on
June 1, 1995.

EXISTING AND UPCOMING STORE LOCATIONS

The following are our store locations, listed in the order in which
they opened and are expected to open:

STORE OPENED DURING 1995

Tippecanoe Mall Lafayette, Indiana November 3, 1995

Total Stores Open: 1

STORES OPENED DURING 1996

Muncie Mall Muncie, Indiana February 29, 1996
Market Place Shopping Center Champaign, Illinois June 29, 1996
Washington Square Shopping
Center Indianapolis, Indiana November 7, 1996
White Oaks Mall Springfield, Illinois November 14, 1996

Total Stores Open: 5

22
<PAGE>

STORES OPENED DURING 1997

Northgate Mall Cincinnati, Ohio March 5, 1997
Glenbrook Square Mall Ft. Wayne, Indiana April 11, 1997
Green Tree Mall Clarksville, Indiana May 5, 1997
Jefferson Mall Louisville, Kentucky June 27, 1997
Florence Mall Florence, Kentucky July 11, 1997
Castleton Square Mall Indianapolis, Indiana July 20, 1997
Indianapolis Airport Indianapolis, Indiana July 30, 1997
River Valley Mall Lancaster, Ohio September 4, 1997
Lafayette Square Shopping
Center Indianapolis, Indiana October 23, 1997
Eastland Mall Bloomington, Illinois October 24, 1997
Bashford Manor Mall Louisville, Kentucky October 29, 1997
Honey Creek Mall Terre Haute, Indiana November 1, 1997
Greenwood Park Plaza Greenwood, Indiana November 2, 1997

Total stores open: 18

STORES OPENED DURING 1998

Greenwood Mall Bowling Green, Kentucky February 13, 1998
Janesville Mall Janesville, Wisconsin March 5, 1998
Southpark Mall Moline, Illinois March 27, 1998
Salem Mall Dayton, Ohio April 1, 1998
Lansing Mall Lansing, Michigan April 3, 1998
Dayton Mall Dayton, Ohio April 3, 1998
Crossroads Center Waterloo, Iowa April 9, 1998
Regency Mall Racine, Wisconsin April 15, 1998
Midland Mall Midland, Michigan April 17, 1998
Fashion Square Mall Saginaw, Michigan April 18, 1998
East Town Mall Madison, Wisconsin April 24, 1998
Knoxville Center Knoxville, Tennessee June 3, 1998
Cherryvale Mall Rockford, Illinois June 5, 1998
Lakeview Square Mall Battlecreek, Michigan June 9, 1998
College Square Mall Cedar Falls, Iowa July 1, 1998
Coral Ridge Mall Coralville, Iowa July 1, 1998
Union Station Shopping
Center St. Louis, Missouri July 9, 1998
Circle Centre Mall Indianapolis, Indiana July 14, 1998
Kentucky Oaks Mall Padacuh, Kentucky July 31, 1998
Governers Square Mall Clarksville, Tennessee September 3, 1998
Grand Central Mall Parkersburg, West Virginia September 24, 1998
Morgantown Mall Morgantown, West Virginia September 25, 1998
Meridan Mall Okemos, Michigan October 11, 1998
Meadowbrook Mall Bridgeport, West Virginia October 21, 1998
Indian Mound Mall Heath, Ohio October 23, 1998
Empire Mall Sioux Falls, South Dakota October 28, 1998

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Ohio Valley Mall St. Clairsville, Ohio November 17, 1998
Uniontown Mall Uniontown, Pennsylvania November 18, 1998
University Mall Carbondale, Illinois November 18, 1998
Fairfield Commons Beavercreek, Ohio November 20, 1998
Anderson Mall Anderson, South Carolina November 21, 1998
Bellevue Center Nashville, Tennessee November 24, 1998
Hamiltion Place Chattanooga, Tennessee November 25, 1998
New Towne Mall New Philadelphia, Ohio December 1, 1998
Charlottesville Fashion
Square Charlottesville, Virginia December 8, 1998

Total stores open: 53

STORES OPENED DURING 1999

College Square Mall Morristown, Tennessee January 19, 1999
Foothills Mall Maryville, Tennessee January 21, 1999
University Mall Little Rock, Arkansas February 24, 1999
McCain Mall Little Rock, Arkansas February 25, 1999
Huntington Mall Barboursville, West Virginia March 3, 1999
Oak Court Mall Memphis, Tennessee March 5, 1999
Nittany Mall State College, Pennsylvania March 13, 1999
Spotsylvania Mall Fredericksburg, Virginia March 16, 1999
Center at Salisbury Salisbury, Maryland March 24, 1999
Crossroads Mall St. Cloud, Minnesota April 1, 1999
Metro Center Mall Jackson, Mississippi April 7, 1999
The Pines Mall Pine Bluff, Arkansas April 13, 1999
Northwoods Mall Charleston, South Carolina April 14, 1999
Tower Place Shopping Center Cincinnati, Ohio April 17, 1999
Stones River Mall Murfreesboro, Tennessee May 11, 1999
Randhurst Mall Shopping
Center Mt. Prospect, Illinois May 13, 1999
Lakeland Square Lakeland, Florida May 14, 1999
Wiregrass Commons Dothan, Alabama May 18, 1999
River Ridge Mall Lynchburg, Virginia May 19, 1999
Capital Mall Jefferson City, Missouri June 2, 1999
North Park Mall Joplin, Missouri June 3, 1999
Golf Mill Shopping Center Niles, Illinois June 11, 1999

Total stores open: 75 to date

The following are additional store locations, with city and state, for
which we have signed leases and which we expect to open during the remainder of
1999. We can not assure you that we will be able to open these stores during
this period.

Chesterfield Town Richmond, Virginia
Cool Springs Galleria Franklin, Tennessee
Oak Hollow Mall High Point, North Carolina
Concord Mall Elkhart, Indiana

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South Park Mall Colonial Heights, Virginia
Coventry Mall Pottstown, Pennsylvania
Lincoln Mall Matteson, Illinois
Chapel Hills Mall Colorado Springs, Colorado
Westwood Mall Jackson, Michigan
Century Plaza Birmingham, Alabama
Pierre Bossier Mall Shreveport, Louisiana
Dover Mall Dover, Delaware
Crossroads Mall Oklahoma City, Oklahoma
Chesapeake Mall Chesapeake Bay, Virginia
Northpark Mall Ridgeland, Mississippi
Colony Square Mall Zanesville, Ohio
Apple Blossom Mall Winchester, Virginia
Tallahassee Mall Talahassee, Florida
Patrick Henry Mall Newport News, Virginia
New River Valley Mall Christianburg, Virginia
Plymouth Meeting Mall Plymouth, Pennsylvania
Rivertown Crossings Grandville, Michigan

In 1999, in addition to the above, we anticipate opening additional stores,
with locations to be determined, for which we have not executed leases.

INDUSTRY OVERVIEW

We compete in the large market for headwear and in the even larger market
for sports affinity products. Estimates of the sports related headwear market
segment vary widely, from $3 billion to over $9 billion in 1998. Recognizing
this wide range, our observation is that all specialty retailers of sports
related headwear represent a small fraction of the total market. This is because
the market for our products is highly fragmented, with competition coming from a
variety of retailers, including arena concessionaires, sporting goods stores,
department stores, discount stores, street vendors, catalog and internet
operations, and other specialty stores. We also believe that the specialty
retail format adds sales to the industry because we make the right products more
readily available to the consumer. Given the wide variance in estimates of the
existing market and our belief that we can increase the size of the market, we
believe our industry is sufficiently large for us to increase our market share.

We believe that the sports related headwear industry is benefiting from
certain favorable demographic and sports trends and economic factors, as
follows:

* We believe the interest in traditionally popular sports has remained
relatively stable, though product selection has grown considerably. In
the US, these would include the major college and professional sports,
such as baseball, football, basketball and hockey. According to the
most recent data from the National Sporting Goods Association, the
four major professional sports leagues represented over half of all
sports logo clothing purchases in 1998. Hat Business Quarterly, July
1997, reported that 1996 sales of the four major professional sports
accounted for $8.75 billion in U.S. retail sales.

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* Interest in traditionally less popular sports has grown. In the US,
these would include golf, professional wrestling, motorsports, soccer
and rodeo. For example, according to Sporting Goods Business Magazine,
May 17, 1999, "NASCAR driver jackets have become so hot among urban
teens and young adults recently that they're outselling a lot of
popular urban brands." The growth of interest in more sports increases
the demand for all types of licensed products associated with those
sports, thereby increasing the product assortment demands of
consumers.
* Growth of interest in sports has been accompanied by growth in the
variety of sports related products. This growth enhances the need for
a "specialty retail presentation" of these products. According to
Barnard's Retail Trend Report, February 1999 edition, "The shift of
consumer dollars away from conventional department stores continues
unabated...Successful apparel specialty stores target lifestyles and
the consumers that identify with them. Customers are made to feel the
stores exist for the express purpose of serving their specific tastes.
Large merchandise assortments and displays converge to yield that
effect."
* American teenagers, an important part of our target market, have more
disposable income than ever. According to USA Weekend's 12th Annual
Teen Survey, The Richest Generation Ever, dated May 2, 1999, "They're
not just rich - they spend billions. Teens spent a record $141 billion
last year, an average of $4,548 each - a gold mine that has everyone
from Hollywood executives to retailers scrambling to produce new
teen-targeted movies and magazines. Almost half the survey respondents
had spent at least $20 in stores within the previous week."
* Low unemployment and a strong stock market boost consumer confidence
and retail spending.
* Prevalence or awareness of skin cancer and debate about the effects of
pollution on the ozone layer of the earth's atmosphere has created
demand for skin care and sun-blocking products.

These demographic trends and economic factors have created a favorable
economic environment and market for headwear, and especially sports related
headwear. We believe that our retail store concept and web site are in good
positions to take advantage of these trends. We believe that due to the
proliferation of sports related headwear and the inability of non-specialty
retailers to carry the latest styles and varieties, there is considerable unmet
demand in the marketplace. By developing our specialty retail concept that
offers broad and deep product choices in sports headwear, we position ourselves
to capture this demand. As a result, we expect that we as a company will be able
to increase our sales, and subsequently, increase the size of our industry.

BUSINESS STRATEGY

Our goal is to be the leading specialty retailer of sports related
headwear. We define leading to include being a profitable, market-driven company
in which our employees enjoy their work. We believe the following elements of
our business strategy will continue to position us for growth:

CATEGORY-FOCUSED MERCHANDISING. Virtually all the products we sell are
available at other retailers. However, a consumer would have to shop many
different stores, and in some cases,

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other cities, to find the selection of products that we carry. We offer a large
selection at each location, at attractive prices. We intend to be a leader in
the sports-licensed headwear category. We can do this by offering a broad range
of products and by identifying fashionable merchandise reflecting the latest
trends. We must select and test-market products, and monitor and react to
individual and group item sales demands.

CONVENIENT LOCATIONS. Our stores are generally located in shopping centers
or malls. We prefer high traffic mall locations because a significant portion of
our business comes from convenience shopping. Our customers, heavily influenced
by the sports industry, want to buy hats but generally postpone purchasing until
the purchase opportunity is made easy and attractive. We provide this easy,
attractive buying opportunity through our convenient store locations, vast
product selection, and welcoming product display. We believe that high traffic
areas offer greater revenue potential than stand-alone locations where we would
be more dependent on the consumer making the store a destination. We must
continue to locate our stores in areas with favorable demographic
characteristics.

TALENTED, INTERESTED PERSONNEL. Generally, we have been able to attract
high quality personnel. We believe it is important that we recruit and hire
sports-minded, friendly managers and support personnel for our stores. A key
component of our business strategy is to make our stores a welcoming, fun
environment in which to work and shop. We believe sales increase in relation to
enjoyment of the buying experience. Enthusiasm for sports and our products is,
to some extent, conveyed by our personnel to the consumer, who is then more
motivated to purchase and enjoy our products.

GROWTH STRATEGY

Our growth strategy is as follows:
* maximize the value of our existing stores by investing in our people,
locations, inventory and systems;
* open new stores in desirable locations on reasonable terms based on
our review of the local market and demographics;
* explore new retail formats, including the kiosk format;
* build and improve our Internet web site;
* renegotiate and remodel desirable existing stores as leases expire;
* consider strategic acquisitions; and
* consider entering new business segments, such as embroidery and team
sales, as opportunities provide and resources allow.

Certain other elements of our growth strategy that are significant are as
follows:

IMPORTANCE OF BEING FIRST/RACE FOR REAL ESTATE. As a single classification
store, we sell primarily hats and have strong appeal to mall management
companies for placement in their malls. Nothing prevents a mall management
company from adding more than one hat retailer to a mall; however, the incentive
diminishes as such stores are added. In other words, there is an advantage to
being first in the mall. The first store tends to have a preferential market
position. We believe there is also an advantage to be perceived as the first of
a kind in the minds of consumers, and this is facilitated by being the first hat
retailer in a consumer's local mall. We believe our competitors

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also recognize these factors. As a result, there is essentially a race for real
estate between companies in our industry to obtain mall locations.

NATIONAL EXPOSURE. We presently have 75 stores in 20 states. We believe
that customer confidence and convenience is enhanced as we increase the number
of stores and our geographic presence. We believe that more stores and greater
geographical coverage give us greater exposure and recognition among consumers
in the regions where our stores are located and increase the benefits which
would otherwise be derived from advertising. We believe that for us there are
compelling benefits to growth. However, we prefer to grow in a well-managed
fashion, maintaining focus on key objectives such as profitability and enjoyment
of the workplace. We believe that we can continue to grow rapidly and well,
though we cannot assure you that this will occur.

KIOSK. In addition to the traditional store format, we also have the
flexibility to use kiosks. It would generally be true that a kiosk would produce
lower sales and less profits than a traditional store in the same mall. However,
kiosks are less costly to open and can be used on a permanent or temporary
basis. A kiosk might be used when a traditional space is not available on
favorable terms. In such cases, operating a kiosk tends to give us priority for
a traditional store on favorable terms when space subsequently becomes
available. A kiosk may also be used when we estimate that sales would be
insufficient to justify a traditional store space but yet desirable enough to
justify the cost of a kiosk. The inventory in a kiosk is about half that of a
traditional store, but the products offered represent approximately 80% of those
sold in a traditional store. While the per-square-foot rents are higher with a
kiosk, the space requirement is lower, so rents can still be favorable as a
percentage of sales through a kiosk. Also, since the cost to construct and set
up a kiosk is considerably less than a traditional store, the
return-on-investment can be higher with a kiosk, though the actual dollar
profits are less. We have two kiosks in operation and plans for opening
additional kiosk locations in 1999 and thereafter. We expect the kiosk format
will prove to be a suitable complement to our traditional stores.

TEMPORARY STORES. We have opened stores with temporary leases, which are
generally those for less than one year. We may employ this strategy during the
Christmas season in order to capture incremental sales and profits while
avoiding the expense of constructing and placing fixtures in a permanent store.
We have also used temporary stores to test a mall or location.

INTERNET WEB SITE. Use of the Internet by the general public has
experienced considerable growth in recent years. We believe that our core
customer may be inclined to use the Internet on a regular basis to purchase
consumer items. We expect that an Internet web site may prove to further enhance
the growth of our sales. Due to the constant entertainment needs of our core
market, a web site, like our stores would need constant updating.
Like our stores, profits would have to be sufficient to justify the costs.

MERCHANDISING STRATEGY

DISTINCTIVE, ITEM-FOCUSED MERCHANDISING. We fit the definition of a niche
or specialty retailer by offering a broad line of hats and hat accessories in a
single location. We are a desirable mall tenant because we are a single
classification store - we sell hats, and that is relatively unique in specialty
retail. Our niche facilitates mall planning and balances the retail store mix
with a highly

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prized specialty venue. Furthermore, our niche gives us the ability to generate
two to three times the average mall sales per-square-foot, without taking
significant revenue away from current mall merchants. This has enabled us to
establish favorable relationships with malls throughout the country. We expect
to leverage these contacts when securing mall space for our expansion strategy.

Due to the marketing power of sports, we expect that our primary market
category will likely always be sports-licensed headwear. We expect other
categories to be important, though not primary, categories from time-to-time.

LOCALIZED PRODUCTS. While the majority of our stores carry similar
products, each store's product assortment is tailored to meet the demands of the
consumer in the local market. This strategy allows each store to capitalize on
marketing advantages unique to its particular location. The sales patterns of
each store are monitored on a daily basis to maximize inventory turns while
satisfying local demands.

MULTIPLE SIZES, STYLES. We offer over 1,200 different hats with fitted hats
and multiples sizes, for a total variety of approximately 5,000 different hats.
Our stores offer mainly traditional, adjustable baseball-style caps. We offer
multiple styles, colors, textures and designs that most merchants don't offer in
one location. Some of our products are the authentic hats that the professional
players wear. We pride ourselves in staying current with styles and fashion. In
addition we have hat bill benders or curving devices and other accessories. We
believe product availability and convenience are greater factors than price in
our business.

CHANGING MERCHANDISE MIX. The success of a team or player, particularly
professionals, has a considerable degree of influence on the demand for their
licensed products. Since we have no advance knowledge of their future successes,
our pre-season buying decisions for some teams are relatively conservative. As
players and teams distinguish themselves and win games, demand increases for
their licensed products, including hats. Our buyers will then place additional
orders to supplement earlier buys. Our costs on such fill-in orders are higher;
however, the retail demand and inventory turns are greater, justifying the
differences.

PRODUCT PRESENTATION. We display our products in a visually appealing
manner. The variety of colors and styles of our product facilitates this effort.
We design our stores and product presentations to encourage customers to browse
and examine the products closely. Each manager has some flexibility to
creatively highlight those products that are expected to have the greatest
appeal to local shoppers. We agree with the viewpoint of the WWD/DNR Specialty
Stores Newsletter, April 1999 edition: "A specialty retailer that makes its
store inviting and visually exciting will always have a niche with its
customers."

WE ARE A CASH BUSINESS. We have no customer receivables since we do not
directly extend credit. We accept national credit cards and personal checks. We
special order products if a customer provides a deposit or pays in advance.

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A TYPICAL HAT WORLD STORE

FORMAT. Our prototype store ranges between 500 and 800 square feet,
although we have stores ranging in size from 200 to 1,200 square feet. The sales
floor is generally about 85% of the total leasehold space. The remainder is
storage and inset entryways. Merchandise is displayed according to display
guidelines and directives given to each store by the New Store Coordinating Team
and the District Manager with input from purchasing and operations personnel.
This procedure ensures uniform display standards and efficient allocation of
products throughout our stores. Our large product assortment is designed and
displayed to create buying interest. The checkout counter, or cash-wrap, is
generally located towards the center of the store, providing the store personnel
with a broad view of the entire store within a few steps.

STORE OPERATIONS. Hat World stores are open seven days a week during mall
hours. Malls are typically open 70 hours per week. A Senior Vice President of
Operations, Four District Managers, and 13 Area Market Leaders manage our store
operations. District Managers generally have responsibility for 25 stores within
a geographic district. Often, we designate our more experienced managers to
serve as Area Market Leaders. They become mentors to managers in their
geographic areas. The store manager is responsible for the day-to-day operation
of the store, including inventory receipt and merchandise display, personnel
functions, store security and sales. A typical store has one full or part-time
assistant manager and several part time sales associates, depending on the size
of the store, volume, and season. Additional part-time sales associates are
typically hired to assist with increased traffic and sales volume in the fourth
quarter. We compensate our district and store managers with a base salary plus a
performance bonus based on store sales, expense control and loss prevention.
Sales associates are compensated on an hourly basis.

We believe that our continued success is dependent on our ability to
attract, retain and motivate quality employees. In particular, the success of
our expansion program will be dependent on our ability to promote and/or recruit
qualified district and store managers and maintain quality sales associates. To
date, we have been able to hire district managers with prior supervisory
experience in the athletic apparel retail industry. Store managers, many of whom
were selected from among our sales associates, generally complete in-store
training before taking responsibility for a store. Store managers are
responsible for hiring and training new sales associates, assisted, where
appropriate, by our personnel administrator, district managers, or other
operations staff. We are continuing to develop enhanced training programs for
our store managers, assistant managers and sales associates. We constantly look
for motivated and talented people to promote from within Hat World, in addition
to recruiting from outside the Company.

SITE SELECTION. We seek to locate our stores in malls that are destinations
for large numbers of shoppers, which reinforces our quality image. To assess
potential new mall locations, we review financial and demographic criteria and
analyze the type and quality of tenants and competitive factors, square footage
availability, frontage space and location and other relevant criteria to
determine the overall acceptability of a mall and the optimal locations within
it. We prefer to locate our stores in regional or super-regional malls with a
history of high sales per-square-foot and multiple national department stores as
anchors. We prefer the presence of successful sporting goods stores or sports
apparel retailers that have modest hat inventories. Our ability to generate two
to three times the average mall sales per-square-foot, without taking
significant revenue away from current mall merchants, has enabled us to
establish favorable relationships with mall

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developers. Furthermore, we believe we are a desirable tenant for mall
developers because of our performance track record. We pay our rent on time,
provide audited financial statements, deliver sales productivity and have a
strong position in the headwear and accessory categories.

PURCHASING AND DISTRIBUTION

PURCHASING. We believe that our disciplined approach to purchasing, our
relationships with suppliers and our strong buying power contribute to our
successful purchasing strategy. We buy inventory on a centralized basis to take
advantage of volume purchase discounts and improve our ability to control
inventory product mix. Our 4-person centralized buying group, located in
Indianapolis, Indiana, is responsible for all purchasing decisions and price
negotiations with vendors. We purchase merchandise on a product by product
basis, rather than based upon broad category classifications.

We manage our total purchases based upon annual budgets that are set at the
beginning of the year and updated throughout the year. We purchase our products
from approximately 30 vendors; however, five vendors supply approximately 70% of
our products. Even though we do no direct importing, many of our vendors either
own production facilities in the Far East or contract their manufacturing with
firms in the Far East. We believe that by buying from importers and domestic
firms instead of directly from foreign manufacturers enables us to maximize
flexibility and minimize risks. We believe that our executive management and
buyers are more effective and efficient by focusing on managing the retail
business and allowing importers, wholesalers and manufacturers to handle the
procurement and shipment of foreign-manufactured merchandise for our stores. The
purchase of our products from domestic manufacturers and wholesalers enables us
to reduce the time between ordering products and displaying them in our stores.

A large part of the inventory purchases are relatively stable and is
purchased at trade shows many months in advance of sale. Inventory purchased at
such shows is generally offered at better prices and with longer payment terms
than other purchases. For example, major college team buys are placed in January
or February for the Christmas season. Delivery dates are predetermined and long
payment terms are common.

INTEREST IN NEW MERCHANDISE. Regardless of the quality of an inventory
management system, no system monitors hats not in the system. In other words, if
we do not carry a hat, our computer does not rate its potential in the
marketplace. For information on new hats, we rely on several sources. Vendors,
being eager to sell their merchandise, usually show us hats well in advance of
the hats being offered in stores. We will often buy a small order of new hats to
test sales before making larger commitments. At that point, the new hat enters
our system and sales can be monitored. We are not always correct in our buying
decisions; however, if our buyers reject a hat that subsequently proves to sell
well in other stores, vendors will generally re-introduce the hat to us with
sales information to entice us to buy.

We also rely on information feedback from our store managers regarding the
types of hats of interest to customers that we may not carry. This is
particularly important as we grow and expand geographically. Demand for
different styles varies geographically, especially with certain items such as
motorsports and professional rodeo products.

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GOOD VENDOR RELATIONSHIPS. We believe we have excellent relationships with
our vendors. We enjoy reasonable prices and credit terms. As we have grown over
the years, our alliances with merchandise suppliers have strengthened.

We buy all our products from United States-based vendors and manufacturers,
many of whom have offshore production facilities or contract their production
with such facilities. Approximately 70% of our purchases are concentrated with
five vendors. Those vendors have the broadest licensing agreements with teams
and leagues and offer the greatest number of design choices. While we are
dependent on key suppliers, they have some dependency on us as well. We believe
that we are among the largest buyers of the complete, or near complete, lines of
some of our vendors. Other national retailers, such as department stores, may
buy more of one design or another, but we buy a broad selection from these key
vendors. Additionally, our vendors are eager for us to test the marketplace with
their new products. Also, the retail market is very fragmented, with many small
retailers. We believe that our key vendors recognize a considerable efficiency
working with us in contrast to working with a large number of smaller accounts
where credit worthiness is often a concern. These factors contribute to our good
working relationship with our vendors.

PRODUCT DISTRIBUTION. Historically, we have both vendor-to-store direct
distribution and a centralized warehouse distribution center in order to
maintain a low cost operating structure. Most of our inventory is distributed
through our warehouse, which gives us more centralized quality control and
flexibility to make distribution decisions based on product deliveries from
vendors. Most of our merchandise is inspected and distributed through our
warehouse. Our vendors ticket approximately 80% of our merchandise.

Merchandise that is shipped directly to the stores is inspected and
ticketed at the stores, displayed in the store by store personnel and later
entered into the main computer system at our warehouse.

We believe our 17,000 square foot distribution/office facility will be
capable of handling 6,000,000 hats per year, which will be adequate to support
up to 300 stores. Our warehouse features a custom-designed, pallet-rack system
integrated with sloped plastic racks designed to expedite sorting and picking of
hats before shipment to stores. The warehouse design facilitates bundling of
palletizing goods, which helps contain freight costs. We believe that adequate
additional distribution center space will be available in the future on
acceptable terms as may be needed in order to accommodate our expansion plans.

MANAGEMENT INFORMATION SYSTEMS AND COMPUTERS

INVENTORY MANAGEMENT SYSTEM. We have historically placed considerable
emphasis on our management information and inventory control systems. We believe
that our systems are an important factor in enabling us to achieve our goals of
effective purchasing, merchandising and store management.

Our management information systems have always included automated
point-of-sale merchandising and financial applications. Our merchandise is
bar-coded, enabling us to manage

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and control inventory more efficiently and effectively. Sales reports are
updated daily in the merchandise reporting system by polling sales information
from each store's cash register. Our information system consists of registers
providing price look-up and scanning of bar-coded labels on a per item basis.
Through automated dial-up electronic communications to each store, sales
information is uploaded to the main system nightly. Information obtained from
such daily polling is used to implement merchandising decisions and to identify
the required merchandise reorders for each store. Shipments are made at least
weekly, and more often in some cases during the peak selling seasons. Our buyers
and merchandisers study the data to determine whether to add inventory by
buying, reduce inventory with price reductions or adjust stock-out points. A
complete physical count of inventory is made at least annually, utilizing
hand-held scanning equipment.

Our management information and control systems enable our operating team to
regularly identify sales trends, replenish depleted store inventories, change
prices, monitor merchandise mix and determine inventory shrinkage at individual
stores and throughout our store network. We believe these systems provide a
number of benefits, including improved store inventory management, better
in-stock availability, higher operating efficiencies and fewer markdowns.

INVENTORY MANAGEMENT SYSTEM UPGRADES. While our current system provides
useful data, we believe we may benefit by upgrading the sophistication of the
system. We have examined alternative systems that statistically interpret the
data, which should help improve the quality of our inventory management system
as we grow. When individual item sales show signs of slowing, they are
discounted. Our objective is to maintain fresh, new and clean inventory, as this
is what appeals most to our core market. It is important to us to maintain our
image of having the latest styles. Usually, moderate discounts are sufficient to
clear slow moving inventory if the discounts are taken promptly in response to
slowing customer demand for a product. We believe a new inventory control system
will identify slowing in sales of individual items more quickly than our current
system. One of our goals in upgrading to a more refined system is to reduce
discounting to clear slower moving inventory. Conversely, the new system should
identify increases in demand more efficiently, which will help the buyers
replenish hot items sooner. Inventory management is recognized as an important
aspect of our business. We have not determined, yet, the extent of change and
costs involved in upgrading or switching to a different system. Estimates are
between several hundred thousand dollars to almost a million dollars. We
recognize the importance of a strong inventory management system and are
continually examining ways to cost-effectively improve our methods and systems.

We expect to have a new inventory management system in place in 1999. The
new system may integrate the existing information system with new back-office
software, or the entire system will be replaced. The new system will be Year
2000 compliant and will be compatible with most of our existing hardware
systems. We expect to select a system that will allow for future expansion to
accommodate our growth plans.

ADVERTISING AND PROMOTION

The marketing power of the sports industry drives our sales. We believe
that people like to identify themselves with heroes and role models, and that
sports teams and celebrities fill that need for some people. People also like
group activities. Sports fans enjoy the group activity of

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viewing, discussing, arguing about, and betting on sports teams and games. The
sports industries are multi-billion dollar marketing networks that promote
themselves and the affinities with their teams. Therefore, in many respects, our
products are inherently sold by the sports industry. Our job is to offer their
products in desirable locations, at attractive prices and in a friendly manner.
Therefore, much of our advertising and promotion costs are built into the
wholesale cost of our products and our mall rents.

HISTORICAL ADVERTISING AND PROMOTION. Historically, we have not engaged in
extensive advertising because we believe that demand for our product is driven
by the sports industry. By paying mall rents for strategic locations in
high-traffic shopping malls we make the products available in locations
frequented by our core market. In the past, we have relied on location and
word-of-mouth advertising by our customers to generate traffic in our stores.
Our advertising was largely limited to sponsoring events, though we have placed
local newspaper and radio ads on occasion to promote our stores or specific
items in our stores. We have also budgeted for store promotion by managers who
provide hats for community fundraisers and events.

ADVERTISING TESTS. We believe it is unlikely that advertising would
increase the demand for products of teams out of favor. Advertising also does
not make our stores more convenient. The only remaining promotional need would
seem to be advertising to inform our target market that we have in-demand
products at convenient locations. To this extent, we have recently begun to
experiment with certain advertising and promotion techniques geared towards our
core market. We have yet to determine the impact that such advertising might
have on store performance.

Key elements of our advertising experiment are to promote ten store grand
openings. We are running traditional television, radio and newspaper ads on a
sample basis. We also plan to increase the level of our co-op advertising with
certain manufacturers. We are working to evaluate the effectiveness of the
various approaches and intend to define a promotion and advertising plan to
include the more successful strategies. The results of this study have not been
determined prior to this offering.

In addition, many shopping mall leases require some advertising, although
an industry shift to media funds has largely been implemented. Media funds are
contributions made by mall retailers at agreed levels to the shopping mall's
advertising fund based on the square footage of the store. Media funds are used
to promote the shopping mall, which encourages consumer visits. We believe that
we benefit from such advertising, though we consider it part of our rent
payment.

SALE EVENTS. We don't have traditional sale events, as do many retailers.
We discount products as sales of products slow, and we generally do more
discounting in January and February than the remainder of the year. Shopping
malls also traditionally have sidewalk sales in these months, and in which all
tenants are encouraged to participate. Sidewalk sale events enable us to sell
merchandise that we buy at discounted prices for sale purposes at such events
and to clear previously marked-down inventory.

GIFT CERTIFICATES/LIBERAL RETURN POLICY. Recognizing the challenges
experienced by gift givers to our core customer group, we offer gift
certificates and have a liberal return policy. These are used more heavily
during holiday shopping seasons.

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FREQUENT BUYER CARD. We promote customer loyalty through our Passport Club,
a frequent buyer card. To obtain membership to this program, our customers buy
their first hat at the regular price and pay an additional $3 for the club
membership. Thereafter, membership provides for a lifetime discount, from the
regular price, of 20% on hats and 10% on other items. We have over 81,000
members in our Passport Club program.

TRADEMARKS

We have applied for registered trademarks with the United States Patent and
Trademark Office for the mark "Hat World" and for our mark consisting of a
triangle with a character and a bar logo with the words "Hat World." We are not
aware of any claims of infringement or other challenges to our right to use our
marks in the United States.

COMPETITION

The retail athletic headwear industry is competitive with respect to
product selection, quality, location, service, and price. Our industry is highly
fragmented, and we compete against a variety of retailers that sell hats,
including arena concessionaires, sporting goods stores, department stores,
discount stores, street vendors, catalog and Internet operations, and other
specialty stores. We believe our range of products offered on a timely basis,
our price and service quality, make us a strong competitor. Furthermore, our
local market merchandising focus and our ability to identify trends and respond
quickly to the changing consumer demands throughout our store network give us a
competitive advantage. In addition to sports related headwear products, we
compete against other specialty retailers for high traffic mall locations. We
believe that our current relationships with mall developers and our aggressive
expansion strategy will continue to give us an advantage in obtaining strategic
store locations.

We compete with all specialty retailers for mall space. We compete most
aggressively with specialty headwear retailers vying for the same spaces. Our
largest competitor has approximately 300 locations. There are several smaller
chains with less than 25 stores each, and an unknown number of single store
operations.

CUSTOMERS

Our core customer is a young adult, 12 to 35 years old. We have found that
at $15 to $25 each, sports hats are a relatively affordable purchase for this
group. In particular, part of the Company's target market, teenagers, have
experienced a greater percentage increase of spending than any other consumer
group, at 50% over the past 5 years. To effectively penetrate this market, many
of our stores are located in shopping malls frequented by this age group, such
as those near colleges and universities.

EMPLOYEES

We have 405 employees, 175 of them are full time, and 230 are part time.
Five of the employees are in executive management. Relations with our employees
are satisfactory, and

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none are subject to collective bargaining agreements. There will be new
employees added as new stores are opened.

FACILITIES

Our holding company occupies 1,400 square feet of leased office space in
Sioux Falls, South Dakota. The lease expires May 31, 2000.

Our operating unit occupies approximately 17,000 square feet of leased
office and warehouse space in Indianapolis, Indiana. Our lease on that facility
expires on January 31, 2002.

LEGAL PROCEEDINGS

From time to time, we have been involved in legal proceedings incidental to
the conduct of our business, none of which have been material. There are no
material legal proceedings pending or, to our knowledge, threatened against us
or management.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers are as follows:

Name Age Positions
- ---- --- ---------

George N. Berger....... 42 Director (Chairman and Secretary)

James Harris........... 42 Director and Chief Executive Officer

Kenneth J. Kocher...... 33 Director and Chief Financial Officer

J. Glenn Campbell...... 34 Director; and Senior Vice President of
Operations of Hat World, Inc.

Scott A. Molander...... 34 Director; and Senior Vice President of Logistics
& Planning of Hat World, Inc.

Steve Kirby............ 46 Director

Paul A. Schock......... 40 Director

GEORGE N. BERGER has served as Corporate Secretary since January 1998 and
as a Director and Chairman of the Board of Directors since inception. He has
served as Senior Vice President of Investor Relations from September 1998 to
June 1999, and as Senior Vice President, Strategic Planning & Investor Relations
from July 1998 to September

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1998. From 1984 to present, he has been a business consultant and investor. Mr.
Berger received an MBA degree from the University of Minnesota, Minneapolis, in
1981; and a BA degree in Economics from Concordia College, Moorhead, Minnesota
in 1977.

JAMES HARRIS has served as President since June 1997 and as a director
since June 1998. From June 1982 until June 1997, Mr. Harris was employed by the
Footlocker division of Kinney Shoe Corp., a subsidiary of Woolworth Corp. (now
"Venator Group Inc."). He began his career at Footlocker as a Store
Manager/Manager Trainer and was promoted to District Sales Manager and then
Regional Vice President. As Regional Vice President, he was responsible for the
direct supervision of twelve District Sales managers with 292 specialty retail
stores including Footlocker, World Footlocker, Athletic Express and Footlocker
Outlets. Mr. Harris received a BS degree in Business from Central Michigan
University, Mt. Pleasant, Michigan.

KENNETH J. KOCHER, CPA, has served as Chief Financial Officer and Treasurer
since July 1997 and a Director since June 1999. He began serving the Company as
an accountant in January 1997. He also served as the Corporate Secretary from
July 1997 to January 1998. For the four years prior to joining the Company, he
was employed as a corporate controller with two medium size companies, one in
manufacturing and one in retail. Mr. Kocher worked in public accounting for five
years, three of which were with a large regional CPA firm, Charles Bailly & Co.
(now "EideBailly LLP"), as both an auditor and tax professional. Mr. Kocher
received a BA degree in Business Administration with a major in Accounting from
the University of North Dakota, Grand Forks, in December 1988.

J. GLENN CAMPBELL has served as a Director since inception and as Senior
Vice President of Operations since July 1998. He served as Corporate Secretary
from inception to July 1997, and as Chief Operating Officer from inception to
July 1998. From 1987 to September 1995, Mr. Campbell was employed by the
Footlocker division of Kinney Shoe Corp., a subsidiary of Woolworth Corp. (now
"Venator Group Inc."). Mr. Campbell received a BS degree in Marketing from
Southeast Missouri State University in December 1987.

SCOTT A. MOLANDER has served as a Director since inception and as Senior
Vice President of Logistics and Planning from July 1998 to present. He has
served as Chief Executive Officer from inception until July 1998, President from
inception until June 1997, and Chief Financial Officer from inception until July
1997. He became a full-time, salaried employee of the Company starting in
October 1996. Mr. Molander was employed in warehouse management by Target
Stores, a division of Dayton-Hudson Corporation, from July 1994 to October 1996.
From April 1994 to June 1994, he was a Sales Representative for Preston Trucking
Corp. From March 1989 to March 1994, Mr. Molander was employed by the Footlocker
division of Kinney Shoe Corp., a subsidiary of Woolworth Corporation (now
"Venator Group Inc."). He received a BS degree in Business Administration from
Dickinson State University, Dickinson, North Dakota in May 1988.

STEVE KIRBY has served as a Director of the Company since July 1997. Mr.
Kirby is a principal of Bluestem Capital Partners II, LP, an SBIC, and a member
of the Board of Managers of Bluestem Capital Partners I, LLC, each of which is
an investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Kirby Capital
Corp., a private equity firm. For the past five years, Mr. Kirby has

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<PAGE>

worked in partnership with Schock Financial Services, Inc., a company owned by
Paul A. Schock, in finding and structuring investments, as well as developing an
investor network for their joint private equity business, Bluestem Capital
Company and funds. Prior to forming Kirby Capital, Mr. Kirby was part owner,
secretary and senior claim counsel for Western Surety Company, a national surety
company, from 1972 to 1992. Mr. Kirby served as the 35th Lieutenant Governor of
South Dakota from May 1993 through January 1995. He is active in civic concerns,
serving on many boards and foundations. Mr. Kirby has a BS degree in Political
Science from Arizona State University and a JD degree from the University of
South Dakota Law School.

PAUL A. SCHOCK has served as a Director of the Company since July 1997. Mr.
Schock is a principal of Bluestem Capital Partners II, LP, an SBIC, and a member
of the Board of Managers of Bluestem Capital Partners I, LLC, each of which is
an investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Schock
Financial Services, Inc. ("SFS"). He is a certified financial planner and
private equity specialist who focuses on finding, structuring and managing
equity investments for his clients. SFS is a general partner in several motel
properties and has initiated and managed a number of manufacturing/operating
projects. Mr. Schock was a commercial banker and manager for eight years with
First Bank Systems of Minneapolis. He left to become CFO of publicly-held
manufacturing company in Sioux Falls, South Dakota. Mr. Schock graduated from
Augustana College, Sioux Falls, SD, with a Business Degree.

BOARD OF DIRECTORS

We currently have seven directors. The directors of the Company are elected
annually by the shareholders for a term of one year or until their successors
are elected and qualified. The officers serve at the pleasure of the Board of
Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The compensation committee consists of Steve Kirby and Paul A. Schock. The
compensation committee reviews and recommends compensation and benefits for the
executive officers.

The audit committee consists of Steve Kirby and Paul A. Schock. The
functions of the audit committee are:

* to review the scope of the audit procedures used by the independent
auditors;
* to review with the independent auditors the accounting practices and
policies;
* to consult with the independent auditors during the year;
* to approve the audit fee charged by the independent auditors; and
* to report to the Board of Directors on such matters and to recommend
the selection of the independent auditors.

DIRECTOR COMPENSATION

In June 1999, we expect to name two non-employee, outside directors and
grant each an option to purchase 4,000 shares of common stock exercisable at
$12.00 per share for three years.

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Additionally, these directors will each be paid $400 for each board meeting
attended in person, and $200 for attendance by teleconference. We will also
reimburse these directors for travel expenses to attend meetings. Grant of
future options will be at the discretion of the board of directors and will be
reviewed annually; however, the grant is expected to be for approximately 2,000
shares per year. Employee directors and non-outside directors do not receive
compensation designated for their participation as board members.

STOCK PLANS

1999 STOCK OPTION PLAN. Our non-qualified and restricted stock option plan
was adopted and approved by shareholders on June 15, 1999. It replaced a similar
plan that was approved on June 8, 1995. No options are to be granted after
December 31, 2005. The plan is administered by the board or a committee
appointed by the board.

Grants may be made to employees, including officers and employee directors,
consultants and non-employee directors of Hat World Corporation or any of its
subsidiaries. Grants under the plan may consist of options intended to qualify
as incentive stock options within the meaning of Section 422A of the Internal
Revenue Code, as amended, and nonqualified stock options that are not intended
to so qualify.

Under the plan, 880,000 shares of common stock have been reserved for
issuance. Shares issued and not expired, voided or forfeited under the prior
plan were "grandfathered" into this plan. Therefore, as of June 15, 1999, there
were outstanding options to purchase 433,500 shares of common stock at a
weighted-average exercise price of approximately $5.61 per share. There are
446,500 additional shares available for which stock options can be granted under
the plan.

The board determines the exercise price of options granted under the plan
in accordance with the guidelines set forth in the plan. The exercise price of
incentive stock options granted pursuant to the plan cannot be less than 100% of
the fair market value of the common stock on the date of the grant. The exercise
price of options granted to any person who at the time of grant owns stock
representing more than 10% of the total combined voting power of all classes of
the company's capital stock or any of its affiliates must be at least 110% of
the fair market value of the company's common stock on the date of grant. The
term of such options cannot exceed six years. Options granted under the plan are
subject to more restrictive terms and conditions and vest at the rate specified
in the option agreement.

Upon certain changes in control of the company, all outstanding options
under the plan must either be assumed or substituted by the surviving entity. In
the event the surviving entity determines not to assume or substitute such
options, then the exercise of such non-assumed options and awards held by
persons will be accelerated. Such options and awards will terminate if not
exercised prior to such change in control event.

401-K PLAN

We started a 401-K plan in February 1998 for all eligible employees
including executive officers. We contribute to this plan 50% of up to 5% of the
salary of each participating employee.

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EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by our executive
officers during the year ended December 31, 1998. There were no executive
officers that earned as much as $100,000 during the same year.

1998 SUMMARY COMPENSATION TABLE

ALL OTHER
NAME AND PRINCIPAL POSITION SALARY COMPENSATION
--------------------------- ------ ------------

George Berger, Chairman....................... $37,244 $0

James Harris, President....................... $80,394 $1,876

Kenneth Kocher, Chief Financial Officer....... $52,994 $0

J. Glenn Campbell, Vice President............. $62,512 $2,077

Scott Molander, Vice President................ $62,512 $1,846

The amounts set forth in "All Other Compensation" represents payments for
automobile allowances. We have since replaced the automobile allowance program
with the use of company-owned cars.

We increased the base pay of each of the executives listed above by 10% at
the time that we had 50 stores in operation. We also agreed to increase the
salaries of the executive officers by 10% at the time that we have opened 100
stores. We pay health insurance for all of the executive officers and their
families. We provide an automobile for each of the following: James Harris,
Scott Molander and J. Glenn Campbell. Please see the information below regarding
employment agreements, compensation and options granted to the executive
officers.

EMPLOYMENT AGREEMENTS

Effective July 1, 1998, we entered into separate 3-year employment
agreements with each of Messrs. Berger, Harris, Kocher, Campbell and Molander.
The base salary, incentive adjustments, performance bonuses and stock options
were set for the three year period for Messrs. Harris, Kocher, Campbell and
Molander and for one year for Mr. Berger.

The base pay rates were set to begin at $50,000 for Mr. Berger, $80,000 for
Mr. Harris, $60,000 for Mr. Kocher, and $70,000 each for Messrs. Campbell and
Molander.

The employment agreements were structured to provide three different types
of incentives for the executives, as follows:

* to encourage company growth, we provide for salary adjustments based
on the number of stores operated;

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<PAGE>

* to promote profits and the financial well-being of the company, we
provide performance bonuses based on certain levels of EBITDA or
earnings before interest, taxes, depreciation and amortization; and
* to promote increased appreciation of the value of our company, we
provide stock options.

The base salary adjustments provide for increases or decreases in annual
base salary for each of these executives as the number of stores which we
operate increases or decreases, as follows:

50 to 99 stores............... 10% increase or decrease*
100 to 149 stores............. 10% increase or decrease*
150 to 199 stores............. 15% increase or decrease*
200 to 249 stores............. 15% increase or decrease*

*The increases or decreases are based initially on the base pay rate
in the first year of employment and, after each adjustment, the
adjusted base pay rate is the rate for each period preceding the event
triggering such increase or decrease. For example, Mr. Harris's base
salary increased from the initial base pay rate of $80,000 per year to
$88,000 per year when we had 50 to 99 stores in operation. His
adjusted base salary will increase to $96,800 when we operate 100 to
149 stores. In other words, the increases or decreases apply to the
immediately prior adjusted annual base salary amount.

The performance bonus is based on a reasonable projected ratio of EBITDA
for the year, as determined by March 31 of that year by the Board of Directors.
In 1999, even though the EBITDA targets were not obtained for the 1998 fiscal
year, the board of directors unanimously approved a discretionary bonus to these
executives of 5% of their then annual base salary amounts.

The stock option incentives we set for our executives are as follows:

We granted George Berger an option to purchase 40,000 shares at an exercise
price of $6.50 per share. His options vest over a period of three years,
beginning on July 1, 1998. These options expire on December 31, 2001, and are
exercisable only during Mr. Berger's employment by us. In the event of an
acquisition of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate.

We granted James Harris an option to purchase 100,000 shares at an exercise
price of $6.50 per share. His options vest over a period of three years,
beginning on July 1, 1998. These options expire on December 31, 2001, and are
exercisable only during Mr. Harris's employment by us. In the event of an
acquisition of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate. We also granted Mr.
Harris an option to purchase 72,000 shares at an exercise price of $1.5625 per
share. Of the total, 52,000 shares were vested as of January 1, 1999 and 20,000
shares will vest on January 1, 2000. These options expire on May 31, 2000, and
are exercisable only during Mr. Harris's employment by us.

We granted Kenneth J. Kocher an option to purchase 80,000 shares at an
exercise price of

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<PAGE>

$6.50 per share. His options vest over a period of three years, beginning on
July 1, 1998. These options expire on December 31, 2001, and are exercisable
only during Mr. Kocher's employment by us. In the event of an acquisition of
more than 50% of our common stock by any control person or group (as defined by
the Securities and Exchange Commission definitions and guidelines), then vesting
of his options is immediate. We also granted Mr. Kocher an option to purchase
12,000 shares at an exercise price of $1.5625 per share. These options expire on
May 31, 2000, and are exercisable only during Mr. Kocher's employment by us.

We granted J. Glenn Campbell an option to purchase 40,000 shares at an
exercise price of $6.50 per share. His options vest over a period of three
years, beginning on July 1, 1998. These options expire on December 31, 2001, and
are exercisable only during Mr. Campbell's employment by us. In the event of an
acquisition of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate.

We granted Scott A. Molander an option to purchase 40,000 shares at an
exercise price of $6.50 per share. His options vest over a period of three
years, beginning on July 1, 1998. These options expire on December 31, 2001, and
are exercisable only during Mr. Molander's employment by us. In the event of an
acquisition of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate.

INDEMNIFICATION

Minnesota Statutes, Section 302A.521, contain an extensive indemnification
provision which requires mandatory indemnification by a corporation of any
officer, director and affiliated person who was or is a party, or who is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a member, director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a member, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, and against judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted, or failed to act, in good faith and in a
manner he 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. In some instances a court
must approve such indemnification.

Indemnification does not eliminate the duty of care and does not affect an
officer's or director's responsibilities under any laws, such as the federal
securities laws.

We have entered into indemnity agreements with each of our directors and
executive officers to indemnify them against expenses and losses incurred for
claims brought against them in their capacities as directors or executive
officers. The indemnification agreements provide that the maximum
indemnification by us of each director or officer would be the maximum extent
permissible under Minnesota law as amended from time to time. Indemnification is
available if the director or officer seeking indemnification:

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<PAGE>

* has not been indemnified by another corporation or employee benefit
plan with respect to the same matters complained of in the proceeding;
* has acted in good faith;
* had no reason, in the case of a criminal proceeding, to believe his
conduct was unlawful;
* received no improper personal benefits and complied with the conflict
of interest provisions of the Minnesota Statutes; and
* reasonably believed the conduct was in our best interests.

Our Board of Directors has authorized our officers to investigate the
availability and cost of director's and officer's liability insurance, and we
may purchase such insurance if the cost and benefits are deemed reasonable.

There is no pending litigation or proceeding involving any director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

As to indemnification for liabilities arising under the Securities Act of
1933 for directors, officers or persons controlling the company, the company has
been informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and unenforceable.

CERTAIN TRANSACTIONS

We have agreed to issue a warrant to Bluestem Capital Partners I to
purchase up to 40,000 shares of our common stock at an exercise price of 125% of
the initial public offering price. The warrant will expire two years from the
effective date of this initial public offering. The warrants are in partial
consideration for the guarantee of a $2,000,000 bridge loan from a bank, which
has funded new stores and working capital prior to this offering. We have also
agreed to pay Bluestem Capital Partners I an interest rate of 4% as additional
compensation for the guaranty.

We believe the transaction summarized above was made on terms no less
favorable than terms we could have obtained from unaffiliated third parties. The
board of directors has determined that any future transactions between us and
our officers, directors or principal stockholders will be approved by a majority
of the disinterested directors and will be on terms no less favorable than we
could obtain from an unaffiliated third party. The board of directors may obtain
independent counsel or other independent advice to assist in that determination.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table details certain information with respect to the
beneficial ownership of our common stock as of May 31, 1999 by:

* each stockholder known by us to beneficially own more than 5% of our
common stock;
* each named executive officer;
* each director; and
* all directors and executive officers as a group.

The table also presents information as adjusted to reflect the sale by us
of the shares offered hereby (assuming no exercise of the representative's
over-allotment option).

Percentage of Shares
Beneficially Owned
Shares Beneficially ----------------------
Owned Prior Prior to After
to Offering Offering Offering
------------------- -------- --------

George Berger (1) ................. 596,524 18.86% 13.83%

Bluestem Capital
Partners I, LLC (2) (3)....... 918,576 28.85 21.20

Bluestem Capital
Partners II, LP (2) (3)....... 597,630 19.01 13.92

J. Glenn Campbell (4).............. 410,000 12.96 9.51

James Harris (4)................... 126,000 3.86 2.85

Ken Kocher (1)..................... 82,500 2.58 1.90

Scott Molander (4)................. 410,000 12.96 9.51

All directors and officers as a
Group (7 persons).................. 3,141,230 91.92% 62.78%

(1) address is: Hat World Corporation, 4912 S. Minnesota Avenue, Sioux Falls,
South Dakota 57108;
(2) address is: 122 S. Phillips Avenue, Sioux Falls, South Dakota 55104;
(3) Steve Kirby and Paul A. Schock, directors, are control persons and
principals of Bluestem Capital Partners I, LLC and Bluestem Capital
Partners II, LP; and
(4) address is: Hat World, Inc., 8142 Woodland Drive, Indianapolis, Indiana
46278.

Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to warrants
or options held by that person that are

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<PAGE>

currently exercisable or will become exercisable within 60 days after May 31,
1999 are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing percentage ownership of any other person. Applicable
percentages are based on 3,143,446 shares of common stock outstanding as of May
31, 1999 and 4,293,446 shares of common stock outstanding after completion of
this offering. Unless otherwise indicated in the following paragraphs, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.

The shares listed as being owned by all directors and executive officers as
a group consists of:

* 2,867,230 shares; and
* 274,000 shares subject to stock options and warrants exercisable
within 60 days of May 31, 1999 held by our directors and executive
officers and entities affiliated with such persons.

The table does not take into account any shares sold as over allotment
shares, or any shares issued pursuant to underwriter's warrants.

DESCRIPTION OF CAPITAL STOCK

The following description summarizes certain terms of our capital stock and
certain provisions of our restated certificate of incorporation and bylaws.
Please refer to our restated certificate of incorporation and bylaws, which have
been filed as exhibits to this registration statement.

COMMON STOCK

We have authorized 10,000,000 shares of common stock, with a par value of
$.01 per share. Each holder of common stock has one vote per share on all
matters voted upon by the shareholders. Such voting rights are not cumulative
and as such shareholders holding more than 50% of the outstanding shares of
common stock are able to and will be able to elect all members of the Board of
Directors. There are no preemptive rights or other rights of subscription.

Each share of common stock is entitled to participate equally in dividends
as and when declared by the Board of Directors of Hat World out of funds legally
available, and is entitled to participate equally in the distribution of assets
in the event of liquidation. All shares, when issued and fully paid, are not
assessable and are not subject to redemption or conversion and have no
conversion rights.

MINNESOTA ANTI-TAKEOVER LAW

We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act. In general, Section 302A.671 restricts the
voting of certain percentages of voting control to be acquired in a control
share acquisition of the Company's voting stock (in excess of 20%, 33.3% or 50%)
until after shareholder approval of the acquisition is obtained. A "control
share acquisition" is an acquisition, directly or indirectly, of beneficial

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<PAGE>

ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. In general, Section 203A.673
prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved by a majority of
disinterested directors of the Company prior to the date the shareholder becomes
an interested shareholder. "Business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who is the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting stock
or who is an affiliate or associate of the corporation and at any time within
four years prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the corporation's voting stock.

In the event of certain tender offers for capital stock of the Company,
Section 302A.675 precludes the tender offeror from acquiring additional shares
of capital stock (including acquisitions pursuant to mergers, consolidations or
statutory share exchanges) within two years following the completion of such an
offer unless the selling shareholders are given the opportunity to sell the
shares of capital stock on terms that are substantially equivalent to those
contained in the earlier tender offer. Section 302A.675 does not apply if a
committee of the Board of Directors consisting of all of its disinterested
directors (excluding present and former officers of the Company) approves the
subsequent acquisition before shares are acquired pursuant to the earlier tender
offer.

These provisions of the Minnesota law could delay and make more difficult a
business combination, particularly one opposed by the board of directors, even
if the business combination could be beneficial, in the short term, to the
interests of shareholders. These statutory provisions could also depress the
price certain investors might be willing to pay in the future for shares of our
common stock (because it may make hostile takeovers more difficult and costly,
and therefore, less attractive to the potential pursuer).

LISTING

We intend to apply for listing of our common stock on the Nasdaq National
Market under the trading symbol "HATS."

TRANSFER AGENT AND REGISTRAR

American Securities Transfer and Trust, Incorporated has been appointed as
the transfer agent and registrar for our common stock.

46
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 4,293,446, shares of common
stock outstanding, or 4,465,946 shares if the over allotment option is exercised
in full. Of these shares, the 1,150,000 sold in this offering (1,322,500 with
the over allotment) will not be deemed to be restricted shares under the
Securities Act of 1933. The remaining 3,143,446 shares were issued and sold in
private transactions and in reliance on the private placement exemption of the
Securities Act.

The 3,143,446 restricted shares will be eligible for sale pursuant to Rule
144 of the Securities Act at the expiration of the one-year holding period from
their date of acquisition. The one-year holding period for some shares has
ended.

In general, under Rule 144 a person who has beneficially owned his
restricted shares for at least one year, and persons who are affiliates of the
company are entitled to sell within any three month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of our
common stock (approximately 42,936 shares immediately after this offering) or
the average weekly trading volume in the company's common stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about us. However, a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale and who
has beneficially owned his registered stock for at least two years would be
entitled to sell his shares under Rule 144 without regard to the volume
limitations, manner of sale provisions or notice requirements.

Prior to this offering there has been a limited market for the common stock
of the company, and no predictions can be made of the effect, if any, that
market sales of restricted shares or the availability of restricted shares for
sale will have on the market price of the shares if a market for the shares
develops. Nevertheless, sales of substantial amounts of the restricted shares in
the public market could adversely affect such market prices.

Taking into account the lock-up agreements the number of restricted shares
that will be available for sale under the provisions of Rules 144, 144(k) and
701, as of the date of this prospectus, 378,000 shares will be eligible for
sale, and 2,765,446 shares will be eligible for sale 12 months after the date of
this prospectus upon the expiration of the lock-up agreements. This does not
take into account any early release from the lock-up agreements or for sales in
reliance on Rule 701 with the consent of the representative of the underwriters.

47
<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which EBI Securities Corporation is
acting as representative, has severally agreed to purchase from us the
respective number of shares of common stock set forth opposite each
underwriter's name.

UNDERWRITER NUMBER OF SHARES

EBI Securities Corporation

Total ......

The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates opinions and letters from us, our counsel and independent auditors.
The underwriters will be obligated to purchase all the shares of common stock
offered, if any shares are purchased.

The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering, price and other selling
terms may be changed by the representative of the underwriters. The
representative has advised us that the underwriters do not expect any sales to
accounts for which any of the underwriters will exercise discretion as to such
sale.

We have granted to the representative of the underwriters an option,
expiring at the close of business on the 60th day after the date of this
prospectus, to purchase up to 172,500 additional shares at the initial public
offering price, less the underwriting discounts, all as set forth on the cover
page of this prospectus. The representative of the underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
common stock in this offering.

The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

Upon completion of this offering we will sell to the representative of the
underwriters for $25 warrants to purchase 115,000 shares of common stock. The
representative's warrants will become exercisable immediately after the
completion of this offering at a per share exercise price equal to 120% of the
initial public offering

48
<PAGE>

price, may not be exercised until one year after the completion of this offering
and will expire five years from the date of this prospectus. The
representative's warrants and underlying shares of common stock will be
restricted from sale, transfer, assignment or hypothecation for a period of one
year from the date of this prospectus, except to the representative,
underwriters, selling group members and their officers, partners and employees.
During the exercise period, holders of the representative's warrants are
entitled to certain demand and incidental rights with respect to the shares of
common stock issuable upon exercise of the representative's warrants. The common
stock issuable on exercise of the representative's warrants is subject to
adjustment in certain events to prevent dilution.

We will pay the representative a nonaccountable expense allowance of 3% of
the gross proceeds of the offering, which will include proceeds from the
over-allotment option, if exercised. The representative's expenses in excess of
the nonaccountable expense allowance, including its legal expenses, will be
borne by the representative. We have paid $40,000 to the representative as an
advance for expenses.

We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, and to contribute to
payments which the underwriters may be required to make regarding these
liabilities.

Hat World has agreed to give notice to the representative of meetings of
the board of directors and to grant access to such meetings to advisors
designated by the representative to attend the meetings as observers. EBI
Securities Corporation also has the right, but not the obligation, to nominate
one director to Hat World's board of directors until July 2003.

For a period of three years after this offering, the representative has the
right to participate as co-managing underwriter in any additional public or
private offering of debt or equity securities by us, excluding debt financing
transactions with banks. During this period, the representative also has the
right to serve as a financial advisor with respect to mergers or other strategic
transactions involving us. The representative may waive such rights if the terms
of its participation are unacceptable.

The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

49
<PAGE>

Neither Hat World nor the underwriters can predict the effect that the
transactions described may have on the price of the common stock. In addition,
neither Hat World nor the underwriters represent that the underwriters will
engage in such transactions. If begun, the transactions may be discontinued at
any time without notice. It is anticipated that certain of the underwriters will
make a market in the common stock on completion of this offering, as permitted
by law. The underwriters are not obligated to make a market in the common stock,
and if they do so may discontinue making a market at any time. We cannot assure
you that an active trading market will ever develop for the common stock.

Before this offering there has been no market for the common stock.
Negotiations between us and the representative will determine the initial
public offering price. The main factors to be considered in determining the
initial public offering price include:

* the information set forth in this prospectus and otherwise available;
* the history and the prospects for the industry in which we will
compete;
* the ability of our management;
* the prospects for our future earnings;
* the present state of our development and our financial condition;
* the general condition of the securities markets at the time of this
offering; and
* the recent market prices of, and the demand for, publicly traded stock
of generally comparable companies

The estimated initial public offering price per share range set forth on
the cover of this preliminary prospectus is subject to change as a result of
these and other factors.

LEGAL MATTERS

The validity of the common stock offered will be passed upon for Hat World
by Charles Clayton, Minneapolis, Minnesota. Clanahan, Tanner, Downing and
Knowlton, P.C., Denver, Colorado will pass upon certain legal matters for the
representative of the underwriters.

EXPERTS

The audited financial statements of Hat World, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
EideBailly LLP, independent public accountants, as indicated in their reports,
and are included in reliance on the authority of the firm as experts in giving
reports.

In June 1999, through stockholder ratification, Hat World, Inc. became the
sole operating subsidiary of Hat World Corporation, a holding company, which was
incorporated in April 1999.

50
<PAGE>

Index to Financial Statements

PAGE
----

Independent Auditor's Report F-2

Balance Sheets, December 31, 1998 (Audited) and March 31, 1999
(Unaudited) F-3

Statements of Operations, Years Ended December 31, 1997 and 1998
(Audited) and Three Months Ended March 31, 1998 and 1999 (Unaudited) F-4

Statements of Stockholders' Equity, Years Ended December 31, 1997 and
1998 (Audited) and Three Months Ended March 31, 1999 (Unaudited) F-5

Statements of Cash Flows, Years Ended December 31, 1997 and 1998
(Audited) and Three Months Ended March 31, 1998 and 1999 (Unaudited) F-6

Notes to Financial Statements F-8

F-1
<PAGE>

[LOGO] EIDE BAILLY LLP

--------------------------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS

INDEPENDENT AUDITOR'S REPORT

The Board of Directors
HAT WORLD, INC.
Sioux Falls, South Dakota

We have audited the accompanying balance sheet of HAT WORLD, INC. as of December
31, 1998, and the related statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HAT WORLD, INC. as of December
31, 1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.

/s/ Eide Bailly LLP

Sioux Falls, South Dakota
January 15, 1999

F-2
<PAGE>

HAT WORLD, INC.
BALANCE SHEETS
DECEMBER 31, 1998 (AUDITED) AND MARCH 31, 1999 (UNAUDITED)

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

DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 433,354 $ 12,224
Receivables 120,794 99,960
Income taxes refundable -- 190,143
Inventories 2,682,854 3,017,136
Prepaid expenses 67,192 168,268
------------ ------------

Total current assets 3,304,194 3,487,731
------------ ------------

DEFERRED INCOME TAXES 114,770 114,770
------------ ------------

INTANGIBLE ASSETS, net of accumulated amortization 2,566 6,158
------------ ------------

PROPERTY AND EQUIPMENT
Leasehold improvements 3,368,917 3,977,672
Furniture and fixtures 513,192 700,342
Equipment, office and computer 329,990 459,776
Vehicles 110,243 136,829
------------ ------------
4,322,342 5,274,619
Less accumulated depreciation & amortization (628,780) (815,314)
------------ ------------

3,693,562 4,459,305
------------ ------------

Total Assets $ 7,115,092 $ 8,067,964
============ ============

LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Notes payable - bank $ -- $ 1,500,000
Current maturities of long-term debt 15,511 24,700
Accounts payable, trade 836,317 1,153,012
Accrued expenses 456,858 215,169
Income taxes payable 373,221 --
------------ ------------

Total current liabilities 1,681,907 2,892,881
------------ ------------

LONG-TERM DEBT, less current maturities 57,689 83,859
------------ ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 10,000,000 shares
Issued, 3,143,446 shares 31,436 31,436
Additional paid-in capital 4,383,230 4,383,230
Retained earnings 960,830 676,558
------------ ------------

Total Stockholders' Equity 5,375,496 5,091,224
------------ ------------

Total Liabilities and Stockholders' Equity $ 7,115,092 $ 8,067,964
============ ============
</TABLE>

See Notes to Financial Statements

F-3
<PAGE>

HAT WORLD, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 (UNAUDITED)

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

THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 3,761,107 $ 10,975,102 $ 1,191,441 $ 3,023,721

COST OF SALES 1,707,026 4,897,930 557,336 1,393,006
------------ ------------ ------------ ------------

GROSS PROFIT 2,054,081 6,077,172 634,105 1,630,715

OPERATING EXPENSES 1,573,407 5,062,679 719,355 2,094,393
------------ ------------ ------------ ------------

INCOME (LOSS) FROM
OPERATIONS 480,674 1,014,493 (85,250) (463,678)

OTHER INCOME (EXPENSE)
Interest income 3,126 15,151 2,352 438
Interest expense (18,620) (41,404) (1,082) (12,783)
Other 5,678 20,029 3,287 2,236
------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE
INCOME TAXES 470,858 1,008,269 (80,693) (473,787)

INCOME TAXES (BENEFIT) 195,300 365,700 (36,312) (189,515)
------------ ------------ ------------ ------------

NET INCOME (LOSS) $ 275,558 $ 642,569 $ (44,381) $ (284,272)
============ ============ ============ ============

EARNINGS (LOSS) PER
COMMON SHARE, basic $ 0.13 $ 0.23 $ (0.02) $ (0.09)
============ ============ ============ ============

EARNINGS (LOSS) PER
COMMON SHARE, diluted $ 0.13 $ 0.22 $ (0.02) $ (0.09)
============ ============ ============ ============
</TABLE>

See Notes to Financial Statements

F-4
<PAGE>

HAT WORLD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED)

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

Common Stock Class A Common Stock Class M Common Stock Additional
------------------ -------------------- --------------------- Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings Total
--------- -------- -------- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 -- $ -- 35,540 $ 355 385,000 $ 3,850 $ 205,848 $ 64,786 $ 274,839
Issuance of 216,474 shares of
Class A common stock, net of
offering costs of $3,117 -- -- 216,474 2,166 -- -- 1,034,468 -- 1,036,634
Purchase and retirement of 560
shares of Class A common stock -- -- (560) (6) -- -- (3,170) -- (3,176)
Conversion of all shares of
Class M and Class A common
stock to shares of common stock 636,454 6,365 (251,454) (2,515) (385,000) (3,850) -- -- --
Issuance of 636,454 shares of
common stock pursuant to a
stock split in the form of a
stock dividend 636,454 6,365 -- -- -- -- -- (6,365) --
Net income -- -- -- -- -- -- -- 275,558 275,558
--------- -------- -------- ---------- ---------- --------- ---------- --------- ----------

BALANCE, DECEMBER 31, 1997 1,272,908 12,730 -- -- -- -- 1,237,146 333,979 1,583,855
Issuance of 248,815 shares of
common stock, net of offering
costs of $928 248,815 2,488 -- -- -- -- 2,996,584 -- 2,999,072
Issuance of 50,000 shares of
common stock upon the exercise
of options 50,000 500 -- -- -- -- 149,500 -- 150,000
Issuance of 1,571,723 shares of
common stock pursuant to a
stock split in the form of a
stock dividend 1,571,723 15,718 -- -- -- -- -- (15,718) --
Net income -- -- -- -- -- -- -- 642,569 642,569
--------- -------- -------- ---------- ---------- --------- ---------- --------- ----------

BALANCE, DECEMBER 31, 1998 3,143,446 31,436 -- -- -- -- 4,383,230 960,830 5,375,496
Net (loss) -- -- -- -- -- -- -- (284,272) (284,272)
--------- -------- -------- ---------- ---------- --------- ---------- --------- ----------

BALANCE, MARCH 31, 1999
(UNAUDITED) 3,143,446 $ 31,436 -- $ -- $ -- -- $4,383,230 $ 676,558 $5,091,224
========= ======== ======== ========== ========== ========= ========== ========= ==========
</TABLE>

See Notes to Financial Statements

F-5
<PAGE>

HAT WORLD, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND THREE MONTHS ENDED
MARCH 31, 1998 AND 1999 (UNAUDITED)

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

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------- ---------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 275,558 $ 642,569 $ (44,381) $ (284,272)
Charges and credits to net income
(loss) not affecting cash
Depreciation 33,250 116,435 13,778 48,833
Amortization of leasehold
improvements and intangibles 104,767 344,798 49,259 137,701
Deferred income taxes (20,585) (98,585) -- --
Changes in assets and liabilities
Receivables 10,954 (116,748) 3,344 29,095
Inventories (587,591) (1,907,153) (183,686) (334,282)
Prepaid expenses 146 (61,324) (30,336) (101,076)
Accounts payable, trade 389,664 332,647 (137,207) 287,618
Accounts payable, stockholders (3,733) -- -- --
Accrued expenses 168,394 230,636 (83,898) (241,689)
Unearned membership dues (4,225) -- -- --
Income taxes payable 189,731 168,153 (241,695) (563,364)
----------- ----------- ----------- -----------
NET CASH FROM (USED FOR)
OPERATING ACTIVITIES 556,330 (348,572) (654,822) (1,021,436)
----------- ----------- ----------- -----------

INVESTING ACTIVITIES
Property and equipment purchases (969,805) (3,072,226) (283,435) (911,526)
Reimbursement received on property
and equipment purchases -- -- -- 7,830
Payment of start-up costs -- -- -- (3,646)
----------- ----------- ----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES (969,805) (3,072,226) (283,435) (907,342)
----------- ----------- ----------- -----------

FINANCING ACTIVITIES
Net borrowings (payments) on
notes payable (198,584) -- 385,000 1,500,000
Proceeds from long-term debt
borrowings -- 78,194 -- 40,663
Principle payments on long-term
debt -- (4,994) -- (5,304)
Proceeds from stock issuance,
net of offering costs 1,036,634 2,999,072 -- --
Proceeds from stock issuance
upon the exercise of options -- 150,000 -- --
</TABLE>

(continued on next page)

F-6
<PAGE>

STATEMENTS OF CASH FLOWS - PAGE 2

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

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------- ----------------------------
1997 1998 1998 1999
----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES (Con't.)
Purchase and retirement of stock $ (3,176) $ -- $ -- $ --
Payment of short-term payable used
to finance equipment purchases -- -- -- (27,711)
----------- ----------- ----------- -----------

NET CASH FROM FINANCING
ACTIVITIES 834,874 3,222,272 385,000 1,507,648
----------- ----------- ----------- -----------

NET CHANGE IN CASH AND CASH
EQUIVALENTS 421,399 (198,526) (553,257) (421,130)

CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 210,481 631,880 631,880 433,354
----------- ----------- ----------- -----------

CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 631,880 $ 433,354 $ 78,623 $ 12,224
=========== =========== =========== ===========

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period
Interest $ 22,561 $ 41,404 $ 1,082 $ 8,487
Income taxes 26,175 296,132 205,383 333,519
=========== =========== =========== ===========

SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and
equipment through accounts
and notes payable $ -- $ 137,954 $ 383,446 $ 56,788
Reimbursement due for property
and equipment purchases
included in receivables -- 118,700 -- 16,091
Stock split in the form of a
stock dividend 6,365 15,718 -- --
=========== =========== =========== ===========
</TABLE>

See Notes to Financial Statements

F-7
<PAGE>

HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998

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

NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPAL BUSINESS ACTIVITY

Hat World, Inc. (the "Company") was incorporated June 1, 1995 for the purpose of
operating specialty retail stores, primarily to sell baseball-style caps. The
first store was opened November 3, 1995 and at December 31, 1998 fifty-three
stores were operating in fourteen states.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited interim financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999, are unaudited but, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
which are necessary for a fair presentation of financial condition, results of
operations, and cash flows. The operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.

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.

CASH EQUIVALENTS

The Company considers money market funds to be cash equivalents.

INVENTORIES

Inventories are valued at the lower of cost, (first-in, first-out method) or
market.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives:

Furniture and fixtures 5 - 7 years
Equipment, office and computer 3 - 5 years

Amortization of the leasehold improvements is computed over the lives of the
respective leases which are one to nine years.

F-8
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

INTANGIBLE ASSET

Amortization of the cost of developing Company trademarks for registration is
computed using the straight-line method over an estimated life of fifteen years.

CONCENTRATION OF CREDIT RISK

At December 31, 1998, one bank account had $437,119 in excess of the Federal
Deposit Insurance Corporation insurance limits.

INCOME TAXES

Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between property and equipment for financial
and income tax reporting. The deferred tax assets represent the future tax
return consequences of those differences, which will be deductible when the
assets are recovered.

ADVERTISING

Advertising costs are expensed as incurred. The Company incurred $28,584 and
$13,932 for advertising costs in 1998 and 1997, respectively.

RECLASSIFICATIONS

Certain amounts in 1997 have been reclassified to conform with 1998
presentation.

NOTE 2 - LINE OF CREDIT AND LONG-TERM DEBT

The Company has a variable rate line of credit of $650,000 at
December 31, 1998, due on demand and secured by
substantially all assets of the Company. Interest is
.5% above the bank's prime rate, and was 9.25% at
December 31, 1998 $ --
===========

F-9
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

Long-term debt at December 31, 1998 consists of:

3.9% note payable to finance corporation, due in monthly
installments of $357, including interest, to
July 2002; secured by a vehicle $ 18,623

9.77% note payable to bank, due in monthly installments
of $449, including interest, to August 2003;
secured by two vehicles 40,255

8.0% note payable to finance corporation, due in monthly
installments of $490, including interest, to
August 2002; secured by a vehicle 14,322
-----------
73,200
Less current maturities (15,511)
-----------

$ 57,689
===========
Long-term debt maturities are as follows:

Years Ending December 31, Amount
------------------------- -----------

1999 $ 15,511
2000 16,772
2001 18,145
2002 15,863
2003 6,909
-----------

$ 73,200
===========

NOTE 3 - ACCRUED EXPENSES

Accrued expenses at December 31, 1998 include:

Compensation, related withholdings & benefits $ 234,675
Sales taxes 182,170
Rent 11,703
Other 28,310
-----------

$ 456,858
===========

NOTE 4 - EMPLOYEE BENEFIT PLAN

The Company established a 401(K) retirement plan in 1998, which covers all
employees who meet eligibility requirements. Employees may defer a maximum of
15% of their salary. The Company will match 50% of the first 5% of the
employee's elective deferral. The Company may also make additional contributions
to the plan at the discretion of the Board of Directors. The Company's
contribution for 1998 was $15,681.

F-10
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

NOTE 5 - INCOME TAXES

The provision for income taxes for the years ended December 31, 1997 and 1998
follows:

1997 1998
------------------------------ ------------------------------
TOTAL CURRENT PREPAID TOTAL CURRENT PREPAID
-------- -------- -------- -------- -------- --------

Federal $146,600 $164,185 $(17,585) $283,700 $366,285 $(82,585)
State 48,700 51,700 (3,000) 82,000 98,000 (16,000)
-------- -------- -------- -------- -------- --------

Total $195,300 $215,885 $(20,585) $365,700 $464,285 $(98,585)
======== ======== ======== ======== ======== ========

The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate of 34% to pretax income for the years
ended December 31, 1997 and 1998 due to the following:

1997 1998
---------- ----------

Computed "expected" tax expense $160,092 $342,799
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 32,149 54,180
Other 3,059 (31,279)
---------- ----------

$195,300 $365,700
========== ==========

Deferred income taxes represent the accumulated depreciation differences between
financial statement and income tax reporting of property and equipment. There is
no valuation allowance account.

NOTE 6 - LEASE COMMITMENTS

The Company leases all fifty-three of its store locations and a warehouse under
noncancelable lease agreements with terms ranging from less than one year to
nine years. In most cases, management expects that in the normal course of
business, leases will be renewed or replaced by other leases. Generally, under
these leases, the Company is obligated for certain minimum rentals, real estate
taxes, utilities, insurance and contingent rentals based upon sales volume. Rent
expense under these leases was $1,230,657 and $390,531 for the years ended
December 31, 1998 and 1997, respectively. Included in the total rent expense for
the years ended December 31, 1998 and 1997 was $18,667 and $28,264,
respectively, representing contingent rent based upon sales volume. At December
31, 1998, the Company had also entered into lease agreements for nine new stores
and a new warehouse, with plans to begin operation at these locations during
1999. Minimum lease payments in future years are as follows:

F-11
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

Years Ending December 31, Amount
------------------------- -------------

1999 $ 1,759,868
2000 1,786,361
2001 1,801,257
2002 1,644,264
2003 1,533,408
Remaining Years 2,380,944
-------------

Total minimum lease payments $10,906,102
=============

Subsequent to year end, the Company entered into a lease agreement for a new
store. The lease will commence on March 1, 1999, with a term of 107 months. The
annual minimum lease payment on the store will be $35,280.

NOTE 7 - EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY

During 1997, all Class M and Class A shares were converted to shares of common
stock, and basic earnings per share was computed for a single class of common
stock. Diluted earnings per share assume the execution of all stock options at
the shareholders' most advantageous price. Earnings per share has been computed
using the weighted average of the number of shares outstanding during each of
the periods presented.

In both 1998 and 1997 the Company declared two for one stock splits in the form
of a stock dividend of two shares of common stock for each share outstanding.
All stock option per share information in these financial statements has been
adjusted retroactively for the effect of these splits.

Following is a reconciliation of the numerators and the denominators for the
earnings per share computations:

<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders $ 275,558 2,074,902 $ 0.13

Effect of Dilutive Securities Options -- 40,936 --
------------- ------------- -------------

Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $ 275,558 2,115,838 $ 0.13
============= ============= =============
</TABLE>

F-12
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 642,569 2,820,890 $ 0.23

EFFECT OF DILUTIVE SECURITIES OPTIONS -- 62,122 --
------------- ------------- -------------

DILUTED EARNINGS PER SHARE
INCOME AVAILABLE TO COMMON
STOCKHOLDERS AND ASSUMED
CONVERSIONS $ 642,569 2,883,012 $ 0.22
============= ============= =============

<CAPTION>
For the Three Months Ended
March 31, 1998 (Unaudited)
----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------

Basic and Diluted Loss Per Share
Loss available to common stockholders $ (44,381) 2,545,816 $ (0.02)
============= ============= =============

<CAPTION>
For the Three Months Ended
March 31, 1999 (Unaudited)
----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------

Basic and Diluted Loss Per Share
Loss available to common stockholders $ (284,272) 3,143,446 $ (0.09)
============= ============= =============
</TABLE>

NOTE 8 - COMMON STOCK

Two classes of common stock were created to facilitate selling shares in an
initial offering of Class A shares to the public utilizing a Small Corporate
Offering Registration Exemption Form (Form U-7). The Class M shares were created
to demonstrate a commitment by the founders of the Company that they would not
participate in the direct financial rewards of owning shares in the Company
until such time as Class A shareholders had an opportunity to receive a priority
return on their investment. Class M shares were to be automatically converted
into Class A shares, on a one for one basis, at such time as the 24,400 Class A
shares sold in the initial U-7 offering achieved a 12.5% Annual, Cumulative,
Priority Return.

Such a priority return was achieved during 1997, in accordance with the terms of
the Company's articles of incorporation, by tendering an offer to buy-back all
outstanding shares issued pursuant to the U-7 offering at a cash purchase price
determined in the prescribed manner. The Company purchased and retired 560 Class
A

F-13
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

shares as a result of the buy-back offer. Acceptance of the buy-back offer by
shareholders was not a condition of conversion of the Class M shares to Class A
shares. Subsequent to tendering the buy-back offer, all outstanding Class M and
Class A shares were converted to shares of common stock, and the Company's
articles of incorporation were amended to reflect only one class of common
stock.

NOTE 9 - STOCK OPTIONS

The Company has reserved 880,000 shares of common stock in its 1995 Stock Option
Plan, as amended, and intends to grant such options to officers, store managers
and other employees as performance incentives. The incentive stock options will
vest over a three to five year period. The Plan expires on December 31, 2005.

During 1998 and 1997, the Company granted options to certain officers and
employees to purchase 329,000 and 114,000 shares, respectively, of common stock
under the Plan. The fair value of each option was estimated using a model
similar to the Black-Scholes option pricing model, with the following weighted
average assumptions: dividend yield of 0%; risk-free interest rate of 5% and 6%
in 1998 and 1997, respectively; and expected life of 3.4 years and 3 years in
1998 and 1997, respectively. Because the exercise price exceeded the market
value at grant date, it was determined that the fair value of the options was
insignificant and no compensation expense would be recorded. Vesting of certain
options granted to an officer was contingent upon the Company meeting net sales
and before tax profit goals during 1997 and 1998. The 1997 goals were met and
the related options vested in 1998. The 1998 goals were not met and the related
options expired.

The Company also reserved 100,000 shares of common stock under an option
agreement with a significant shareholder of the Company. These options were
granted by the Company in 1997 and were exercised by the shareholder in 1998.
The fair value of these options at grant date, determined using the same
assumptions as those stated above, was insignificant, and no value would be
recognized in the financial statements.

A summary of the status of the Company's stock options as of December 31, 1997
and 1998, and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
1997 1998
-------------------------- --------------------------
Weighted- WEIGHTED-
Average AVERAGE
Shares Exercise Price SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 214,000 $ 1.53
Granted 214,000 1.53 329,000 6.46
Exercised -- -- (100,000) 1.50
Forfeited -- -- (28,000) 2.08
--------- ---------

Outstanding at end of year 214,000 1.53 415,000 5.41
========= =========

Options exercisable at year-end 122,000 1.53 142,500 4.53
========= =========
</TABLE>

F-14
<PAGE>

NOTES TO FINANCIAL STATEMENTS

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

The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- -------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FIXED OPTIONS:
$ 1.5625 76,000 1.5 YEARS $ 1.5625 36,000 $ 1.5625
$ 4.00 13,000 2.0 YEARS 4.0000 13,000 4.0000
$ 6.50 300,000 3.0 YEARS 6.5000 75,000 6.5000
$ 10.00 10,000 3.0 YEARS 10.0000 2,500 10.0000

PERFORMANCE BASED:
$ 1.5625 16,000 1.5 YEARS 1.5625 16,000 1.5625
----------- -----------

415,000 2.6 YEARS 5.4100 142,500 4.5300
=========== ===========
</TABLE>

On January 6, 1999, stock options were granted to an employee of the Company to
purchase 2,500 shares of common stock for $10 per share. The options expire on
May 31, 2002.

F-15
<PAGE>

PART II

Item 24. Indemnification of Directors and Officers.

The statutes of the State of Minnesota provide for indemnification of
any officer, director or affiliated person for acts or omissions if he acted in
good faith and in what he believed to be the best interests of the corporation.
The registrant has indemnification agreements with its officers and directors.
The registrant understands that the Securities and Exchange Commission feels
that this indemnification is against public policy as to liability arising out
of the Securities Act of 1933.

Item 25. Other Expenses of Issuance and Distribution.

Registration Fees $3,125
NASD filing fee $
Nasdaq National Market application fee $5,000
Accounting Fees. $30,000
Legal Fees. $20,000
Printing Expenses $40,000
Blue Sky Fees $10,000
Transfer Agent and Registrar Fees. $10,000
Miscellaneous $
TOTAL $

Item 26. Recent Sales of Unregistered Securities.

The following are all sales of unregistered securities for the past three years.

Name Number of Shares Date Amount Paid

Bernadette A. Berger 10,200 8/95 $14,000
George N. Berger 495,440 6/95 $64,000
Ida Berger 4,400 9/95 $5,000
Ramona A. Berger 24,760 8/95 $33,260
Bluestem Capital I 838,576 7/97 $1,000,000
Bluestem Capital II 597,630 7/98 $3,150,000
J. Glenn Campbell 440,000 6/95 $1,000
CR Ventures, Inc. 220,000 6/95 $50,000
James I. Davis 340 4/97 $510
Neil C. Davis 340 4/97 $510
Gerard Hanson 4,800 2/95 $5,550
James Harris 4,000 10/97 $ 0
William Heupel 4,400 9/95 $5,000
Thomas D. Houle 1,760 8/95 $2,000
John M. Kavali 4,000 3/97 $6,000

<PAGE>

Becky Knudson 4,000 12/96 $5,500
Les Knudson 4,000 12/96 $5,500
Kenneth Kocher 10,000 10/97 $15,000
Donna Molander 2,640 12/95 $3,000
Scott A. Molander 440,000 6/95 $1,000
Shane Molander 800 12/96 $1,100
Harry Overholtzer 400 8/95 $(175)
Jack G. Rentschaler 7,200 10/96 $9,900
David W. Stewart 22,000 8/95 $25,000
Grant Washnok 1,760 9/95 $2,000

The registrant believes that all transactions were transactions not involving
any public offering within the meaning of Section 4(2) of the Securities Act of
1933, since (a) each of the transactions involved the offering of such
securities to a substantially limited number of persons; (b) each person took
the securities as an investment for his own account and not with a view to
distribution; (c) each person had access to information equivalent to that which
would be included in a registration statement on the applicable form under the
Act; (d) each person had knowledge and experience in business and financial
matters to understand the merits and risk of the investment; therefore no
registration statement need be in effect prior to such issuances.

Item 27. Exhibits.

3.0 Articles and Bylaws Hat World Corporation
3.1 Articles and Bylaws Hat World, Inc.
4.0 Opinion of Counsel/with consent
10.0 Lease, Indianapolis
10.1 Lease, Sioux Falls
10.2 Employment Agreement, James Harris
10.4 Employment Agreement, George Berger
10.5 Employment Agreement, Kenneth Kocher
10.6 Employment Agreement, Glenn Campbell
10.7 Employment Agreement, Scott Molander
24.0 Consent of Accountant

Item 28. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to reflect in the

<PAGE>

prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment
thereof) which, individually, or in the aggregate, represents a fundamental
change in the information set forth in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant 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 Act and will be governed by the final
adjudication of such issue.

(4) To file, during any period in which offers or sales are being made, a post
effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; (iv) that for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and (v)
to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on June 11, 1999.

HAT WORLD CORPORATION

By: /s/
------------------------------------
President

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on June 11, 1999.

/s/
---------------------------------------------------
George N. Berger, Director, Secretary

/s/
---------------------------------------------------
Kenneth J. Kocher, Chief Financial Officer

/s/
---------------------------------------------------
J. Glenn Campbell, Director

/s/
---------------------------------------------------
James Harris, Director, President

/s/
---------------------------------------------------
Scott A. Molander, Director

/s/
---------------------------------------------------
Steve Kirby, Director

/s/
---------------------------------------------------
Paul A. Schock, Director

EXHIBIT 3.0

ARTICLES OF INCORPORATION
OF
HAT WORLD CORPORATION

Pursuant to Minnesota statutes, Chapter 302A of the Minnesota Business
Corporation Act, the undersigned does hereby submit these Articles of
Incorporation for the purpose of forming a business corporation.

ARTICLE I
NAME

The name of the corporation is Hat World Corporation.

ARTICLE II
REGISTERED AGENT AND OFFICE

The registered agent and office of the corporation in Minnesota are as
follows:

Charles Clayton, Esq.
527 Marquette Ave. S., Suite 1800
Minneapolis, MN 55402
(Hennepin County)

ARTICLE III
AUTHORIZED CAPITAL STOCK

The Capital Stock which the corporation shall have authority to issue,
itemized by class, number of shares and par value, if any, is as follows:

CLASS OF COMMON SHARES NUMBER OF SHARES PAR VALUE PER SHARE
---------------------- ---------------- -------------------
Common Stock 10,000,000 $.01

Each share of Common Stock issued and outstanding shall be entitled to
one noncumulative vote.

ARTICLE IV
NO PREEMPTIVE RIGHTS

No holder of any class of stock in the corporation shall have a
preemptive right to acquire any rights to purchase securities of the Corporation
or a certain fraction of the unissued securities before the Corporation may
offer them to other person(s), other than such rights (if any) as the Board of
Directors, in its discretion, may determine from time to time.

ARTICLE V
LIMITATION OF LIABILITY

No director of the corporation shall be personally liable to the
corporation or any of its shareholders for monetary damages for breach of
fiduciary duty as a director; provided, that such limitation upon a director's
liability shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or it shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 302A.559 or 80A.23
of the Minnesota Statutes; (iv) for any transaction from which the director
derived an improper personal benefit; or (v) for any act or omission occurring
prior to the date this provision becomes effective. If the Minnesota Business
Corporation Act authorizes, or is amended to authorize, corporate action further
eliminating or limiting the personal liability of Directors, then the liability
of a Director of the Corporation shall be eliminated or limited to the fullest
extent permitted or permitted as so amended.

<PAGE>

ARTICLES OF INCORPORATION, PAGE 2.

ARTICLE VI
INCORPORATOR

The name and address of the incorporator are as follows:

George N. Berger
c/o Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108

ARTICLE VII
EFFECTIVE DATE

These Articles will be effective upon filing.

- ------------------------------------ ---------------------------------------
Date George N. Berger, Incorporator

State of South Dakota
ss
County of __________________________

The foregoing instrument was acknowledged before me this _____day of __________,
1999.

(Notarial Seal)

---------------------------------------
(Notary Public)

EXHIBIT 3.1

AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HAT WORLD, INC.

ARTICLE I
NAME

The name of the corporation is Hat World, Inc.

ARTICLE II
REGISTERED AGENT AND OFFICE

The registered agent and office of the corporation in Minnesota are as
follows:

Charles Clayton, Esq.
527 Marquette Ave. S., Suite 1800
Minneapolis, MN 55402
(Hennepin County)

ARTICLE III
AUTHORIZED CAPITAL STOCK

The Capital Stock which the corporation shall have authority to issue,
itemized by class, number of shares and par value, if any, is as follows:

CLASS OF COMMON SHARES NUMBER OF SHARES PAR VALUE PER SHARE
---------------------- ---------------- -------------------
Common Stock 10,000,000 $.01

Each share of Common Stock issued and outstanding shall be entitled to one
noncumulative vote.

ARTICLE IV
NO PREEMPTIVE RIGHTS

No holder of any class of stock in the corporation shall have a preemptive
right to acquire any rights to purchase securities of the Corporation or a
certain fraction of the unissued securities before the Corporation may offer
them to other person(s), other than such rights (if any) as the Board of
Directors, in its discretion, may determine from time to time.

ARTICLE V
LIMITATION OF LIABILITY

[STAMP]
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
OCTOBER 06, 1997
/s/ Joan Anderson Growe
Secretary of State

<PAGE>

BYLAWS

HAT WORLD, INC.
A MINNESOTA CORPORATION

<PAGE>

HAT WORLD, INC.
A MINNESOTA CORPORATION

TABLE OF CONTENTS

ARTICLE I OFFICES...........................................................1
Section 1 Principal Executive Office.....................................1
Section 2 Other Offices..................................................1

ARTICLE II MEETINGS OF THE SHAREHOLDERS......................................1
Section 1 Time and Place of Meetings.....................................1
Section 2 Regular Meetings...............................................1
Section 3 Special Meetings...............................................1
Section 4 Notice of Shareholders' Meetings...............................2
Section 5 Waiver of Notice...............................................2
Section 6 Validation of Defectively Called or Noticed Meetings...........2
Section 7 Notice Defined.................................................2
Section 8 Voting.........................................................3
Section 9 Quorum.........................................................3
Section 10 Action Without a Meeting.......................................3
Section 11 Proxies........................................................3
Section 12 Inspectors of Election.........................................4

ARTICLE III DIRECTORS.........................................................4
Section 1 Powers.........................................................4
Section 2 Number and Qualification of Directors..........................5
Section 3 Term of Office.................................................5
Section 4 No Cumulative Voting...........................................5
Section 5 Resignation and Removal........................................5
Section 6 Vacancies......................................................5
Section 7 Place of Meeting...............................................6
Section 8 Organization Meeting...........................................6
Section 9 Regular Meetings and Special Meetings; Notice and Waiver.......6
Section 10 Presence at a Meeting..........................................6
Section 11 Absent Director................................................6
Section 12 Quorum.........................................................6
Section 13 Action of the Board............................................7
Section 14 Action Without Meeting.........................................7
Section 15 Adjournment....................................................7
Section 16 Fees and Compensation..........................................7
Section 17 Committees.....................................................7
Section 18 Committee of Disinterested Persons.............................7
Section 19 Secrecy Agreement..............................................8

ARTICLE IV OFFICERS..........................................................9
Section 1 Officers.......................................................9
Section 2 Election.......................................................9
Section 3 Subordinate Officers, etc......................................9
Section 4 Removal and Resignation........................................9
Section 5 Vacancies......................................................9
Section 6 Chairman of the Board..........................................9
Section 7 President and Chief Executive Officer..........................9
Section 8 Chief Operating Officer........................................9
Section 9 Vice President................................................10
Section 10 Secretary.....................................................10
Section 11 Chief Financial Officer.......................................10
Section 12 Assistant Secretaries and Assistant Financial Officers........10

-i-
<PAGE>

ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS.....................................................11
Section 1 Definitions...................................................11
Section 2 Indemnification...............................................11
Section 3 Advances......................................................12
Section 4 Reimbursement to Witness......................................12
Section 5 Determination of Eligibility..................................12
Section 6 Change in Applicable Law......................................13
Section 7 Shareholder Disclosure........................................13
Section 8 Nonexclusive Right............................................13
Section 9 Insurance.....................................................13

ARTICLE VI CAPITAL STOCK....................................................13
Section 1 Record Date...................................................13
Section 2 Certificate of Shares.........................................14

ARTICLE VII CORPORATE RECORDS................................................14
Section 1 Books and Records.............................................14
Section 2 Inspection of Corporate Records...............................15
Section 3 Financial Statements..........................................16

ARTICLE VIII AMENDMENTS.......................................................16
Section 1 Power of Board of Directors...................................16
Section 2 Power of Shareholders.........................................16

ARTICLE IX MISCELLANEOUS....................................................16
Section 1 Checks, Drafts, Etc...........................................16
Section 2 Contracts, Etc., How Executed.................................16
Section 3 Representation of Shares of Other Corporations................16
Section 4 Construction and Definitions..................................17

-ii-
<PAGE>

BYLAWS

HAT WORLD, INC.

ARTICLE I

OFFICES

SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The Board of Directors shall fix,
and may from time to time change, the location of the principal executive office
of HAT WORLD, INC. (the "Corporation"), at any place within or outside the State
of Minnesota. If the principal executive office is outside the state of
Minnesota, and if the Corporation has one or more business offices in Minnesota,
the Board of Directors may fix and designate a principal business office in
Minnesota.

SECTION 2. OTHER OFFICES. Branch or subordinate offices may at any time be
established by the Board of Directors or the Corporation's President and Chief
Executive Officer at any place or places where the Corporation is qualified to
transact business or where the Board or the Corporation's President and Chief
Executive Officer deems necessary or desirable.

ARTICLE II

MEETINGS OF THE SHAREHOLDERS

SECTION 1. TIME AND PLACE OF MEETINGS. All regular and special meetings of
shareholders shall be held on the day or date and time and place, within or
without the State of Minnesota as may be designated by the President and Chief
Executive Officer or by the Board of Directors or a person authorized by these
Bylaws to call a meeting; PROVIDED, HOWEVER, that a meeting called by or at the
demand of a shareholder pursuant to Sections 2 and 3 of this Article II shall be
held in the county where the principal executive office of the Corporation is
located.

SECTION 2. REGULAR MEETINGS. Regular meeting of shareholders may, in the
Board's sole discretion, be held annually on a date and at such time as the
Board of Directors shall determine. At each regular meeting of the shareholders,
qualified successors for directors who serve and indefinite term or whose terms
have expired or are due to expire within six months after the meeting shall be
elected, reports of the affairs of the Corporation shall be considered, and any
other business may be transacted which is within the power of the shareholders.

If a regular meeting of shareholders has not been held during the
immediately preceding 15 month period, a shareholder or shareholders holding
three percent (3%) or more of the voting power of all shares entitled to vote
may demand a regular meeting of shareholders by written notice of demand given
to the President and Chief Executive Officer or the Chief Financial Officer of
the Corporation. Within 30 days after receipt of the demand by one of those
officers, the Board shall cause a regular meeting of shareholders to be called
and held on notice no later than ninety (90) days after receipt of the demand,
all at the expense of the Corporation. If the Board fails to cause a regular
meeting to be called and held as required by this paragraph, the shareholder or
shareholders making the demand may call the regular meeting by giving notice as
required by Section 4 of this Article II, all at the expense of the Corporation.

SECTION 3. SPECIAL MEETINGS. Except as otherwise provided by the Minnesota
Business Corporation Act, a special meeting of the shareholders may be called at
any time and for any purpose by (i) two or more Directors, (ii) the Chairman of
the Board, (iii) the President and Chief Executive Officer, (iv) the Chief
Financial Officer, or (v) by one or more shareholders holding ten percent (10%)
or more of the voting power of all shares entitled to vote, except that one or
more shareholders may only call a special

-1-
<PAGE>

meeting for the purpose of considering an action to directly or indirectly
facilitate or effect a business combination, including any action to change or
otherwise affect the composition of the board of directors for that purpose, if
they hold 25 percent or more of the voting power of all shares entitled to vote.

A shareholder or shareholders holding the voting power specified in the
preceding paragraph may demand a special meeting of shareholders by written
notice of demand given to the President and Chief Executive Officer or the Chief
Financial Officer of the Corporation and containing the purposes of the meeting.
Within 30 days after receipt of the demand by one of those officers, the Board
shall cause a special meeting of shareholders to be called and held on notice no
later than 90 days after receipt of the demand, all at the expense of the
Corporation. If the Board fails to cause a special meeting to be called and held
as required by this paragraph, the shareholder or shareholders making the demand
may call the meeting by giving notice as required by Section 4 of this Article
II, all at the expense of the Corporation.

The business transacted at a special meeting is limited to the purposes
stated in the notice of the meeting. Any business transacted at a special
meeting that is not included in those stated purposes is voidable by or on
behalf of the Corporation, unless all the shareholders have waived notice of the
meeting in accordance with Section 5 of this Article II.

SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. Notice of all meetings of
shareholders shall be given to every holder of shares entitled to vote, except
where the meeting is an adjourned meeting and the date, time and place of the
meeting were announced at the time of adjournment. Unless otherwise provided by
law, all notices of meetings of shareholders shall be sent or otherwise given
not less than five (5) nor more than sixty (60) days before the date of the
meeting. The notice shall specify the date, time and place of the meeting, and
in the case of a special meeting, a statement of the purposes of the meeting.

An affidavit of mailing or other means of giving any notice of a
shareholders meeting may be executed by the Secretary, Assistant Secretary or
agent of the Corporation giving the notice, may be filed and maintained in the
minute book of the Corporation, and, if utilized, shall constitute conclusive
and binding evidence that such notices are mailed or delivered as specified
therein.

SECTION 5. WAIVER OF NOTICE. A shareholder may waive notice of a meeting of
shareholders. A waiver of notice by a shareholder entitled to notice is
effective whether given before, at, or after the meeting, and whether given in
writing, orally, or by attendance. Attendance by a shareholder at a meeting is a
waiver of notice of that meeting, except where the shareholder objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened, or object before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of the item at the meeting.

SECTION 6. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of shareholders, either regular or special, however
called and noticed, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy, and
if, either before, during or after the meeting each of the persons entitled to
vote, not present in person or by proxy, or who, though present, has, at the
beginning of the meeting, properly objected to the transaction of any business
because the meeting was not lawfully called or convened, or to particular
matters of business legally required to be included in the notice, but not so
included, signs a written waiver of notice, or a consent to the holding of such
meeting, or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

SECTION 7. NOTICE DEFINED. "Notice" is given by a shareholder to the
Corporation or an officer of the Corporation when in writing and mailed or
delivered to the Corporation or the officer at the registered office or
principal executive office of the Corporation. In all other case, "notice" is
give to a person when mailed to the person at an address designated by the
person or at the last known address of the person, or when communicated to the
person orally, or when handed to the person, or when left at the office of the
person with a clerk or other person in charge of the office, or if there is no
one in charge, when left in a conspicuous place in the office, or if the office
is closed or the person to be notified has no office, when left at the dwelling
house or usual place of abode of the person with some person of suitable age and

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discretion then residing therein. Notice by mail is given when deposited in the
United States mail with sufficient postage affixed. Notice is deemed received
when it is given.

If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the Corporation is returned to the Corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have been duly given without
further mailing if such notices or reports shall be available to the shareholder
upon written demand by the shareholder at the principal executive office of the
Corporation for a period of one year from the date of the giving of the notice.

SECTION 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 1
of Article VI. Unless otherwise provided in the Corporation's Articles of
Incorporation, each shareholder has one vote for each share held, and the vote
may be by voice vote or by ballot. The shareholders shall take action by the
affirmative vote of the holders of a majority of the voting power of the shares
present and entitled to vote, unless the vote of a greater number or voting by
classes is required by the Articles of Incorporation or law. Except as provided
in the immediately following paragraph, a holder of shares entitled to vote may
vote any portion of the shares in any way the shareholder chooses. If a
shareholder votes without designating the portion or number of shares voted in a
particular way, the shareholder is deemed to have voted all of the shares in
that way.

Shares owned by two or more shareholder may be voted by any one of them
unless the Corporation receives written notice from any one of them denying the
authority of that person to vote those shares. Unless the Articles of
Incorporation or these Bylaws specifically provide otherwise, no shareholder
shall be entitled to cumulate votes for directors or for any other matter to
come before a vote of the shareholders.

SECTION 9. QUORUM. Unless otherwise provided in the Corporation's Articles
of Incorporation, the presence in person or by proxy of the holders of a
majority of the voting power of shares entitled to vote at any meeting shall
constitute a quorum for the transaction of business. If a quorum is present when
a duly called or held meeting is convened, the shareholders present may continue
to transact business until adjournment, even though the withdrawal of a number
of shareholders originally present leaves less than the proportion or number
otherwise required for a quorum.

SECTION 10. ACTION WITHOUT MEETING. Any action permitted or required to be
taken at a meeting of the shareholders may be taken without a meeting by written
action signed by all of the shareholders entitled to vote on that action. The
written action is effective when it has been signed by all of those
shareholders, unless a different effective time is provided in the written
action. Such written action or actions shall be filed with the minutes of the
proceedings of the shareholders and shall have the same force and effect as a
unanimous vote of the shareholders.

SECTION 11. PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by casting or authorizing the
casting of a vote by filing a written appointment of proxy with the Secretary of
the Corporation at or before the meeting at which the appointment is to be
effective. An appointment of a proxy for shares held jointly by two or more
shareholders is valid if signed by any one of them, unless the Secretary of the
Corporation receives from any one of those shareholders written notice either
denying the authority of that person to appoint a proxy or appointing a
different proxy. Any proxy duly executed is not revoked and continues in full
force and effect until, (i) a written notice of the termination of appointment
is filed with the Secretary of the Corporation, (ii) a new written appointment
of a proxy is filed with the Secretary of the Corporation, or (iii) written
notice of the death or incapacity of the maker of such proxy is received by the
Secretary of the Corporation before the proxy exercises the authority under the
appointment; PROVIDED, HOWEVER, that no such proxy shall be valid after the
expiration of 11 months from the date of its execution unless a longer period is
expressly provided in the appointment, and, PROVIDED, FURTHER, that an
appointment is not revocable if coupled with an interest except in accordance
with the terms of an agreement, if any, between the parties to the appointment.

Unless the appointment specifically provides otherwise, if two (2) or more
persons are appointed as proxies for a shareholder, (i) any one of them may vote
the shares on each item of business in accordance with the specific instructions
contained

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in the appointment and (iii) if no specific instructions are contained in the
appointment with respect to voting the shares on a particular item of business,
the shares shall be voted as a majority of such appointed persons determine.

SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. If inspectors of election are not appointed, the chairman of any such
meeting may make such appointment at the meeting. The number of inspectors shall
be either one or three. In case any person appointed as an inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the Board of Directors in advance of the meeting, or at the meeting by the
chairman of the meeting.

The duties of such inspector(s) shall be as follows:

(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies;

(b) Receive votes, ballots or consents;

(d) Count and tabulate all votes or consents;

(e) Determine when the polls shall close;

(f) Determine the result; and

(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.

The inspector(s) of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspector(s) of election is prima
facie evidence of the facts stated therein.

ARTICLE III

DIRECTORS

SECTION 1. POWERS. Subject to the limitations of the Corporation's Articles
of Incorporation, these Bylaws and the Minnesota Business Corporation Act as to
action to be or which may be authorized or approved by the shareholders, and
subject to the provisions of any shareholder control agreement pursuant to
Subdivision 2 of Section 302A.457 of the Minnesota Business Corporations Act,
all corporate powers shall be exercised by or under the direction of, and the
business and affairs of the Corporation shall be managed by or under the
direction of, the Board of Directors. The Board of Directors may delegate the
management of the day-to-day operations of the business of the Corporation to a
management company or other person provided that the business and affairs of the
Corporation shall be managed and all corporate powers shall be exercised under
the direction of the Board of Directors. Subject to the above limitations, it is
hereby expressly declared that the directors shall have the following powers in
addition to the other powers enumerated in these Bylaws or the Minnesota
Business Corporation Act:

(a) To select and remove all officers, agents and employees of the
Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Articles of Incorporation or the Bylaws,
fix their compensation and require from them security for faithful
service.

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(b) To conduct, manage and control the affairs and business of the
Corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the Articles of Incorporation or the
Bylaws, as they may deem best.

(c) To adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and
of such certificates from time to time, as in their judgment they may
deem best, provided such seal and such certificates shall at all times
comply with the provisions of law.

(d) To authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms as may be lawful in consideration
of money paid, labor done or services actually rendered, debts or
securities cancelled or tangible or intangible property actually
received.

(e) To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed an delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor.

SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors to be elected by the incorporators shall be two (2). Thereafter, the
number of directors to be elected at any regular or special meeting of
shareholders, or by appointment by the directors if a vacancy exists, shall be
determined by the Board of Directors. A director must be a natural person, but
need not be a shareholder.

SECTION 3. TERM OF OFFICE. The directors shall be elected at each regular
meeting of shareholders, but, if any such regular meeting is not held or the
directors are not elected thereat, the directors may be elected at any special
meeting of the shareholders held for that purpose. All directors shall hold
office until the next succeeding regular meeting and until their respective
successors are elected and qualified, or until their death, resignation, removal
or disqualification.

SECTION 4. NO CUMULATIVE VOTING. No shareholder shall have the right to
cumulative voting in the election of directors or in any and all other matter(s)
to come to a vote before the shareholders.

SECTION 5. RESIGNATION AND REMOVAL. Unless the notice specifies a later
time for the effectiveness of such resignation, any director may resign
effective upon giving written notice to the President and Chief Executive
Officer, the Chief Financial Officer or the Board of Directors of the
Corporation. If the resignation is effective at a future time, the Board or the
shareholders shall have the power to elect a successor to take office when the
resignation is to become effective. The resignation is effective without
acceptance.

A director may be removed at any time, with or without cause, by the Board
of Directors if a majority of the remaining directors present affirmatively vote
to remove the director.

Any one or all of the directors may be removed at any time, with or without
cause, by the affirmative vote of the holders of the proportion or number of the
voting power of the shares of the classes or series the director represents
sufficient to elect them.

New directors may be elected at a meeting at which directors are removed.

Notwithstanding any other provision of these Bylaws to the contrary, no
reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.

SECTION 6. VACANCIES. A vacancy in the Board of Directors shall be deemed
to exist in case of the death, resignation, removal or disqualification of any
director, or if the Board of Directors by resolution declares vacant the office
of a director who has been declared of unsound mind by order of court or

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convicted of a felony, if the authorized number of directors be increased, or if
the shareholders fail, at any regular or special meeting of shareholders at
which any director or directors are to be elected, to elect the full authorized
number of directors to be voted for at that meeting.

Vacancies in the Board of Directors may be filled by a majority of the
remaining directors, though less than a quorum, or by the sole remaining
director, and each director so elected shall hold office until his successor is
elected at a regular or special meeting of the shareholders and qualifies. The
shareholders may elect a director or directors at any time to fill any vacancy
or vacancies not filled by the directors.

SECTION 7. PLACE OF MEETING. Regular and special meetings of the Board of
Directors may be held at any place, within or without the State of Minnesota,
designated in the notice of the meeting or, if not stated in the notice, or if
there is no notice, at any place designated by resolution of the Board or by
written consent of all members of the Board. In the absence of such designation,
regular or special meetings shall be held at the principal executive office of
the Corporation.

SECTION 8. ORGANIZATION MEETING. Immediately following each regular meeting
of shareholders, the Board of Directors shall hold a regular meeting at the
place of regular meeting of shareholders or at such other place as shall be
fixed by the Board of Directors for the purposes of organization, any desired
election of officers, and the transaction of other business. Notice of such
meeting shall not be required.

SECTION 9. REGULAR MEETINGS AND SPECIAL MEETINGS; NOTICE AND WAIVER. The
organization, other regular and all special meetings of the Board of Directors
may be called by any director by giving five (5) days notice to all directors of
the time and place of the meeting. The notice need not state the purpose of the
meeting unless the Articles of Incorporation otherwise require.

A director may waive notice of a meeting of the Board. A waiver of notice
by a director entitled to notice is effective whether given before, at, or after
the meeting, and whether given in writing, orally, or by attendance. Attendance
by a director at a meeting is a waiver of notice of that meeting, except where
the director objects at the beginning of the meeting to the transaction of
business because the meeting is not lawfully called or convened and does not
participate thereafter in the meeting.

SECTION 10. PRESENCE AT A MEETING. A director shall be deemed present and
in attendance at a meeting if he attends in person or through electronic
communications. A conference among directors by any means of communication
through which the directors may simultaneously hear each other during the
conference constitutes a Board meeting, if the same notice is given of the
conference as would be required for a meeting, and if the number of directors
participating in the conference would be sufficient to constitute a quorum at a
meeting. Participation in a meeting by that means constitutes attendance in
person at the meeting.

A director may participate in a Board meeting not described in the
immediately preceding paragraph by any means of communication through which the
director, other directors so participating, and all directors physically present
at the meeting may simultaneously hear each other during the meeting.
Participation in a meeting by that means constitutes attendance in person at the
meeting.

SECTION 11. ABSENT DIRECTOR. A director may give advance written consent or
opposition to a proposal to be acted on at a Board meeting. If the director is
not present at the meeting, consent or opposition to a proposal does not
constitute attendance for purposes of determining the existence of a quorum, but
consent or opposition shall be counted as a vote in favor of or against the
proposal and shall be entered in the minutes or other record of action at the
meeting, if the proposal acted on at the meeting is substantially the same or
has substantially the same effect as the proposal to which the director has
consented or objected.

SECTION 12. QUORUM. Attendance at a meeting of the Board of Directors of a
majority of the directors currently holding office constitutes a quorum for the
transaction of business. If a quorum is in attendance when a duly called or held
meeting is convened, the directors originally in attendance may continue to
transact business until adjournment, even though the withdrawal of a number of
directors originally in attendance leaves less than the number otherwise
required for a quorum.

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SECTION 13. ACTION OF THE BOARD. Except where the Minnesota Business
Corporations Act or the Articles of Incorporation require the affirmative vote
of a larger portion or number, the Board of Directors shall take action by the
affirmative vote of a majority of directors present at a duly held meeting.

SECTION 14. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at a meeting of the Board of Directors may be taken by written action
signed by all of the directors. Unless a different date is provided in the
written action, the written action is effective when signed by the required
number of directors.

When written action is taken by less than all directors, all directors
shall be notified immediately of its text and effective date. Failure to provide
the notice does not invalidate the written action. A director who does not sign
or consent to the written action has no liability for the action or actions
taken thereby. Such written consent or consents shall be filed with the minutes
of the proceedings of the Board.

SECTION 15. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place
until a quorum is present. Notice of the time and place of holding an adjourned
meeting need not be given, other than by announcement at the meeting at which
adjournment is taken.

SECTION 16. FEES AND COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by resolution of the Board.

SECTION 17. COMMITTEES. The Board of Directors may, by a resolution adopted
by a majority of the authorized number of directors, establish an executive and
other committees having the authority of the Board in the management of the
business of the Corporation only to the extent provided in the resolution. Each
committee shall consist of two or more natural persons, who need not be
directors, who shall serve at the pleasure of the Board. The Board may designate
one or more natural persons as alternate members. The appointment of members or
alternate members of a committee requires the vote of a majority of the number
of directors present. Committees are subject at all times to the direction and
control of the Board except as provided in this Section 17. In the absence of
any such direction or control, such committee shall have the power to prescribe
the manner in which its proceedings shall be conducted. Unless the Board or such
committee shall otherwise provide, the provisions of these Bylaws and the
Minnesota Business Corporations Act applicable to meetings and actions of the
Board shall govern. Minutes shall be kept of each meeting of each committee and
shall be made available upon request to members of the committee and to any
director.

The establishment of, delegation of authority to, and action by a committee
does not alone constitute compliance by a director with his or her required
standard of conduct. Committee members are deemed to be directors for purposes
of Article V of these Bylaws and Article VII of the Articles of Incorporation
and for purposes of Sections 302A.251, 302A.255 and 302A.521 of the Minnesota
Business Corporation Act.

SECTION 18. COMMITTEE OF DISINTERESTED PERSONS. The Board may establish a
committee composed of two or more disinterested directors or other disinterested
persons to determine whether it is in the best interests of the Corporation to
pursue a particular legal right or remedy of the Corporation and whether to
cause the dismissal or discontinuance of a particular proceeding that seeks to
assert a right or remedy on behalf of the Corporation. For purposes of this
section, a director or other person is "disinterested" if the director or other
person is not the owner of more than one percent of the outstanding shares of,
or a present or former officer, employee, or agent of, the Corporation or of a
related corporation and has not been made or threatened to be made a party to
the proceeding in question. The committee, once established, is not subject to
the direction or control of, or termination by, the Board of Directors. A
vacancy on the committee may be filled by a majority vote of the remaining
committee members. The good faith determinations of the committee are binding
upon the Corporation and its directors, officers, and shareholders. The
committee terminates when it issues a written report of its determinations to
the Board of Directors.

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SECTION 19. SECRECY AGREEMENT. By accepting the nomination or position as a
director of the Corporation, each director agrees to be bound by the provisions
of these Bylaws including the secrecy provisions of this Section 19.

While serving as a director of the Corporation, each director shall not,
without the express prior authorization of the Corporation's Board of Directors,
directly or indirectly, other than in the performance of his duties required by
these Bylaws or by law;

(a) perform or render any services of a business, professional or
commercial nature, relating to services or products similar to those
of the Corporation;

(b) engage in any activity directly or indirectly in competition with
or adverse to the Corporation's business or welfare, whether
individually or as a shareholder, partner, officer, director, employee
or agent;

(c) engage in any activity for the purposes of influencing or
attempting to influence the Corporation's customers either directly or
indirectly, to conduct business with any business enterprise in
competition with the Corporation;

(d) undertake or participate in any planning for or organization of
any business activity that is or will be in competition with the
Corporation in any field(s) or area(s) in which the director has
worked or with which the director has come into contact or of which
the director has gained knowledge during the term of office as a
director with the Corporation.

No director shall at any time while serving as a director of the
Corporation either directly or indirectly use or divulge, disclose or
communicate to any person, firm or corporation, in any manner whatsoever, any
confidential information of any kind, nature or description concerning any
matters affecting or relating to the business of the Corporation unless the
Corporation gives its prior written consent or the disclosure is part of the
director's performance of his duties with the Corporation. By way of example
only and without limiting the generality of the foregoing, the term
"confidential information" as used in this Bylaw provision includes (i) the
names or practices of any of the Corporation's customers or clients, (ii) the
name of any of its vendors, suppliers or subcontractors, (iii) the names or
practices of any of its investors, owners, stockholders, creditors, employees or
persons associated directly or indirectly with the Corporation, (iv) any and all
ideas, concepts, notes, documentation, etc. relating to the business activity of
the Corporation, (v) the cost of materials or other items purchased by the
Corporation and the prices it obtains or has obtained or at which it sells or
has sold its products or services, (vi) descriptions of organizational
techniques or topics, (vii) lists or other written records of any kind used in
the Corporation's business, (viii) compensation paid to employees and other
terms of employment, (ix) any and all trade secrets and proprietary information
connected with the Corporation's business, or (x) any other confidential or
proprietary information, about or concerning the Corporation's business, its
manner of operation, or other confidential data of any kind, nature or
description.

Each director shall promptly disclose to the Corporation all discoveries,
designs, improvements, inventions, ideas and data, whether or not patentable or
registerable under copyright or similar statutes, made or conceived or reduced
to practice or learned by the director whether alone or jointly with others,
during the term of his relationship with the Corporation that (a) are related to
or useful in the business of the Corporation, (b) result from tasks performed by
the director or (c) result from the use of premises or information owned, leased
or contracted for by the Corporation (all such items being referred to as
"inventions"). All inventions shall be the sole property of the Corporation and
its assigns, and the Corporation and its assigns shall be the sole owner of all
patents, copyrights, and other rights in connection therewith.

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ARTICLE IV

OFFICERS

SECTION 1. OFFICERS. The officers of the Corporation shall be a President
and Chief Executive Officer, a Chief Operating Officer, a Chief Financial
Officer, a Secretary and, if desired, one or more Vice Presidents. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board, one or more assistant financial officers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article. Any number of offices may be held by the same person.

SECTION 2. ELECTION. The officers of the Corporation, except such officers
as may be appointed by the President and Chief Executive Officer in accordance
with the provisions of Section 3 or Section 5 of this Article, shall be chosen
by the Board of Directors, and each shall serve at the pleasure of the Board.

SECTION 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint,
and may empower the President and Chief Executive Officer to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office, for such period, have such authority and perform such duties as are
provided in the Bylaws or as the Board of Directors may from time to time
determine.

SECTION 4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of any
officer under any contract of employment, any officer may be removed, at any
time, with or without cause, by resolution approved by the affirmative vote of a
majority of the directors present, or, except in case of an officer chosen by
the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the Board of
Directors, to the President and Chief Executive Officer, or to the Secretary, if
any, of the Corporation, without prejudice, however, to the rights, if any, of
the Corporation under any contract to which such officer is a party. Any such
resignation shall take effect without acceptance on the date of the receipt of
such notice unless a later time is specified therein.

SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause may, or in the case of
a vacancy in the office of President and Chief Executive Officer or Chief
Financial Officer shall be filled for the unexpired portion of the term in the
manner prescribed in the Bylaws for regular appointments to such office.

SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall
be such an officer, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the
Bylaws. He shall preside at all meetings of the shareholders.

SECTION 7. PRESIDENT AND CHIEF EXECUTIVE OFFICER. Subject to such
supervisory powers, if any, as may be given by the Board of Directors to the
Chairman of the Board, if there be such an officer, the President and Chief
Executive Officer shall be the top general manager of the business of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. The President and Chief Executive Officer shall have the general
powers and duties of management usually vested in the office of President and
Chief Executive Officer of a Corporation, and shall have such other powers and
duties as may be prescribed by the Board of Directors or the Bylaws of
prescribed by Statute. In the event the corporation operates retail stores, then
this officer would be responsible for determining when and where to open and
close stores, the development of administrative and information systems and
other duties typical of a Chief Executive Officer.

SECTION 8. CHIEF OPERATING OFFICER. Subject to such supervisory powers, if
any, as may be given by the Board of Directors to the Chairman of the Board, if
there be such an officer, and to the President and Chief Executive Officer, the
Chief Operating Officer shall be the general manager of the corporation's
operations. In the event the corporation operates retail stores, then this
officer would be

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responsible for supervising store operations, marketing and advertising, the
opening of new stores and other duties typical of a Chief Operating Officer.

SECTION 9. VICE PRESIDENT. In the absence or disability of the President,
the Chief Operating Officer, if any, of if not such Chief Operating Officer be
elected, the Executive Vice President, if any, then the Vice Presidents, if any,
in order of their rank as fixed by the Board of Directors or, if not ranked, the
Vice President designated by the Board of Directors, shall perform all the
duties of the President and Chief Executive Officer, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President and Chief Executive Officer. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board of Directors or the Bylaws.

SECTION 10. SECRETARY. The Secretary, if any, shall record or cause to be
recorded, and shall keep or cause to be kept, at the principal executive office
and such other place as the Board of Directors may order, a book of minutes of
actions taken at all meetings of shareholders, the Board of Directors and its
committees, with the time and place of holding, whether regular or special, and,
if special, how authorized, the notice thereof given, the names of those present
at Board and committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.

The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent, if any, a share
register, or a duplicate share register, showing the names of the shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board of Directors required by the Bylaws to be
give, and he shall keep the seal of the Corporation, if one be adopted, in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board of Directors or by the Bylaws.

The Secretary may keep, or cause to be kept, at the Corporation's principal
executive office, or if its principal executive office is not in the State of
Minnesota, at its principal business office in Minnesota, the original or a copy
of the Bylaws as amended to date, which shall be open to inspection by
shareholders at all reasonable times during office hours. If the principal
executive office of the Corporation is outside the State of Minnesota and the
Corporation has no principal business office in Minnesota, the Secretary shall,
upon the written request of any shareholders, furnish to that shareholder a copy
of the Bylaws as amended to date.

SECTION 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct accounts
and financial records of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares and, subject
to the control of the Board of Directors, shall have the general powers and
duties of management usually vested in the office of Chief Financial Officer or
Treasurer.

The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the Corporation with such depositories as may be
designated by the Board of Directors. He shall Disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and Chief Executive Officer and directors, whenever they request it,
an account of all of his transactions as Chief Financial Officer and of the
financial condition of the Corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or the
Bylaws.

SECTION 12. ASSISTANT SECRETARIES AND ASSISTANT FINANCIAL OFFICERS. In the
absence of the Secretary or in the event of his death, inability or refusal to
act, the assistant secretaries, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, the assistant Secretary designated by the
President and Chief Executive Officer or Board of Directors, shall perform the
duties and exercise the authority of the Secretary.

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<PAGE>

In the absence of the Chief Financial Officer or in the event of his death,
inability or refusal to act, the assistant financial officers, if any, in order
of their rank as fixed by the Board of Directors or, if not ranked, the
assistant Secretary designated by the President and Chief Executive Officer or
Board of Directors, shall perform the duties and exercise the authority of the
Chief Financial Officer.

ARTICLE V

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS

SECTION 1. DEFINITIONS. For purposes of this Article, the following
definitions apply:

(a) "corporation" or "Corporation" includes a domestic or foreign
corporation that was the predecessor of the Corporation in a merger or
other transaction in which the predecessor's existence ceased upon
consummation of the transaction.

(b) "official capacity" means (i) with respect to a director, the
position of director in a corporation, (ii) with respect to a person
other than a director, the elective or appointive office or position
held by an officer, member of a committee of the Board, or the
employment relationship undertaken by an employee of the Corporation,
and (iii) with respect to a director, officer, or employee of the
Corporation who, while a director, officer, or employee of the
Corporation, is or was serving at the request of the Corporation or
whose duties in that position involve or involved service as a
director, officer, partner, trustee, employee, or agent of another
organization or employee benefit plan, the position of that person as
a director, officer, partner, trustee, employee, or agent, as the case
may be, of the other organization or employee benefit plan.

(c) "proceeding" means a threatened, pending, or completed civil,
criminal, administrative, arbitration, or investigative proceeding,
including a proceeding by or in the right of the Corporation.

(d) "special legal counsel" means counsel who has not represented the
Corporation or a related corporation, or a director, officer, member
or a committee of the Board, or employee, whose indemnification is in
issue.

SECTION 2. INDEMNIFICATION. At the discretion of the Board of Directors,
the Corporation may indemnify any person made or threatened to be made a party
to any proceeding by reason of the former or present official capacity of the
person against judgments, penalties, fines (including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan), settlements, and reasonable expenses (including attorneys' fees and
disbursements), incurred by the person in connection with the proceeding, if,
with respect to acts or omissions of the person complained of in the proceeding,
the person:

(i) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines (including,
without limitation, excise taxes assessed against the Director with
respect to an employee benefit plan), settlements, and reasonable
expenses (including attorney's fees and disbursements) incurred by the
person in connection with the proceeding with respect to the same acts
or omissions;

(ii) acted in good faith;

(iii) received no improper personal benefits and complied with the
conflict of interest provisions of Minnesota Statutes Section
302A.255, if applicable;

(iv) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful;

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<PAGE>

(v) in the case of acts or omissions occurring in the official
capacity described in Section 1, paragraph (b), clause (i) or (ii) of
this Article V, reasonably believed that the conduct was in the best
interest of the Corporation; and

(vi) in the case of acts or omissions occurring in the official
capacity described in Section 1, paragraph (b), clause (i) or (iii) of
this Article V, reasonably believed that the conduct was not opposed
to the best interest of the Corporation.

If the person's acts or omissions complained of in the proceeding relate
to conduct as a director, officer, trustee, employee or agent of an employee
benefit plan, the conduct is not considered to be opposed to the best interests
of the Corporation if the person reasonably believed that the conduct was in the
best interest of the participants or beneficiaries of the employee benefit plan.

The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendre or its equivalent does not, of
itself, establish that the person did not meet the criteria set forth in this
Section 2.

SECTION 3. ADVANCES. At the discretion of the Board of Directors, if a
person is made or threatened to be made a party to a proceeding, the Director is
entitled, upon written request to the Corporation, to payment or reimbursement
by the Corporation of reasonable expenses, including attorneys' fees and
disbursements, incurred by the Director in advance of the final disposition of
the proceeding (i) upon receipt by the Company of a written affirmation by the
person of a good faith belief that the criteria for indemnification set forth in
Section 1 have been satisfied and a written undertaking by the person to repay
all amounts so paid or reimbursed by the Company, if it is ultimately determined
that the criteria for indemnification have not been satisfied, and (ii) after
determination that the facts then known to those making the determination would
not preclude indemnification under this Article V. The written undertaking
required by clause (i) of this Section 3 is an unlimited general obligation of
the person making it, but need not be secured and shall be accepted without
reference to financial ability to make the repayment.

SECTION 4. REIMBURSEMENT TO WITNESSES. Notwithstanding anything in this
Article V to the contrary, at the discretion of the Board of Directors, the
Corporation may reimburse expenses, including, without limitation, attorneys'
fees and disbursements, incurred by a person in connection with an appearance as
a witness in a proceeding at a time when the person has not been made or
threatened to be made a party to a proceeding.

SECTION 5. DETERMINATION OF ELIGIBILITY. All determinations whether
indemnification of a person is required because the criteria set forth in
Section 2 have been satisfied and whether a person is entitled to payment or
reimbursement of expenses in advance of the final disposition of a proceeding as
provided in Section 3 shall be made: (i) by the Board of Directors by a majority
of a quorum (directors who are at the same time parties to the proceeding shall
not be counted for determining either a majority or the presence of a quorum);
(ii) if a quorum under clause (i) cannot be obtained, by a majority of a
committee of the Board, consisting solely of two or more directors not at the
time parties to the proceeding, duly designated to act in the matter by a
majority of the full Board including directors who are parties; (iii) if a
determination is not made under clause (i) or (ii), by a special legal counsel,
selected either by a majority of the Board or a committee by vote pursuant to
clause (i) or (ii) or, if the requisite quorum of the full Board cannot be
obtained and the committee cannot be established, by a majority of the full
Board including directors who are parties; (iv) if a determination is not made
under clauses (i) to (iii), by the shareholders, excluding the votes of shares
held by parties to the proceeding; or (v) if an adverse determination is not
made under clauses (i) to (iv) or under the following paragraph within 60 days
after the termination of a proceeding or after a request for an advance of
expenses, as the case may be, by a court in the State of Minnesota, which may be
the same court in which the proceeding involving the person's liability took
place, upon application of the person and any notice the court requires.

With respect to a person who is not, and was not at the time of the acts
or omissions complained of in the proceedings, a director, officer, or person
possessing, directly or indirectly, the power to direct or cause the direction
of the management or policies of the Corporation, the determination whether
indemnification of this person is required because the criteria set forth in
Section 2 have been satisfied and whether this person is entitled to payment or
reimbursement of expenses in advance of the final disposition

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<PAGE>

of a proceeding as provided in Section 3 may be made by an annually appointed
committee of the Board, having at least one member who is a director. The
committee shall report at least annually to the Board of Directors concerning
its actions.

SECTION 6. CHANGE IN APPLICABLE LAW. Notwithstanding anything in this
Article V to the contrary, at the discretion of the Board of Directors, the
Corporation may provide the maximum indemnification of a person by the
Corporation permissible under Minnesota law, including to the extent Minnesota
law is revised, amended or interpreted to permit broader indemnification
protection of a person than that which this Article provides (this Article shall
be deemed to allow for such broader indemnification of the person by the
Company).

SECTION 7. SHAREHOLDER DISCLOSURE. If the Corporation indemnifies or
advances expenses to a person in accordance with this Article in connection with
a proceeding by or on behalf of the Corporation, the Corporation shall report to
the shareholders in writing the amount of the indemnification or advance and to
whom and on whose behalf it was paid not later than the next meeting of
shareholders.

SECTION 8. NONEXCLUSIVE RIGHTS. Indemnification provided by this Article
is not exclusive to any other rights to which a person may be entitled under the
Articles of Incorporation, Bylaws, Agreement, vote of disinterested Directors,
or otherwise, both as to actions in the person's official capacity and as to
actions in another capacity while holding such office, and shall continue after
the person has ceased to serve in an official capacity and shall inure to the
benefit of the heirs and administrators of such a person.

SECTION 9. INSURANCE. Upon an in the event of a determination by the Board
of Directors of the Corporation to purchase such insurance, the Corporation may
purchase and maintain insurance on behalf of a person in that persons official
capacity against any liability asserted against or incurred by the person in or
arising from that capacity, whether or not the Corporation would have been
required to indemnify the person against that liability under the provisions of
this Article V.

ARTICLE VI

CAPITAL STOCK

SECTION 1. RECORD DATE. The Board of Directors may fix a date in the future
as a record date for the determination of the shareholders entitled to notice of
and to vote at any meeting of shareholders or entitled to give consent to
corporate action in writing without a meeting, to receive any report, to receive
any dividend or distribution, or any allotment of rights, or to exercise rights
in respect to any change, conversion, or exchange of shares. The record date so
fixed shall be not more than sixty (60) days nor less than five (5) days prior
to the date of any meeting, nor more than sixty (60) days prior to any other
event for the purpose of which it is fixed. When a record date is so fixed, only
shareholders of record at the close of business on that date are entitled to
notice of and to vote at any such meeting, to give consent without a meeting, to
receive a report, to receive a dividend, distribution, or allotment of rights,
or to exercise the rights, as the case may be, notwithstanding any transfer of
any shares on the books of the Corporation after the record date, except as
otherwise provided in the Articles of Incorporation, Bylaws or the Minnesota
Business Corporations Act.

If no record date is fixed:

(i) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the date notice is given
or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held;

(ii) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is

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<PAGE>

necessary, shall be at the close of business on the business day next
preceding the day on which the first written consent is given; and

(iii) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto, or the
sixtieth day prior to the date of such other action, whichever is
later.

A resolution approved by the affirmative vote of a majority of the
directors present may establish procedures whereby a shareholder may certify in
writing to the Corporation that all or a portion of the shares registered in the
name of the shareholder are held for the account of one or more beneficial
owners. Upon receipt by the Corporation of the writing, the persons specified as
beneficial owners, rather than the actual shareholder, are deemed the
shareholders for the purposes specified in writing.

A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting.

SECTION 2. CERTIFICATE FOR SHARES. Every holder of shares in the
Corporation shall be entitled to have a certificate signed in the name of the
Corporation by the President and Chief Executive Officer and the Secretary, if
any, or if not signed, have a facsimile signature of such person placed upon the
certificate, certifying the number of shares and the class or series of shares
owned by the shareholder. In case any officer, transfer agent or registrar who
has signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue.

Except as provided by law or in this Section 2, no new certificates for
shares shall be issued to replace an old certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. Except as
prohibited by law, including the Minnesota Business Corporation Act Section
302A.419, the Secretary may, in case any share certificate or certificate for
any other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the Secretary may
require, including provision for indemnification of the Corporation secured by a
bond or other adequate security sufficient to protect the Corporation against
any claim that may be made against it, including any expense or liability, on
account of the alleged loss, theft, or destruction of the certificate or the
issuance of the replacement certificate.

ARTICLE VII

CORPORATE RECORDS

SECTION 1. BOOKS AND RECORDS. The Corporation shall keep at its principal
executive office, or at another place or places within the United States
determined by the Board of Directors, a share register not more than one year
old, containing the names and addresses of the shareholders and the number and
classes of shares held by each shareholder. The Corporation shall also keep, at
is principal executive office, or at another place or places within the United
States determined by the Board, a record of the dates on which certificates or
transaction statements representing shares were issued.

The Corporation shall keep at is principal executive office, or, if its
principal executive office is outside of the State of Minnesota, shall make
available at it registered office within ten days after receipt by the Secretary
of the Corporation of a written demand for them made by a person described in
Section 2 of this Article VII, originals or copies of:

(a) Records of all proceeding of shareholders for the last three
years;

(b) Records of all proceedings of the Board of Directors for the last
three years;

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<PAGE>

(d) The current Bylaws, as amended;

(e) Financial statements required by Section 4 of this Article and the
financial statement for the most recent interim period prepared in the
course of the operation of the Corporation for distribution to the
shareholders or to a governmental agency as a matter of public record;

(f) Reports made to shareholders generally within the last three
years;

(g) A statement of the names and usual business addresses of its
directors and principal officers; and

(h) Certain voting trust agreements and shareholder control agreements
as required by law.

The records maintained by the Corporation, including its share register,
financial records and minute books, may utilize any information storage
technique (including punched holes, printed or magnetized spots, or
micro-images) even though that makes them illegible visually, if the records can
be converted accurately and within a reasonable time, into a form that is
legible visually and whose contents are assembled by related subject matter to
permit convenient use by people in the normal course of business. The
Corporation will convert any of the records referred to in this paragraph upon
the request of a person entitled to inspect them, and the expense of the
conversion shall be borne by the person entitled to inspect and requesting the
records. A copy of the conversion shall be accepted for all purposes to the same
extent as the existing or original records would be if they were legible
visually.

SECTION 2. INSPECTION OF CORPORATE RECORDS. If the Corporation is not
publicly held, a shareholder, beneficial owner, or a holder of a voting trust
certificate, has an absolute right, upon written demand, to examine and copy, in
person or by a legal representative, at any reasonable time, the Corporations
share register and records listed in Section 1, subdivisions (a) through (h) of
this Article VII. If the Corporation is not publicly held, a shareholder,
beneficial owner, or a holder of a voting trust certificate, has the right, upon
written demand, to examine and copy, in person or by a legal representative,
other corporate records at any reasonable time only if the shareholder,
beneficial owner, or holder of a voting trust certificate demonstrates a proper
purpose for the examination.

If the Corporation is publicly held, a shareholder, beneficial owner, or a
holder of a voting trust certificate has, upon written demand stating the
purpose and acknowledged or verified in the manner provided in Chapter 358 of
the Minnesota Statutes, the right at any reasonable time to examine and copy the
Corporation's share register and other corporate records upon demonstrating the
stated purpose to be a proper purpose. The acknowledged or verified demand must
be directed to the Corporation at it registered office in the State of Minnesota
or at its principal place of business.

A shareholder, beneficial owner, or holder of a voting trust certificate
who has gained access under this Section to any corporate record including the
share register may not use or furnish to another for use the corporate record or
a portion of the contents for any purpose other than a proper purpose.

For purposes of this Section, a "proper purpose" is one reasonably related
to the person's interest as a shareholder, beneficial owner, or holder of a
voting trust certificate of the Corporation. Copies of the share register and
all documents referred to in Section 1, subparagraphs (a) through (h), if
required to be furnished under this Section, shall be furnished at the expense
of the Corporation. In all other cases, the Corporation may charge the
requesting party a reasonable fee to cover the expenses of providing the copy.

Every Director shall have the absolute right at any reasonable time to
inspect all books, records and documents of every kind and to inspect the
physical properties of the Corporation. Such inspection by a Director may be
made in person or by agent or attorney and the right of inspection includes the
right to copy, photograph and make extracts.

SECTION 3. FINANCIAL STATEMENTS. The Corporation shall keep appropriate and
complete financial records. The Corporation shall, upon written request by a
shareholder, furnish annual financial

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<PAGE>

statements, including at least a balance sheet as of the end of each fiscal year
and a statement of income for the fiscal year, which shall be prepared on the
basis of accounting methods reasonable in the circumstances and may be
consolidated statements of the Corporation and one or more of its subsidiaries,
if any. In the case of statements audited by a public accountant, each copy
shall be accompanied by a report setting forth the opinion of the accountant on
the statements; in other cases, each copy shall be accompanied by a statement of
the Chief Financial Officer or other person in charge of the Corporation's
financial records stating the reasonable belief of the person that the financial
statements were prepared in accordance with accounting methods reasonable in the
circumstances, describing the basis of presentation, and describing any respects
in which the financial statements were not prepared on a basis consistent with
those prepared for the previous year.

ARTICLE VIII

AMENDMENTS

SECTION 1. POWER OF BOARD OF DIRECTORS. Unless otherwise provided by the
Articles of Incorporation, new Bylaws may be adopted or these Bylaws may be
amended or repealed only by the affirmative vote of a majority of the directors;
PROVIDED, HOWEVER, that the director's power to adopt, amend or repeal Bylaws is
subject to the power of the shareholders, exercisable in a manner provided in
Section 2 of this Article VIII, to adopt, amend or repeal bylaws adopted,
amended or repealed by the directors.

SECTION 2. POWER OF SHAREHOLDERS. If a shareholder or shareholders holding
three percent or more of the voting power of the shares entitled to vote propose
a resolution for action by the shareholders to adopt, amend, or repeal bylaws
adopted, amended, or repealed by the directors and the resolution sets forth the
provision or provisions proposed for adoption, amendment, or repeal, the
limitations and procedures for submitting, considering, and adopting the
resolution are the same as provided in Section 302A.135, Subdivisions 2 to 4 of
the Minnesota Business Corporation Act, for amendment of the articles. The
provisions of this subdivision regarding shareholder-proposed amendments shall
not apply to the Corporation if it is registered or reporting under the Federal
securities laws to the extent that those provisions are in conflict with the
Federal securities laws or rules promulgated thereunder, in which case the
Federal securities laws or rules promulgated thereunder shall govern.

ARTICLE IX

MISCELLANEOUS

SECTION 1. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payments of money, notes or other evidences of indebtedness, issued in the name
of or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board of Directors.

SECTION 2. CONTRACTS, ETC., HOW EXECUTED. The Board of Directors, except as
otherwise provided in these Bylaws, may authorize any officer or officers, agent
or agents, to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation, and such authority may be general or confined
to specific instances; and, unless so authorized by the Board of Directors, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.

SECTION 3. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of
the Board, the President and Chief Executive Officer, the Chief Financial
Officer, or any other person authorized by resolution of the Board of Directors
is authorized to vote on behalf of the Corporation any and all shares of any
other corporation or corporations, foreign or domestic, standing in the name of
the Corporation. The authority granted to these officers to vote or represent on
behalf of the Corporation any and all shares held

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<PAGE>

by the Corporation in any other corporation or corporations may be exercised by
any of these officers in person or proxy duly executed by these officers.

SECTION 4. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the Minnesota Business Corporations Act shall govern the
construction of these Bylaws. Without limiting the generality of the foregoing,
the masculine gender includes the feminine and neuter, the singular number
includes the plural and the plural number includes the singular, and the term
"person" includes a corporation as well as a natural person.

CERTIFICATE OF SECRETARY

I, the undersigned, do hereby certify:

(1) That I am the duly elected and acting Secretary of HAT WORLD,
INC., a Minnesota corporation; and

(2) That the foregoing Bylaws, comprising seventeen (17) pages,
constitute the Bylaws of said corporation as duly approved and adopted
by action of the sole director on June 7, 1995.

By: /s/ J. Glenn Campbell
------------------------------------
, Secretary
-------------------
Date: June 10, 1995
---------------------------------

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EXHIBIT 4.0

[CHARLES CLAYTON LETTERHEAD]

June 9, 1999

Hat World Corporation
4912 S. Minnesota Ave.
Sioux Falls, SD

Gentlemen:

I have acted as counsel for the company in connection with the
preparation of the Registration Statement, and, based on this, I am of the
opinion that:

1. The company is a corporation, duly organized, validly existing, and
in good standing under the laws of the State of Minnesota, with corporate
authority to conduct the business in which it is now engaged, and as described
in the Registration Statement.

2. The shares have been duly authorized, and, when issued and
delivered, will be validly issued, fully paid and nonassessable and free from
preemptive rights, will be without cumulative voting rights and will conform to
the description in the Prospectus.

3. There is not pending, or to the knowledge of counsel, threatened,
any action, suit, or proceeding before or by any court or governmental agency or
body to which the company is a party, or to which any property of the company is
subject, and which, in the opinion of counsel, could result in a material
adverse change in the business, business prospects, financial position or
results of operations, present or prospective, of the company or of its
properties or assets.

I consent that this opinion be filed as an exhibit to the Registration
Statement, and to the use of my name in the Registration Statement under the
caption "Legal Matters."

Cordially,

/s/ Charles Clayton

Charles Clayton

EXHIBIT 10.0

LEASE AGREEMENT
---------------

THIS LEASE is executed this 30th day of November, 1998, by and between PARK
100 PROPERTIES, INC., a Delaware corporation ("Landlord"), and HAT WORLD, INC.,
a Minnesota corporation ("Tenant").

WITNESSETH:

ARTICLE 1 - LEASE OF PREMISES
-----------------------------

Section 1.01. Basic Lease Provisions and Definitions.

A. Leased Premises (shown outlined on Exhibit A attached hereto); 8142
Woodland Drive; Indianapolis, Indiana 46278; Building No. 64 (the
"Building"); located in Park 100 Business Park (the "Park");

B. Rentable Area: approximately 17,600 square feet

Landlord shall use commercially reasonable standards, consistently applied,
in determining the Rentable Area and the rentable area of the Building.
Landlord's determination of Rentable Area shall conclusively be deemed
correct for all purposes hereunder.

C. Tenant's Proportionate Share: 21.15%;

D. Minimum Annual Rent:

February 1, 1999 - April 30, 1999 $15,840.00 (3 months)
May 1, 1999 - January 31, 2000 $65,340.00 (9 months)
February 1, 2000 - January 31, 2002 $87,120.00 per year

E. Monthly Rental Installments:

February 1, 1999 - April 30, 1999 $5,280.00 per month
May 1, 1999 - January 31, 2002 $7,260.00 per month

F. Landlord's Share of Expenses: $1.32 times the rentable area of the Building
which is included in the rent;

G. Lease Term: Three years;

H. Commencement Date: February 1, 1999, provided this Lease Agreement if fully
executed by Landlord and Tenant on or before November 30, 1998, that the
Leased Premises is available to Tenant on or before January 1, 1999 and
that Landlord completes Landlord's work as described in attached Exhibit B
prior to January 10, 1999;

I. Security Deposit: $7,260.00;

J. Guarantor(s): N/A;

K. Broker(s): Duke Realty Services Limited Partnership representing Landlord
and Hovance Properties, Inc. representing Tenant;

L. Permitted Use: Distribution of hats to a chain of retail outlets and
related purposes;

M. Address for notices:

Landlord: Park 100 Properties, Inc.
c/o Duke Realty Services Limited Partnership
8888 Keystone Crossing, Suite 1200
Indianapolis, IN 46240

<PAGE>

Tenant: Hat World, Inc.
8142 Woodland Drive
Indianapolis, IN 46278

Address for rental and other payments:

Park 100 Properties, Inc.
c/o Duke Realty Services Limited Partnership
P.O. Box 66486
Indianapolis, IN 46266

Section 1.02. Leased Premises. Landlord hereby leases to Tenant and Tenant
leases from Landlord, under the terms and conditions herein, the Leased
Premises.

ARTICLE 2 - TERM AND POSSESSION
-------------------------------

Section 2.01. Term. The term of this Lease ("Lease Term") shall be for the
period of time and shall commence on the Commencement Date described in the
Basic Lease Provisions. Upon delivery of possession of the Leased Premises to
Tenant, Tenant shall execute a letter of understanding acknowledging (i) the
Commencement Date of this Lease, and (ii) that Tenant has accepted the Leased
Premises. If Tenant takes possession of and occupies the Leased Premises, Tenant
shall be deemed to have accepted the Leased Premises and that the condition of
the Leased Premises and the Building was at the time satisfactory and in
conformity with the provisions of this Lease in all respects.

Section 2.02. Construction of Tenant Improvements. Tenant has personally
inspected the Leased Premises and accepts the same "AS IS" without
representation or warranty by Landlord of any kind and with the understanding
that Landlord shall have no responsibility with respect thereto except to
construct in a good an workmanlike manner the improvements designated as
Landlord's obligations in the attached Exhibit B, which shall be in accordance
with and at the expense of the party indicated on Exhibit B.

Section 2.03. Surrender of the Premises. Upon the expiration or earlier
termination of this Lease, Tenant shall immediately surrender the Leased
Premises to Landlord in broom-clean condition and in good condition and repair.
Tenant shall also remove its personal property, trade fixtures and any of
Tenant's alterations designated by Landlord, promptly repair any damage caused
by such removal, and restore the Leased Premises to the condition existing upon
the Commencement Date, reasonable wear and tear excepted. If Tenant fails to do
so, Landlord may restore the Leased Premises to such condition at Tenant's
expense, Landlord any cause all of said property to be removed at Tenant's
expense, and Tenant hereby agrees to pay all the costs and expenses thereby
reasonably incurred. All Tenant property which is not removed within ten (10)
days following Landlord's written demand therefor shall be conclusively deemed
to have been abandoned by Tenant and Landlord shall be entitled to dispose of
such property at Tenant's cost without thereby incurring any liability to
Tenant. The provisions of this section shall survive the expiration or other
termination of this Lease unless otherwise agreed by Landlord and Tenant prior
to the expiration date.

Section 2.04. Holding Over. If Tenant retains possession of the Leased
Premises after the expiration or earlier termination of this Lease, Tenant shall
become a tenant from month to month at twice the Monthly Rental Installment in
effect at the end of the Lease Term, and otherwise upon the terms, covenants and
conditions herein specified, so far as applicable. Acceptance by Landlord of
rent in such event shall not result in a renewal of this Lease, and Tenant shall
vacate and surrender the Leased Premises to Landlord upon Tenant being given
thirty (30) days' prior written notice from Landlord to vacate whether or not
said notice is given on the rent paying date. This Section 2.04 shall in no way
constitute a consent by Landlord to any holding over by Tenant upon the
expiration or earlier termination of this Lease, nor limit Landlord's remedies
in such event.

ARTICLE 3 - RENT
----------------

Section 3.01. Base Rent. Tenant shall pay to Landlord the Minimum Annual
Rent in the Monthly Rental Installments, in advance, without deduction or
offset, beginning on the Commencement Date and on or before the first day of
each and every calendar month thereafter during the Lease Term. The Monthly
Rental Installment for partial calendar months shall be prorated.

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Section 3.02. Additional Rent. In addition to the Minimum Annual Rent
Tenant shall pay to Landlord for each calendar year during the Lease Term, as
"Additional Rent," Tenant's Proportionate Share of all costs and expenses
incurred by Landlord during the Lease Term for Real Estate Taxes and Operating
Expenses for the Building and common areas (collectively "Common Area Charges")
to the extent such Common Area Charges exceed Landlord's Share of Expenses.

"Operating Expenses" shall mean all of Landlord's expenses for operation,
repair, replacement and maintenance to keep the Building and common areas in
good order, condition and repair (including all additional direct costs and
expenses of operation and maintenance of the Building which Landlord reasonably
determines it would have paid or incurred during such year if the Building had
been fully occupied), including, but not limited to, management or
administrative fees; utilities; stormwater discharge fees; license, permit,
inspection and other fees; fees and assessments imposed by any covenants or
owners' association; security services; insurance premiums and deductibles; and
maintenance, repair and replacement of the driveways, parking areas (including
snow removal), exterior lighting, landscaped areas, walkways, curbs, drainage
strips, sewer lines, exterior walls, foundation, structural frame, roof and
gutters. The cost of any capital improvement shall be amortized over the useful
life of such improvement (as reasonably determined by Landlord), and only the
amortized portion shall be included in Operating Expenses.

"Real Estate Taxes" shall include any form of real estate tax or assessment
or service payments in lieu thereof, and any license fee, commercial rental tax,
improvement bond or other similar charge or tax (other than inheritance,
personal income or estate taxes) imposed upon the Building or common areas (or
against Landlord's business of leasing the Building) by any authority having the
power to so charge or tax, together with costs and expenses of contesting the
validity or amount of Real Estate Taxes which at Landlord's option may be
calculated as if such contesting work had been performed on a contingent fee
basis (whether charged by Landlord's counsel or representative; provided,
however, that said fees are reasonably comparable to the fees charged for
similar services by others not affiliated with Landlord, but in no event shall
fees exceed thirty-three percent (33%) of the good faith estimated tax savings).
Additionally, Tenant shall pay, prior to delinquency, all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all personal property
of Tenant contained in the Leased Premises.

Section 3.03. Payment of Additional Rent. Landlord shall estimate the total
amount of Additional Rent to be paid by Tenant during each calendar year of the
Lease Term, pro-rated for any partial years. Commencing on the Commencement
Date, Tenant shall pay to Landlord each month, at the same time the Monthly
Rental Installment is due, an amount equal to one-twelfth (1/12) of the
estimated Additional Rent for such year. Within a reasonable time after the end
of each calendar year, Landlord shall submit to Tenant a statement of the actual
amount of such Additional Rent and within thirty (30) days after receipt of such
statement, Tenant shall pay any deficiency between the actual amount owed and
the estimates paid during such calendar year. In the event of overpayment,
Landlord shall credit the amount of such overpayment toward the next
installments of Minimum Rent; provided, however, Tenant shall not be entitled to
a credit if actual Common Area Charges are less than Landlord's Share of
Expenses.

Section 3.04. Late Charges. Tenant acknowledges that Landlord shall incur
certain additional unanticipated administrative and legal costs and expenses if
Tenant fails to timely pay any payment required hereunder. Therefore, in
addition to the other remedies available to Landlord hereunder, if any payment
required to be paid by Tenant to Landlord hereunder shall become overdue, such
unpaid amount shall bear interest from the due date thereof to the date of
payment at the prime rate (as reported in the Wall Street Journal) of interest
("Prime Rate") plus six percent (6%) per annum.

ARTICLE 4 - SECURITY DEPOSIT

Tenant, upon execution of this Lease, shall deposit with Landlord the
Security Deposit as security for the performance by Tenant of all of Tenant's
obligations contained in this Lease. In the

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event of a default by Tenant Landlord may apply all or any part of the Security
Deposit to cure all or any part of such default; and Tenant agrees to promptly,
upon demand, deposit such additional sum with Landlord as may be required to
maintain the full amount of the Security Deposit. All sums held by Landlord
pursuant to this section shall be without interest. At the end of the Lease
Term, provided that there is then no uncured default, Landlord shall return the
Security Deposit to Tenant.

ARTICLE 5 - USE
---------------

Section 5.01. Use of Leased Premises. The Leased Premises are to be used by
Tenant solely for the Permitted Use and for no other purposes without the prior
written consent of Landlord.

Section 5.02. Covenants of Tenant Regarding Use. Tenant shall (i) use and
maintain the Leased Premises and conduct its business thereon in a safe,
careful, reputable and lawful manner, (ii) comply with all laws, rules,
regulations, orders, ordinances, directions and requirements of any governmental
authority or agency, now in force or which may hereafter be in force, including
without limitation those which shall impose upon Landlord or Tenant any duty
with respect to or triggered by a change in the use or occupation of, or any
improvement or alteration to, the Leased Premises, and (iii) comply with and
obey all reasonable directions of the Landlord, including any reasonable rules
and regulations that may be adopted by Landlord from time to time. Tenant shall
not (do or permit anything to be done in or about the Leased Premises or common
areas which constitutes a nuisance or which interferes with the rights of other
tenants or injures or annoys them. Landlord shall not be responsible to Tenant
for the nonperformance by any other tenant or occupant of the Building of its
lease or of any rules and regulations. Tenant shall not overload the floors of
the Leased Premises. All damage to the floor structure or foundation of the
Building due to improper positioning or storage of items or materials shall be
repaired by Landlord at the sole expense of Tenant, who shall reimburse Landlord
immediately therefor upon demand. Tenant shall not use the Leased Premises, or
allow the Leased Premises to be used, for any purpose or in any manner which
would invalidate any policy of insurance now or hereafter carried on the
Building or increase the rate of premiums payable on any such insurance policy
unless Tenant reimburses Landlord as Additional Rent for any increase in
premiums charged.

Section 5.03. Landlord's Rights Regarding Use. In addition to the rights
specified elsewhere in this Lease, Landlord shall have the following rights
regarding the use of the Leased Premises or the common areas, each of which may
be exercised without notice or liability to Tenant, (a) Landlord may install
such signs, advertisements, notices or tenant identification information as it
shall deem necessary or proper; (b) Landlord shall have the right at any time to
control, change or otherwise alter the common areas as it shall deem necessary
or proper; and (c) Landlord or Landlord's agent shall be permitted to inspect or
examine the Leased Premises at any reasonable time upon reasonable notice
(except in an emergency when no notice shall be required), and Landlord shall
have the right to make any repairs to the Leased Premises which are necessary
for its preservation; provided, however, that any repairs made by Landlord shall
be at Tenant's expense, except as provided in Section 7.02 hereof. Landlord
shall incur no liability to Tenant for such entry, nor shall such entry
constitute an eviction of Tenant or a termination of this Lease. or entitle
Tenant to any abatement of rent therefor.

ARTICLE 6 - UTILITIES AND SERVICES
----------------------------------

Tenant shall obtain in its own name and pay directly to the appropriate
supplier the cost of all utilities and services serving the Leased Premises.
However, if any services or utilities are jointly metered with other property,
Landlord shall make a reasonable determination of Tenant's proportionate share
of the cost of such utilities and services (at rates that would have been
payable if such utilities and services had been directly billed by the utilities
or services providers to Tenant) and Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement except
for negligence of Landlord, its agents, invitees or contractors. Landlord shall
not be liable in damages or otherwise for any failure or interruption of any
utility or other building service and no such failure or interruption shall
entitle Tenant to terminate this Lease or withhold sums due hereunder. In the
event of utility "deregulation", Landlord may choose the service provider.

ARTICLE 7 - MAINTENANCE AND REPAIRS
-----------------------------------

Section 7.01. Tenant's Responsibility. During Lease Term, Tenant shall, at
its own cost and expense, maintain the Leased Premises in good condition,
regularly servicing and promptly making all repairs and replacements thereto,
including but not limited to the electrical systems, heating and air
conditioning systems, plate glass, floors, windows and doors, sprinkler and
plumbing systems, and shall obtain a preventive maintenance contract on the
heating, ventilating and air-conditioning systems, and provide Landlord with a
copy thereof. The preventive maintenance contract shall meet or exceed

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Landlord's standard maintenance criteria, and shall provide for the inspection
and maintenance of the heating, ventilating and air conditioning system on not
less than a semi-annual basis.

Section 7.02. Landlord's Responsibility. During the term of this Lease,
Landlord shall maintain in good condition and repair, and replace as necessary,
the roof, exterior walls, foundation and structural frame of the Building and
the parking and landscaped areas, the costs of which shall be included in
Operating Expenses; provided, however, that to the extent any of the foregoing
items require repair because of the negligence, misuse, or default of Tenant,
its employees, agents, customers or invitees, Landlord shall make such repairs
solely at Tenant's expense.

Section 7.03. Alterations. Tenant shall not permit alterations in or to the
Leased Premises unless and until the plans have been approved by Landlord in
writing. As a condition of such approval, Landlord may require Tenant to remove
the alterations and restore the Leased Premises upon termination of this Lease;
otherwise, all such alterations shall at Landlord's option become a part of the
realty and the property of Landlord, and shall not be removed by Tenant. Tenant
shall ensure that all alterations shall be made in accordance with all
applicable laws, regulations and building codes, in a good and workmanlike
manner and of quality equal to or better than the original construction of the
Building. No person shall be entitled to any lien derived through or under
Tenant for any labor or material furnished to the Leased Premises, and nothing
in this Lease shall be construed to constitute a consent by Landlord to the
creation of any lien. If any lien is filed against the Leased Premises for work
claimed to have been done for or material claimed to have been furnished to
Tenant, Tenant shall cause such lien to be discharged of record within thirty
(30) days after filing. Tenant shall indemnify Landlord from all costs, losses,
expenses and attorneys' fees in connection with any construction or alteration
and any related lien.

ARTICLE 8 - CASUALTY
--------------------

Section 8.01. Casualty. In the event of total or partial destruction of the
Building or the Leased Premises by fire or other casualty, Landlord agrees to
promptly restore and repair same; provided, however, Landlord's obligation
hereunder shall be limited to the reconstruction of such of the Tenant finish
improvements as were originally required to be made by Landlord, if any. Rent
shall proportionately abate during the time that the Leased premises or part
thereof are unusable because of any such damage. Notwithstanding the foregoing,
if the Leased Premises are (i) so destroyed that they cannot be repaired or
rebuilt within one hundred eighty (180) days from the casualty date; or (ii)
destroyed by a casualty which is not covered by the insurance required hereunder
or, if covered, such insurance proceeds are not released by any mortgages
entitled thereto or are insufficient to rebuild the Building and the Leased
Premises; then, in case of a clause (i) casualty, either Landlord or Tenant may,
or, in the case of a clause (ii) casualty, then Landlord may, upon thirty (30)
days' written notice to the other party, terminate this Lease with respect to
matters thereafter accruing.

Section 8.02. All Risk Coverage Insurance. During the Lease Term, Landlord
shall maintain all risk coverage insurance on the Building, but shall not
protect Tenant's property on the Leased Premises, and, notwithstanding the
provisions of Section 9.01, Landlord shall not be liable for any damage to
Tenant's property, (regardless of cause), except to the extent caused directly
by the negligence of Landlord and its employees, agents and invitees. Tenant
hereby expressly waives any right of recovery against Landlord for damage to any
property of Tenant located in or about the Leased Premises, however caused,
except to the extent caused directly by the negligence of Landlord and its
employees, agents and invitees. Notwithstanding the provisions of Section 9.01
below, Landlord hereby expressly waives any rights of recovery against Tenant
for damage to the Leased Premises or the Building which is insured against under
Landlord's all risk coverage insurance. All insurance policies maintained by
Landlord or Tenant as provided in this Lease shall contain an agreement by the
insurer waiving the insurer's right of subrogation against the other party to
this Lease.

ARTICLE 9 - LIABILITY INSURANCE
-------------------------------

Section 9.01. Tenant's Responsibility. Landlord shall not be liable to
Tenant or to any other person for (i) damage to property or injury or death to
persons due to the condition of the Leased Premises, the Building or the common
areas, or (ii) the occurrence of any accident in or about the Leased Premises or
the common areas, or (iii) any act or neglect of Tenant or any other tenant or
occupant of the Building or of any other person, unless such damage, injury or
death is directly and solely the result of Landlord's negligence and that of its
employees, agents and invitees; and Tenant hereby releases Landlord from any and
all liability for the same. Tenant shall be liable for, and shall indemnify and
defend Landlord from, any and all liability for (i) any act or neglect of Tenant
and any person coming on the Leased Premises or common areas by the license of
Tenant, express or implied, (ii) any damage to the Leased Premises, and (iii)
any loss of or damage or injury to any person (including death resulting
therefrom) or property occurring in, on or about the Leased Premises,

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regardless of cause, except for any loss or damage covered by Landlord's all
risk coverage insurance as provided in Section 8.02 and except for that caused
solely and directly by Landlord's negligence. This provision shall survive the
expiration or earlier termination of this Lease.

Section 9.02. Tenant's Insurance. Tenant shall carry general public
liability and property damage insurance, issued by one or more insurance
companies acceptable to Landlord, with the following minimum coverages:

A. Worker's Compensation: minimum statutory amount.

B. Commercial General Liability Insurance, including blanket, contractual
liability, broad form property damage, personal injury, completed
operations, products liability, and fire damage: Not less than $3,000,000
Combined Single Limit for both bodily injury and property damage.

C. All Risk Coverage, Vandalism and Malicious Mischief, and Sprinkler Leakage
insurance, if applicable, for the full cost of replacement of Tenant's
property.

D. Business interruption insurance.

The insurance policies shall protect Tenant and Landlord as their interests may
appear, naming Landlord and Landlord's managing agent and mortgagee as
additional insureds, and shall provide that they may not be canceled on less
than thirty (30) days' prior written notice to Landlord. Tenant shall furnish
Landlord with Certificates of Insurance evidencing all required coverages on
or before the Commencement Date. If Tenant fails to carry such insurance and
furnish Landlord with such Certificates of Insurance after a request to do so,
Landlord may obtain such insurance and collect the cost thereof from Tenant.

ARTICLE 10 - EMINENT DOMAIN
---------------------------

If all or any substantial part of the Buiding or common areas shall be
acquired by the exercise of eminent domain, Landlord may terminate this Lease by
giving written notice to Tenant on or before the date that actual possession
thereof is so taken. If all or any part of the Leased Premises shall be acquired
by the exercise of eminent domain so that the Leased Premises shall become
unusable by Tenant for the Permitted Use, Tenant may terminate this Lease as of
the date that actual possession thereof is so taken by giving written notice to
Landlord. All damages awarded shall belong to Landlord, provided, however, that
Tenant may claim dislocation damages if such amount is not subtracted from
Landlord's award.

ARTICLE 11 - ASSIGNMENT AND SUBLEASE
------------------------------------

Tenant shall not assign this lease or sublet the Leased Premises in whole
or in part without Landlord's prior written consent, which consent shall not be
unreasonably withheld, delayed or denied (provided that it shall not be
unreasonable for Landlord to withhold or deny its consent with respect to any
proposed assignment or subletting to a third party that is already a tenant in
the Building or the Park). In the event of any assignment or subletting, Tenant
shall remain primarily liable hereunder, and any extension, expansion, rights of
first offer, rights of first refusal or other options granted to Tenant under
this Lease shall be rendered void and of no further force or effect. The
acceptance of rent from any other person shall not be deemed to be a waiver of
any of the provisions of this Lease or to be a consent to the assignment of this
Lease or the subletting of the Leased Premises. Without in any way limiting
Landlord's right to refuse to consent to any assignment or subletting of this
Lease, Landlord reserves the right to refuse to give such consent if in
Landlords' opinion (i) the Leased Premises are or may be in any way adversely
affected; (ii) the business reputation of the proposed assignee or subtenant is
unacceptable; or (iii) the financial worth of the proposed assignee or subtenant
is insufficient to meet the obligations hereunder. Landlord further expressly
reserves the right to refuse to give its consent to any subletting if the
proposed rent is to be less than the then current rent for similar premises in
the Park. Tenant agrees to reimburse Landlord for reasonable accounting and
attorneys' fees incurred in conjunction with the processing and documentation of
any such requested assignment, subletting or any other hypothecation of this
Lease or Tenant's interest in and to the Leased Premises.

ARTICLE 12 - TRANSFERS BY LANDLORD
----------------------------------

Section 12.01. Sale of the Building. Landlord shall have the right to sell
the Building at any time during the Lease Term, subject only to the rights of
Tenant hereunder; and such sale shall operate to release Landlord from
liability hereunder after the date of such conveyance.

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Section 12.02. Subordination and Estoppel Certificate. Landlord shall have
the right to subordinate this Lease to any mortgage presently existing or
hereafter placed upon the Building by so declaring in such mortgage. Within ten
(10) days following receipt of a written request from Landlord, Tenant shall
execute and deliver to Landlord, without cost, any instrument which Landlord
deems necessary or desirable to confirm the subordination of this Lease and an
estoppel certificate in such form as Landlord may reasonably request certifying
(i) that this Lease is in full force and effect and unmodified or stating the
nature of any modification, (ii) the date to which rent has been paid, (iii)
that there are not, to Tenant's knowledge, any incurred defaults or specifying
such defaults if any are claimed, and (iv) any other matters or state of facts
reasonably required respecting the Lease. Such estoppel may be relied upon by
Landlord and by any purchaser or mortgagee of the Building. Notwithstanding the
foregoing, if the mortgagee shall take title to the Leased Premises through
foreclosure or deed in lieu of foreclosure, Tenant shall be allowed to continue
in possession of the Leased Premises as provided for in this Lease so long as
Tenant shall not be in default.

ARTICLE 13 - DEFAULT AND REMEDY
-------------------------------

Section 13.01. Default. The occurrence of any of the following shall be a
"Default":

(a) Tenant fails to pay any Monthly Rental Installment or Additional Rent
within ten (10) days after the same is due, or Tenant fails to pay any other
amounts due Landlord from Tenant within ten (10) days after the same is due.

(b) Tenant fails to perform or observe any other term, condition, covenant
or obligation required under this Lease for thirty (30) days after written
notice thereof from Landlord; provided, however, that if the nature of Tenant's
default is such that more than thirty days are reasonably required to cure,
then such default shall be deemed to have been cured if Tenant commences such
performance within said thirty-day period and thereafter diligently completes
the required action within a reasonable time.

(c) Tenant shall assign or sublet all or a portion of the Leased Premises
in contravention of the provisions of Article 11 of this Lease.

(d) All or substantially all of Tenant's assets in the Leased Premises or
Tenant's interest in this Lease are attached or levied under execution (and
Tenant does not discharge the same within sixty (60) days thereafter); a
petition in bankruptcy, insolvency or for reorganization or arrangement is
listed by or against Tenant (and Tenant fails to secure a stay or discharge
thereof within sixty (60) days thereafter): Tenant is insolvent and unable to
pay its debts as they become due; Tenant makes a general assignment for the
benefit of creditors; Tenant takes the benefit of any insolvency action or law;
the appointment of a receiver or trustee in bankruptcy for Tenant or its assets
if such receivership has not been vacated or set aside within thirty (30) days
thereafter; or, dissolution or other termination of Tenant's corporate charter
if Tenant is a corporation.

Section 13.02. Remedies. Upon the occurrence of any Default, Landlord shall
have the following rights and remedies, in addition to those allowed by law or
in equity, any one or more of which may be exercised without further notice to
Tenant:

(a) Landlord may apply the Security Deposit or re-enter the Leased Premises
and cure any default of Tenant, and Tenant shall reimburse Landlord as
additional rent for any costs and expenses which Landlord thereby incurs; and
Landlord shall not be liable to Tenant for any loss or damage which Tenant may
sustain by reason of Landlord's action.

(b) Landlord may terminate this Lease or, without terminating this Lease,
terminate Tenant's right to possession of the Leased Premises as of the date of
such Default, and thereafter (i) neither Tenant nor any person claiming under or
through Tenant shall be entitled to possession of the Leased Premises and Tenant
shall immediately surrender the Leased Premises to Landlord; and (ii) Landlord
may re-enter the Leased Premises and dispossess Tenant and any other occupants
of the Leased premises by any lawful means and may remove their effects, without
prejudice to any other remedy which Landlord may have. Upon the termination of
this Lease, Landlord may declare the present value (discounted at the Prime
Rate) of all rent which would have been due under this Lease for the balance of
the Lease Term to be immediately due and payable, whereupon Tenant shall be
obligated to pay the same to Landlord, together with all loss or damage which
Landlord may sustain by reason of Tenants' default ("Default Damages"), which
shall include without limitation expenses of preparing the Leased Premises for
re-letting, demolition, repairs, tenant finish improvements, brokers'
commissions and attorneys' fees, if being expressly understood and agreed that
the liabilities and remedies specified in this subsection (b) shall survive the
termination of this Lease.

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(c) Landlord may, without terminating this Lease, re-enter the Leased
Premises and re-let all or any part thereof for a term different from that which
would otherwise have constituted the balance of the Lease Term and for rent and
on terms and conditions different from those contained herein, whereupon Tenant
shall be immediately obligated to pay to Landlord as liquidated damages the
present value (discounted at the Prime Rate) of the difference between the rent
provided for herein and that provided for in any lease covering a subsequent
re-letting of the Leased Premises, for the period which would otherwise have
constituted the balance of the Lease Term, together with all of Landlord's
Default Damages.

(d) Landlord may sue for injunctive relief or to recover damages for any
loss resulting from the Default.

Section 13.03. Landlord's Default and Tenant's Remedies. Landlord shall be
in default if it fails to perform any term, condition, covenant or obligation
required under this Lease for a period of thirty (30) days after written notice
thereof from Tenant to Landlord; provided, however, that if the term, condition,
covenant or obligation to be performed by Landlord is such that it cannot
reasonably be performed within thirty (30) days, such default shall be deemed to
have been cured if Landlord commences such performance within said thirty-day
period and thereafter diligently undertakes to complete the same. Upon the
occurrence of any such default, Tenant may sue for injunctive relief or to
recover damages for any loss directly resulting from the breach, but Tenant
shall not be entitled to terminate this Lease or withhold, offset or abate any
sums due hereunder.

Section 13.04. Limitation of Landlord's Liability. If Landlord shall fail
to perform any term, condition, covenant or obligation required to be performed
by it under this Lease and if Tenant shall, as a consequence thereof, recover a
money judgment against Landlord, Tenant agrees that it shall look solely to
Landlord's right, title and interest in and to the Building for the collection
of such judgment; and Tenant further agrees that no other assets of Landlord
shall be subject to levy, execution or other process for the satisfaction of
Tenant's judgment.

Section 13.05. Nonwaiver of Defaults. Neither party's failure or delay in
exercising any of its rights or remedies or other provisions of this Lease shall
constitute a waiver thereof or affect its right thereafter to exercise or
enforce such right or remedy or other provision. No waiver of any default shall
be deemed to be a waiver of any other default. Landlord's receipt of less than
the full rent due shall not be construed to be other than a payment on account
of rent then due, nor shall any statement on Tenant's check or any letter
accompanying Tenant's check be deemed an accord and satisfaction. No act or
omission by Landlord or its employees or agents during the Lease Term shall be
deemed an acceptance of a surrender of the Leased Premises, and no agreement to
accept such a surrender shall be valid unless in writing and signed by Landlord.

Section 13.06. Attorneys' Fees. If either party defaults in the performance
or observance of any of the terms, conditions, covenants or obligations
contained in this Lease and the non-defaulting party obtains a judgment against
the defaulting party, then the defaulting party agrees to reimburse the
non-defaulting party for reasonable attorneys' fees incurred in connection
therewith.

ARTICLE 14 - LANDLORD'S RIGHT TO RELOCATE TENANT
------------------------------------------------

Landlord shall have the right upon at least thirty (30) days' prior written
notice to Tenant to relocate Tenant and to substitute for the Leased Premises
other space in the Building or in the Park containing at least as much rentable
area as the Leased Premises. Such substituted space shall be improved by
Landlord, at its expense, with improvements at least equal in quantity and
quality to those in the Leased Premises. Landlord shall reimburse Tenant for all
reasonable expenses incurred in connection with such relocation. In no event
shall Landlord be liable to Tenant for any consequential damages as a result of
any such relocation, including, but not limited to, loss of business income or
opportunity.

ARTICLE 15 - TENANT'S RESPONSIBILITY REGARDING
ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES
----------------------------------------------

Section 15.01. Definitions.

a. "Environmental Laws" - All present or future federal, state and
municipal laws, ordinances, rules and regulations applicable to the
environmental and ecological condition of the Leased Premises, the rules and
regulations of the Federal Environmental Protection Agency or any other federal,
state or municipal agency or governmental board or entity having jurisdiction
over the Leased Premises.

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b. "Hazardous Substances"

Those substances included within the definitions of "hazardous substances,"
"hazardous materials," "toxic substances," "solid waste" or "infectious waste"
under Environmental Laws.

Section 15.02. Compliance. Tenant, at its sole cost and expense, shall
promptly comply with the Environmental Laws including any notice from any source
issued pursuant to the Environmental Laws or issued by any insurance company
which shall impose any duty upon Tenant with respect to the use, occupancy,
maintenance or alteration of the Leased Premises whether such notice shall be
served upon Landlord or Tenant.

Section 15.03. Restrictions on Tenant. Tenant shall operate its business
and maintain the Leased Premises in compliance with all Environmental Laws.
Tenant shall not cause or permit the use, generation, release, manufacture,
refining, production, processing, storage or disposal of any Hazardous
Substances on, under or about the Leased Premises, or the transportation to or
from the Leased Premises of any Hazardous Substances, except as necessary and
appropriate for its Permitted Use in which case the use, storage or disposal of
such Hazardous Substances shall be performed in compliance with the
Environmental Laws and the highest standards prevailing in the industry.

Section 15.04. Notices, Affidavits, Etc. Tenant shall immediately notify
Landlord of (i) any violation by Tenant, its employees, agents, representatives,
customers, invitees or contractors of the Environmental Laws on, under or about
the Leased Premises, or (ii) the presence or suspected presence of any Hazardous
Substances, on, under or about the Leased Premises and shall immediately deliver
to Landlord any notice received by Tenant relating to (i) and (ii) above from
any source. Tenant shall execute affidavits, representations and the like within
five (5) days of Landlord's request therefor concerning Tenant's best knowledge
and belief regarding the presence of any Hazardous Substances on, under or about
the Leased Premises.

Section 15.05. Landlord's Rights. Landlord and its agents shall have the
right, but not the duty, upon advance notice (except in the case of emergency
when no notice shall be required) to inspect the Leased Premises and conduct
tests thereon to determine whether or the extent to which there has been a
violation of Environmental Laws by Tenant or whether there are Hazardous
Substances on, under or about the Leased Premises. In exercising its rights
herein, Landlord shall use reasonable efforts to minimize interference with
Tenant's business but such entry shall not constitute an eviction of Tenant, in
whole or in part, and Landlord shall not be liable for any interference, loss,
or damage to Tenant's property or business ensued thereby.

15.06. Tenant's Indemnification. Tenant shall indemnify Landlord and
Landlord's managing agent from any and all claims, losses, liabilities, costs,
expenses and damages, including attorneys' fees, costs of testing and
remediation costs, incurred by Landlord in connection with any breach by Tenant
of its obligations under this Article 15. The covenants and obligations under
this Article 15 shall survive the expiration or earlier termination of this
Lease.

Section 15.07. Landlord's Representation. Notwithstanding anything
contained in this Article 15 to the contrary, Tenant shall not have any
liability to Landlord under this Article 15 resulting from any conditions
existing, or events occurring, or any Hazardous Substances existing or
generated, at, in, on, under or in connection with the Leased Premises prior to
the Commencement Date of this Lease except to the extent Tenant exacerbates the
same.

ARTICLE 16 - MISCELLANEOUS
--------------------------

Section 16.01. Benefit of Landlord and Tenant. This lease shall inure to
the benefit of and be binding upon Landlord and Tenant and their respective
successors and assigns.

Section 16.02. Governing Law. This Lease shall be governed in accordance
with the laws of the State where the building is located.

Section 16.03. Guaranty. In consideration of Landlord's leasing the Leased
Premises to Tenant, Tenant shall provide Landlord with a Guaranty of Lease
executed by the guarantor(s) described in the Basic Lease Provisions, if any.

Section 16.04. Force Majeure. Landlord and Tenant (except with respect to
the payment of any monetary obligation) shall be excused for the period of any
delay in the performance of any obligation hereunder when such delay is
occasioned by causes beyond its control, including but not

-9-

<PAGE>

limited to work stoppages, boycotts, slowdowns or strikes; shortages of
materials, equipment, labor or energy; unusual weather conditions; or acts or
omissions of governmental or political bodies.

Section 16.05. Examination of Lease. Submission of this instrument for
examination or signature to Tenant does not constitute a reservation of or
option for Lease, and it is not effective as a Lease or otherwise until
execution by and delivery to both Landlord and Tenant.

Section 16.06. Indemnification for Leasing Commissions. The parties hereby
represent and warrant that the only real estate brokers involved in the
negotiation and execution of this Lease are the Brokers. Each party shall
indemnify the other from any and all liability for the breach of this
representation and warranty on its part and shall pay any compensation to any
other broker or person who may be entitled thereto.

Section 16.07. Notices. Any notice required or permitted to be given under
this Lease or by law shall be deemed to have been given if it is written and
delivered in person or by overnight courier or mailed by certified mail, postage
prepaid, to the party who is to receive such notice at the address specified in
Article 1. If delivered in person, notice shall be deemed given as of the
delivery date. If sent by overnight courier, notice shall be deemed given as of
the first business day after sending. If mailed, the notice shall be deemed to
have been given on the date which is three business days after mailing. Either
party may change its address by giving written notice thereof to the other
party.

Section 16.08. Partial Invalidity; Complete Agreement. If any provision of
the Lease shall be held to be invalid, void or unenforceable, the remaining
provisions shall remain in full force and effect. This Lease represents the
entire agreement between Landlord and Tenant covering everything agreed upon or
understood in this transaction. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof or in effect between the
parties. No change or addition shall be made to this Lease except by a written
agreement executed by Landlord and Tenant.

Section 16.09. Financial Statements. During the Lease Term and any
extensions thereof, Tenant shall provide to Landlord on an annual basis, within
ninety (90) days following the end of Tenant's fiscal year, a coy of Tenant's
most recent financial statements (certified and audited if the Minimum Annual
Rent hereunder exceeds $100,000) prepared as of the end of Tenant's fiscal year.
Such financial statements shall be signed by Tenant who shall attest to the
truth and accuracy of the information set forth in such statements. All
financial statements provided by Tenant and Landlord hereunder shall be prepared
in conformity with generally accepted accounting principles, consistently
applied.

Section 16.10. Representations and Warranties. The undersigned represent
and warrant the (i) such party is duly organized, validly existing and in good
standing (if applicable) in accordance with the laws of the state under which it
was organized; and (ii) the individual executing and delivering this Lease has
been properly authorized to do so, and such execution and delivery shall bind
such party.

Section 16.11. Early Occupancy. Provided the Leased Premises are ready for
occupancy, Landlord will allow Tenant to take possession of the Leased Premises
on or after January 1, 1999, (the "Early Occupancy Date"). All terms and
conditions of this Lease will become effective upon the Early Occupancy Date
except for payment of Base Rent which will commence on February 1, 1999. In
accordances with the provisions set forth in subsection H of the Basic Lease
Provisions and Definitions, the Commencement Date shall be postponed one day for
each day after the Early Occupancy Date that the Tenant does not get possession
of the Leased Premises from the Landlord.

-10-

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.

LANDLORD:

PARK 100 PROPERTIES, INC.,
a Delaware corporation

By: Duke Realty Services Limited
Partnership, an Indiana limited
partnership, as Agent

By: Duke Services, Inc.,
its General Partner

By: /s/ Phillip W. Wegele
---------------------------------------
Phillip W. Wegele
Vice President and
General Manager
Indiana Industrial Group

TENANT:

HAT WORLD, INC., a Minnesota corporation
By: /s/ Scott Molander
---------------------------------------
Printed: Scott Molander
Title: Sr. V.P.

STATE OF Indiana )
) SS:
COUNTY OF Johnson )

Before me, a Notary Public in and for said County and State, personally
appeared Scott Molander, by me known and by me known to be the Senior Vice
President of Hat World, Inc., a Minnesota corporation, who acknowledged the
execution of the above and foregoing Lease Agreement for and on behalf of said
corporation.

WITNESS my hand and Notarial Seal this 30th day of November, 1998.

/s/ Crysta C. Kabrich
--------------------------------------------
Notary Public

Crysta C. Kabrich
--------------------------------------------
(Printed Signature)

My Commission Expires:
[Notary Stamp]
My County of Residence:

-11-

<PAGE>

EXHIBIT "A"

[Floor Plan]

BLDG. 64 -- PARK 100
83,200 S.F. ALL ADDRESSES ARE WOODLAND DRIVE

12/6/93 KEYBO6

<PAGE>

HAT WORLD, INC. EXHIBIT B
Building 64, Park 100 TENANT FINISH IMPROVEMENTS
8142 Woodland Drive REVISED November 30, 1998
Indianapolis, Indiana 46278 Page 1 of 1

Tenant agrees to pay Landlord an amount not to exceed $2,500.00 for Landlord's
work to close the openings in the west demising wall, create a new exterior
entrance and demolish four (4) feet of interior wall as shown below. Tenant
shall pay to Landlord said amount within thirty (30) days after Landlord
completes Landlord's work to Tenant's satisfaction and after Tenant's receipt of
Landlord's itemized bill for Landlord's work.

[Floor Plan]

DUKE [LOGO & COMPANY INFORMATION]

EXHIBIT 10.1

COMMERCIAL LEASE

A140-10
R140-04

THIS LEASE is made between Dennis C. Motz and Janice M. Motz of 4904
South Minnesota Avenue, Sioux Falls, South Dakota-57108, herein called Lessor,
and Hat World, 5347 West 86th Street, Indianapolis, Indiana-46268, herein called
Lessee.

Lessee hereby offers to lease from Lessor the premises situated in the
City of Sioux Falls, County of Minnehaha, State of __________, described as 4912
South Minnesota Avenue, upon the following TERMS and CONDITIONS:

1. TERM AND RENT. Lessor demises the above premises for a term of two years,
commencing June 1, 1998, and terminating on May 31, 2000, or sooner as provided
herein at the annual rental of Fourteen Thousand Four Hundred and 00/100 Dollars
($14,400.00), payable in equal installments in advance on the first day of each
month for that month's rental, during the term of this lease. All rental
payments shall be made to Lessor, at the address specified above.

2. USE. Lessee shall use and occupy the premises for Business Office and
Accounting Use. The premises shall be used for no other purpose. Lessor
represents that the premises may lawfully be used for such purpose.

3. CARE AND MAINTENANCE OF PREMISES. Lessee acknowledges that the premises are
in good order and repair, unless otherwise indicated herein. Lessee shall, at
his own expense and at all times, maintain the premises in good and safe
condition, including plate glass, electrical wiring, plumbing and heating
installations and any other system or equipment upon the premises and shall
surrender the same, at termination hereof, in as good condition as received,
normal wear and tear excepted. Lessee shall be responsible for all repairs
required, excepting the roof, exterior walls, structural foundations, and:
Parking Lot, which shall be maintained by Lessor, Lessee shall also maintain in
good condition such portions adjacent to the premises, such as sidewalks, which
would otherwise be required to be maintained by Lessor.

4. ALTERATIONS. Lessee shall not, without first obtaining the written consent of
Lessor, make any alterations, additions, or improvements, in, to or about the
premises.

5. ORDINANCES AND STATUTES. Lessee shall comply with all statutes, ordinances
and requirements of all municipal, state and federal authorities now in force,
or which may hereafter be in force, pertaining to the premises, occasioned by or
affecting the use thereof by Lessee.

6. ASSIGNMENT AND SUBLETTING. Lessee shall not assign this lease or sublet any
portion of the premises without prior written consent of the Lessor, which shall
not be unreasonably withheld. Any such assignment or subletting without consent
shall be void and, at the option of the Lessor, may terminate this lease.

7. UTILITIES. All applications and connections for necessary utility services on
the demised premises shall be made in the name of Lessee only, and Lessee shall
be solely liable for utility charges as they become due, including those for
gas, electricity, and telephone services.

8. ENTRY AND INSPECTION. Lessee shall permit Lessor or Lessor's agents to enter
upon the premises at reasonable times and upon reasonable notice, for the
purpose of inspecting the same, and will permit Lessor at any time within sixty
(60) days prior to the expiration of this lease, to place upon the premises any
usual "To Let" or "For Lease" signs, and permit persons desiring to lease the
same to inspect the premises thereafter.

9. POSSESSION. If Lessor is unable to deliver possession of the premises at the
commencement hereof, Lessor shall not be liable for any damage caused thereby,
not shall this lease be void or voidable, but Lessee shall not be liable for any
rent until possession is delivered. Lessee may terminate this lease if
possession is not delivered within ____ days of the commencement of the term
hereof.

10. INDEMNIFICATION OF LESSOR. Lessor shall not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on the
demised premises or any part thereof, and Lessee agrees to hold Lessor harmless
from any claims for damages, no matter how caused.

11. INSURANCE. Lessee, at his expense, shall maintain plate glass and public
liability insurance including bodily injury and property damage insuring Lessee
and Lessor with minimum coverage as follows:

Lessee shall provide Lessor with a Certificate of Insurance showing
Lessor as additional insured. The Certificate shall provide for a ten-day
written notice to Lessor in the event of cancellation or material change of
coverage. To the maximum extent permitted by insurance policies which may be
owned by Lessor or Lessee, Lessee and Lessor, for the benefit of each other,
waive any and all rights of subrogation which might otherwise exist.

NOTICE. Contact your local county real estate board or Association of
Realtors(R) for additional forms that may be required to meet your
specific needs.

Page 1 of 2

(Revised 9/96)

<PAGE>

12. EMINENT DOMAIN. If the premises or any part thereof or any estate therein,
or any other part of the building materially affecting Lessee's use of the
premises, shall be taken by eminent domain, this lease shall terminate on the
date when title vests pursuant to such taking. The rent, and any additional
rent, shall be apportioned as of the termination date, and any rent paid for any
period beyond that date shall be repaid to Lessee. Lessee shall not be entitled
to any part of the award for such taking or any payment in lieu thereof, but
Lessee may file a claim for any taking of fixtures and improvements owned by
Lessee, and for moving expenses.

13. DESTRUCTION OF PREMISES. In the event of a partial destruction of the
premises during the term hereof, from any cause, Lessor shall forthwith repair
the same, provided that such repairs can be made within sixty (60) days under
existing governmental laws and regulations, but such partial destruction shall
not terminate this lease, except that Lessee shall be entitled to a
proportionate reduction of rent while such repairs are being made, based upon
the extent to which the making of such repairs shall interfere with the business
of Lessee on the premises. If such repairs cannot be made within said sixty (60)
days, Lessor, at his option, may make the same within a reasonable time, this
lease continuing in effect with the rent proportionately abated as aforesaid,
and in the event that Lessor shall not elect to make such repairs which cannot
be made within sixty (60) days, this lease may be terminated at the option of
either party. In the event that the building in which the demised premises may
be situated is destroyed to an extent of not less than one-third of the
replacement costs thereof, Lessor may elect to terminate this lease whether the
demised premises be injured or not. A total destruction of the building in which
the premises may be situated shall terminate this lease.

14. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults in the payment of rent, or
any additional rent, or defaults in the performance of any of the other
covenants or conditions hereof, Lessor may give Lessee notice of such default
and if Lessee does not cure any such default within 15 days, after the giving of
such notice (or if such other default is of such nature that it cannot be
completely cured with such period, if Lessee does not commence such curing
within such 15 days and thereafter proceed with reasonable diligence and in good
faith to cure such default), then Lessor may terminate this lease on not less
than 15 days' notice to Lessee. On the date specified in such notice the term of
this lease shall terminate, and Lessee shall then quit and surrender the
premises to Lessor, but Lessee shall remain liable as hereinafter provided. If
this lease shall have been so terminated by Lessor, Lessor may at any time
thereafter resume possession of the premises by any lawful means and remove
Lessee or other occupants and their effects. No failure to enforce any term
shall be deemed a waiver.

15. SECURITY DEPOSIT. Lessee shall deposit with Lessor on the signing of this
lease the sum of One Thousand Two Hundred Dollars ($1,200.00) as security for
the performance of Lessee's obligations under this lease, including without
limitation the surrender of possession of the premises to Lessor as herein
provided. If Lessor applies any part of the deposit to cure any default of
Lessee, Lessee shall on demand deposit with Lessor the amount so applied so that
Lessor shall have the full deposit on hand at all times during the term of this
lease.

16. TAX INCREASE. Lessee to have 5 parking spaces.

17. COMMON AREA EXPENSES. In the event the demised premises are situated in a
shopping center or in a commercial building in which there are common areas,
Lessee agrees to pay his pro-rata share of maintenance, taxes, and insurance for
the common area. Included in Gross Lease Amount.

18. ATTORNEY'S FEES. In case suit should be brought for recovery of the
premises, or for any sum due hereunder, or because of any act which may arise
out of the possession of the premises, by either party, the prevailing party
shall be entitled to all cost incurred in connection with such action, including
a reasonable attorney's fee.

19. WAIVER. No failure of Lessor to enforce any term hereof shall be deemed to
be a waiver.

20. NOTICES. Any notice which either party may or is required to give, shall be
given by mailing the same, postage prepaid, to Lessee at the premises, or Lessor
at the address specified above, or at such other places as may be designated by
the parties from time to time.

21. HEIRS, ASSIGNS, SUCCESSORS. This lease is binding upon and inures to the
benefit of the heirs, assigns, and successors in interest to the parties.

22. OPTION TO RENEW. Provided that Lessee is not in default in the performance
of the lease, Lessee shall have the option to renew the lease for an additional
term of 12 months commencing at the expiration of the initial lease term. All of
the terms and conditions of the lease shall apply during the renewal term except
that the monthly rent shall be the sum of $1,300.00. The option shall be
exercised by written notice given to Lessor not less than 60 days prior to the
expiration of the initial lease term. If notice is not given in the manner
provided herein within the time specified, this option shall expire.

23. SUBORDINATION. This lease is and shall be subordinated to all existing and
future liens and encumbrances against the property.

24. RADON GAS DISCLOSURE. As required by law, (Landlord) (Seller) makes the
following disclosure: "Radon Gas" is a naturally occurring radioactive gas that,
when it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it over time. Levels of radon that
exceed federal and state guidelines have been found in buildings in Sioux Falls,
SD. Additional information regarding radon and radon testing may be obtained
from your county public health unit.

25. ENTIRE AGREEMENT. The foregoing constitutes the entire agreement between the
parties and may be modified only by a writing signed by both parties. The
following Exhibits, if any, have been made a part of this lease before the
parties' execution hereof:

Signed this 19th day of May, 1998.

By: /s/ Ken Koch By: /s/ Dennis C. Motz
-------------------------------- -------------------------------
Ken Koch CFO Dennis C. Motz
Lessee Lessor

* E-Z LEGAL FORMS. Before you use this form, read it, fill in all blanks, and
make whatever changes are necessary to your particular transaction. Consult a
lawyer if you doubt the form's fitness for your purpose and use. E-Z Legal Forms
and the retailer make no representation or warranty, express or implied, with
respect to the merchantability of this form for an intended use or purpose.

Page 2 of 2

(Revised 9/96)

EXHIBIT 10.2

1998
EMPLOYMENT AGREEMENT

BETWEEN

HAT WORLD, INC.
A MINNESOTA CORPORATION

AND

JAMES HARRIS

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into
as of the 31st day of July, 1998, by and between HAT WORLD, INC., a Minnesota
corporation (the "Employer"), and JAMES HARRIS, an Indiana resident (the
"Employee").

RECITALS

A. Employee is presently employed by Employer, and Employee and
Employer desire to continue Employee's employment on the terms and conditions
set forth in this Agreement.

B. Employee understands that Employer, through extensive efforts, has
developed, and continues to develop, certain management and marketing techniques
and strategies, innovations, designs, ideas, plans, trade secrets, proprietary
information, sales methods and systems, customer and client lists, methods of
obtaining business, advertising and pricing strategies and other proprietary
information that Employer desires to protect and keep confidential.

C. Employee will have access to confidential and proprietary
information belonging to Employer by reason of Employee's employment with
Employer pursuant to this Agreement, and will be able to harm the protectable
business interests of Employer unless reasonable restrictions are imposed on
Employee's conduct and activities following termination of Employee's
relationship with Employer.

D. Employer will be at an unfair competitive disadvantage and will be
harmed if Employee divulges Employer's confidential information at any time
during or after the termination of Employee's employment pursuant to this
Agreement or competes with Employer during a certain period of time following
termination of Employee's employment pursuant to this Agreement.

E. Employee wishes to assure Employer that Employee's relationship with
Employer and the information and relationships acquired and developed by
Employee during the course thereof do not and will not constitute a threat or
risk that Employer will be unfairly harmed or placed at an unfair competitive
disadvantage by Employee's actions in the future.

AGREEMENT

NOW, THEREFORE, in consideration of the promises and covenants
contained in this Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employer and Employee
agree as follows:

1. EMPLOYMENT. Employer hereby agrees to employ Employee as President
of Employer in accordance with the terms and conditions set forth in this
Agreement. Employee shall perform such duties and responsibilities as may from
time to time be assigned to him by Employer. Employee accepts such employment
subject to the general supervision, orders, advice, and direction of Employer
and to the terms and conditions set forth in this Agreement.

1
<PAGE>

2. TERMS AND TERMINATION. Employee's employment hereunder shall be on
an at-will basis, terminable at any time with or without cause by either party.
In the event Employee terminates Employee's employment with Employer, Employee
agrees to give notice of such termination to Employer as far in advance of such
termination as is reasonably possible under the circumstances (but in no event
fewer than 30 days' advance notice).

3. COMPENSATION AND RELATED MATTERS.

(a) For all services rendered by Employee to Employer pursuant to
this Agreement, Employee's compensation shall be determined, computed and paid
in accordance with the Compensation Schedule attached hereto as Schedule A and
made a part hereof.

(b) Employee, subject to any applicable eligibility and insurability
requirements, shall be offered the opportunity to receive the same benefits, on
comparable terms and subject to comparable conditions, as those that are made
available by Employer to other employees generally from time to time (the
"Benefits"). Employer reserves the right, in its sole discretion, to modify,
supplement, replace or eliminate any or all of the Benefits without advance
notice to Employee.

4. EXPENSES AND CHARGES. If Employee incurs any out-of-pocket expenses
in performing his responsibilities and duties as President of Employer (the
"Duties"), Employer will reimburse Employee for such expenses only to the
extent, and in the amounts and at the times, in accordance with Employer's
expense policies in effect from time to time (the "Expense Policy"). Employer
reserves the right, in it's sole discretion, to modify, supplement, replace or
cancel any or all provisions in the Expense Policy without advance notice to
Employee.

5. NONCOMPETITION AND NONSOLICITATION. Employee will not, during the
term of his employment with Employer or at any time within 24 months immediately
following the termination of his employment with Employer, directly or
indirectly, on his own behalf or on behalf of any third party whether as an
agent, employee, employer, officer, director, manager, shareholder, member,
principal, consultant, independent contractor, partner, creditor or in any other
capacity:

(a) employ or seek to employ any person who was, during the "Service
Period" (as hereinafter defined), an employee of Employer; or

(b) induce, cause, solicit, advise or influence any person to leave
employment with Employer who was, during the "Service Period" (as hereinafter
defined), an employee of Employer; or

(d) induce, cause, solicit, advise or influence any person, business
or entity who was a customer of Employer during the "Service Period" to
patronize a "competitor" (as hereinafter defined) of Employer; or

(e) initiate contact with or solicit or accept the business of any
person, business or entity who was a customer of Employer during the "Service
Period" (as hereinafter defined) for the purpose of "competing" (as hereinafter
defined) with Employer or effecting any of the prohibited actions described in
this Section 5.

2
<PAGE>

For purposes of this Agreement, "Service Period" shall mean the period
during which Employee is employed by Employer, whether under this Agreement or
otherwise. For purposes of this Agreement, "compete", "competes" and "competing"
shall mean to engage or seek to engage in the provision of products or services
that are identical or substantially similar to those products or services
provided by Employer during the "Service Period." For purposes of this
Agreement, "primary market area" shall mean any counties in any states of the
United States where, during the Service Period, Employer has performed services
or sold products in such counties or to customers who are located in such
counties. For purposes of this Agreement, "competitor" shall mean any person,
business, or entity that competes with Employer. Employee acknowledges and
understands that it is essential and reasonable, in order to protect Employer's
interests under this Agreement, that Employee be restricted in the manner
described above for the period described hereinabove.

6. CONFIDENTIALITY. Except for necessary disclosures made in the
ordinary course of the performance of the Duties, and except as is otherwise
expressly authorized by Employer in writing, Employee shall not at any time,
either during the term of his employment with Employer or at any time
thereafter, directly or indirectly, on his own behalf or on behalf of any third
party, whether as agent, employee, employer, officer, director, manager,
shareholder, member, principal, consultant, independent contractor, partner,
creditor or in any other capacity, use or disclose any confidential information
obtained, received or learned by him while Employed by Employer (including
information conceived, originated, discovered or developed by Employee)
including but not limited to, ideas, concepts, designs, specifications,
technical data, discoveries, programs, technical know-how, methods, procedures,
business plans, marketing plans, marketing information, techniques, forecasts,
customer (actual or prospective) lists, customer (actual or prospective)
information, supplier (actual or prospective) lists, Supplier (actual or
prospective) information, processes, formulae, research, development,
inventions, trademarks, trade names, trade secrets, proposals, and financial
information, whether or not the same are, or may be, patented, registered, or
otherwise publicly protected, and whether or not originated or generated by or
through Employer; provided, however, that this Section 6 shall not preclude
Employee from use or disclosure of information known generally to the public
(provided that Employee was not, without Employer's consent, directly or
indirectly responsible for such information becoming known generally to the
public) or from disclosure required by law or court order.

7. RETURN OF RECORDS AND PROPERTY. Employee agrees that all documents
and records and copies of documents and records pertaining to the financial
affairs, operations, customers, recruits, employees and business of Employer,
including, without limitation, price lists, customer lists, employee lists,
marketing data, sales aids, notes (even if made by or delivered to Employee),
and every other document or record obtained or received by Employee while
employed by Employer shall be the exclusive property of Employer, and Employee
agrees to keep such documents and records subject to Employer's direction,
custody and control and to surrender to Employer such of those documents and
records as are still in his possession at the termination of his employment with
Employer. Employee agrees not to disclose or give possession of such documents
or records to anyone except authorized representatives of Employer. Employee
further agrees to return to Employer, promptly upon termination of his
employment with Employer, all documentation, records, customer lists, supplier
lists, software, hardware, brochures, forms, supplies, samples, and all items of
a confidential nature.

3
<PAGE>

8. SEVERANCE BENEFITS.

(a) Upon termination of Employee's employment with Employer for any
reason or under any circumstance other an on account of the death or
"misconduct" (as defined in Section 8(d) hereof) of Employee, Employer shall pay
Employee in cash an amount equal to four (4) month's base salary then in effect
for Employee. Except for the additional severance compensation and/or benefits,
if any, granted by Employer pursuant to Section 8(b) hereof, the severance
benefits provided for by this Section 8(a) shall constitute the entire
obligation of Employer for the payment of severance compensation or benefits to
Employee under this Agreement.

(b) Upon termination of Employee's employment with Employer for any
reason or under any circumstance other than on account of the death or
"misconduct" (as defined in Section 8(d) hereof) of Employee, the Board or an
authorized committee of the Board, shall consider and make a determination s to
whether, under the circumstances, severance compensation and/or benefits in
addition to the severance benefits granted in Section 8(a) should be awarded to
Employee. Employer shall be under no obligation to award any such additional
severance compensation and/or benefits and the determination of whether to award
such additional severance compensation and/or benefits shall be in the sole
discretion of the Board or such committee.

(c) Nothing in this Agreement shall be construed as affecting
Employee's right to severance compensation or benefits under any other written
agreements between Employer and Employee.

(d) For purposes of this Agreement, "misconduct" means:

(i) the failure of Employee to substantially perform any of
Employee's significant duties or responsibilities in connection with Employee's
employment (other than any such failure resulting from incapacity due to
physical or mental illness); or

(ii) any act that constitutes on the part of Employee common law
fraud or dishonesty regardless of whether such fraud or dishonesty resulted in,
or was intended to result in, a benefit to Employee at the expense of Employer;
or

(iii) the conviction of Employee of, or the plea by Employee of
nolo contendere to, a felony or a crime involving moral turpitude; or

(iv) any violation by Employee in any material respect of any of
Employer's policies or of any term or provision of any employment or other
agreement between Employee and Employer; or

(v) Employee's unexcused total abandonment or neglect of
Employee's duties and responsibilities in connection with Employee's employment
with Employer (other than absences due to illness, physical or mental
incapacity, vacations, or other excused absences) for a continuous period of ten
working days.

(e) Employer shall withhold from the severance benefits granted in
Section 8(a) (and any discretionary severance compensation and/or benefits
otherwise paid to Employee) all federal, state, city, county or other taxes as
shall be required pursuant top any law or governmental regulation or ruling.

4
<PAGE>

9. NOTICES. Any notice, request, demand or other communication to be
given hereunder to any party by any other party shall be in writing and shall be
personally delivered or sent by prepaid same day or over night courier or
certified mail, return receipt requested, postage prepaid, addressed as follows
(or addressed to such other address as shall be given in writing by any party to
the other):

To Employer: Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108
Attn.: Board of Directors

To Employee: James Harris
46 Sycamore St.
Brownsburg, IN 46112

10. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes
the entire agreement between Employer and Employee with respect to the subject
matter hereof and supersedes all prior or contemporaneous agreements,
representations and understandings, written or oral, relative to the subject
matter hereof. No supplement, modification or amendment to this Agreement shall
be binding unless executed in writing by the parties hereto. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision, whether or not similar, nor will any waiver constitute a
continuing waiver. No waiver will be binding unless executed in writing by the
party making the waiver.

11. HEADINGS; PRONOUNS. Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions. All pronouns
and any variations thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of the person or persons may require.
Use of the terms "herein", "hereof", and "hereunder" shall be deemed references
to this Agreement in its entirety and not to the Section or clause in which such
term appears.

12. REASONABLENESS OF TERMS. Both Employer and Employee stipulate and
agree that the covenants and other terms contained in this Agreement are
reasonable in all respects, including any time periods and geographical
coverage.

13. SEVERABILITY. Should any clause, portion or section of this
Agreement be unenforceable or invalid for any reason, such unenforceability or
invalidity shall not affect the enforceability or validity of the remainder of
this Agreement. Should any particular covenant in this Agreement be held
unreasonable or unenforceable for any reason, including, without limitation, the
time period, geographical area or scope of activity covered by such covenant,
such covenant shall be given effect and enforced to whatever extent would be
reasonable and enforceable.

14. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in all respects by the laws of the State of Indiana. The parties intend
the provisions of this Agreement to supplement, but not displace, their
respective rights and responsibilities under the Indiana Uniform Trade Secrets
Act, I.C. 24-2-3, as such statute may be amended, from time to time.

15. BINDING EFFECT. The Agreement is binding upon and shall inure to
the benefit of and may be enforced by Employer, is successors and assigns, and
shall be binding upon Employee and may be enforced against Employee and
Employee's executors, personal representatives, administrators, legatees and
other successors in

5
<PAGE>

interest. This Agreement, being personal to Employee, may not be assigned by
Employee.

16. EMPLOYEE REPRESENTATIONS AND ACKNOWLEDGMENTS. Employee
acknowledges, stipulates, agrees, represents and warrants to Employer that (a)
he has had adequate time to review this Agreement, (b) he has had the
opportunity to ask questions and receive answers from Employer regarding this
Agreement, and (c) he has had the opportunity, and has been encouraged by
Employer, to consult with legal advisors of his choice concerning the terms,
conditions and provisions of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written. By affixing his name hereto, Employee acknowledges
that he has received and read a fully executed copy of this Agreement.

"EMPLOYER"

HAT WORLD, INC.

By:
-----------------------------------
George N. Berger
Chairman & Corporate Secretary

"EMPLOYEE"

---------------------------------------
James Harris

6
<PAGE>

SCHEDULE A

COMPENSATION

1. BASE SALARY. Unless the Agreement is earlier terminated, Employer
shall pay to Employee an annual salary (less any applicable local, state and
federal taxes), payable in installments and as prorated to reflect any partial
months of employment hereunder, Eighty Thousand Dollars ($80,000) for the period
commencing July 1, 1998 to June 30, 2001.

Salary payments will be payable in 26 equal installments per year,
every two weeks, two weeks in arrears, or, if such Payment Date falls on a
Saturday, Sunday or legal holiday, on the last business day before such Payment
Date; or (b) in accordance with a schedule mutually agreed upon by the parties
hereto.

2. BASE SALARY ADJUSTMENTS. The annual base salary shall increase or
decrease as the number of stores operated by Employer increases or decreases as
follows:

Hat World Stores Operated Base Pay Increases
------------------------- ------------------
50 to 99 stores 10.00% to $88,000 Annually
100 to 149 stores 10.00% to $96,800 Annually
150 to 199 stores 15.00% to $111,320 Annually
200 to 249 stores 15.00% to $128,018 Annually

Annual increases or decreases shall be effective from the date the
total number of stores operated by Employer attains the numbers listed above
prorated to reflect any partial months of employment hereunder.

The increase would be lost if the total number of stores declines below
the thresholds indicated above. For example, if the store number is 50, then a
10.00% increase applies for the remainder of the term unless the store number
would drop to 49 or less, then the original Base Salary ($80,000) would apply.

3. PERFORMANCE BONUSES. By March 31 of each year, the board of
directors shall approve a reasonable projected ratio of Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) as a percent of
Revenues. For fiscal and calendar year 1998 the EBITDA Percent shall be 15.74%.

For 1998, the Employee shall receive a performance bonus as
determined by the actual EBITDA Percent as follows:

Actual EBITDA Percent for 1998 Performance Bonus
------------------------------ -----------------
Below 14.50% 0.00%
14.50% to less than 15.00% 10.00%
15.00% to less than 15.50% 12.50%
15.50% to less than 16.00% 15.00%
16.00% to less than 16.50% 17.50%
16.50% to less than 17.00% 20.00%

The ranges for achievement of Performance Bonuses in subsequent years
shall be reasonably adjusted to reflect changes in the projected ratio of EBITDA
Percent for such subsequent years. Performance Bonus percentages are of Base
Salary after adjustments.

A-1
<PAGE>

accepted accounting principles in the United States of America in effect at the
time of the calculation as promulgated by the Financial Standards Accounting
Board and recognized and interpreted by the American Institute of Certified
Public Accountants.

4. STOCK OPTIONS. Upon execution of the Agreement by both parties,
Employer shall grant to Employee a non-qualified option to purchase shares of
Stock (the "Option"), which Option shall be subject to the terms and
restrictions on transfer and other restrictions, if any, as provided in the Hat
World, Inc. 1995 Stock Option Plan, as amended, modified or restated from time
to time (the "Plan") or the Non-Qualified Stock Option Agreement between
Employee and Employer of even date herewith (the "Option Agreement"), and the
following terms and conditions:

(a) Number of Shares: 50,000 shares of Common Stock (based on the
number of shares outstanding as of July 1, 1998)

(b) Exercise Price: $13.00 per share

(c) Expiration Date: The Option, to the extent unexercised, shall
expire at 12:00 noon, Indianapolis time, on December 31, 2001.

(d) Exercisability: The Option shall be exercisable so long as
Employee remains employed by Employer and in accordance with the following
vesting schedule:

Date of Vesting Number of Shares
--------------- ----------------
July 1, 1998 12,500
June 30, 1999 12,500
June 30, 2000 12,500
June 30, 2001 12,500

In the event of an acquisition of more than fifty percent of the
common stock of the Employer by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then vesting of
all the options indicated above shall be immediate.

5. PRIOR OPTIONS. All options granted by prior employment agreements
and option grants, and not heretofore cancelled or expired, shall continue in
full force and effect.

A-2

EXHIBIT 10.4

1998
EMPLOYMENT AGREEMENT

BETWEEN

HAT WORLD, INC.
A MINNESOTA CORPORATION

AND

GEORGE N. BERGER
<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into
as of the 31st day of July, 1998, by and between HAT WORLD, INC., a Minnesota
corporation (the "Employer"), and George N. Berger, a South Dakota resident (the
"Employee").

RECITALS

A. Employee is presently employed by Employer, and Employee and
Employer desire to continue Employee's employment on the terms and conditions
set forth in this Agreement.

AGREEMENT

1. EMPLOYMENT. Employer hereby agrees to employ Employee as Senior Vice
President, Strategic Planning & Investor Relations and Corporate Secretary of
Employer in accordance with the terms and conditions set forth in this
Agreement. Employee shall perform such duties and responsibilities as may from
time to time be assigned to him by Employer. Employee accepts such employment
subject to the general supervision, orders, advice, and direction of Employer
and to the terms and conditions set forth in this Agreement.

1
<PAGE>

3. COMPENSATION AND RELATED MATTERS.

(a) employ or seek to employ any person who was, during the "Service
Period" (as hereinafter defined), an employee of Employer; or

(b) induce, cause, solicit, advise or influence any person to leave
employment with Employer who was, during the "Service Period" (as hereinafter
defined), an employee of Employer; or

2
<PAGE>

3
<PAGE>

8. SEVERANCE BENEFITS.

(c) Nothing in this Agreement shall be construed as affecting
Employee's right to severance compensation or benefits under any other written
agreements between Employer and Employee.

(d) For purposes of this Agreement, "misconduct" means:

(iii) the conviction of Employee of, or the plea by Employee of
nolo contendere to, a felony or a crime involving moral turpitude; or

(iv) any violation by Employee in any material respect of any of
Employer's policies or of any term or provision of any employment or other
agreement between Employee and Employer; or

4
<PAGE>

To Employer: Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108
Attn.: Board of Directors

To Employee: George N. Berger
600 S. Conklin Ave.
Sioux Falls, SD 57103

5
<PAGE>

interest. This Agreement, being personal to Employee, may not be assigned by
Employee.

"EMPLOYER"

HAT WORLD, INC.

By:
-----------------------------------
George N. Berger
Chairman & Corporate Secretary

"EMPLOYEE"

---------------------------------------
George N. Berger

6
<PAGE>

SCHEDULE A

COMPENSATION

1. BASE SALARY. Unless the Agreement is earlier terminated, Employer
shall pay to Employee an annual salary (less any applicable local, state and
federal taxes), payable in installments and as prorated to reflect any partial
months of employment hereunder, Fifty Thousand Dollars ($50,000) for the period
commencing July 1, 1998 to June 30, 1999. Base salary for the period July 1,
1999 to June 30, 2001 shall be determined by the Board of Directors.

2. BASE SALARY ADJUSTMENTS. The annual base salary shall increase or
decrease as the number of stores operated by Employer increases or decreases as
follows:

Hat World Stores Operated Base Pay Increases
------------------------- ------------------
50 to 99 stores 10.00% to $55,000 Annually
100 to 149 stores 10.00% to $60,500 Annually
150 to 199 stores 15.00% to $69,575 Annually
200 to 249 stores 15.00% to $80,012 Annually

The table above assumes the Base Salary prior to adjustments for the
period beyond June 30, 1999 will be $50,000, for purposes of demonstrating the
effect of adjustments.

For 1998, the Employee shall receive a performance bonus as
determined by the actual EBITDA Percent as follows:

A-1
<PAGE>

Actual EBITDA Percents shall be properly calculated from financial
statements of Employer for the relevant period, certified after audit by
Employer's certified public accountants, which financial statements shall be
prepared in accordance with generally accepted accounting principles in the
United States of America in effect at the time of the calculation as promulgated
by the Financial Standards Accounting Board and recognized and interpreted by
the American Institute of Certified Public Accountants.

(a) Number of Shares: 20,000 shares of Common Stock (based on the
number of shares outstanding as of July 1, 1998)

(b) Exercise Price: $13.00 per share

(c) Expiration Date: The Option, to the extent unexercised, shall
expire at 12:00 noon, Indianapolis time, on December 31, 2001.

(d) Exercisability: The Option shall be exercisable so long as
Employee remains employed by Employer and in accordance with the following
vesting schedule:

Date of Vesting Number of Shares
--------------- ----------------
July 1, 1998 5,000
June 30, 1999 5,000
June 30, 2000 5,000
June 30, 2001 5,000

In the event that the Board of Directors and Employee do not
reach agreement on Base Salary for the period after June 30, 1999, then vesting
of all the options indicated above shall be immediate.

5. PRIOR OPTIONS. All options granted by prior employment agreements
and option grants, and not heretofore cancelled or expired, shall continue in
full force and effect.

A-2

EXHIBIT 10.5

1998
EMPLOYMENT AGREEMENT

BETWEEN

HAT WORLD, INC.
A MINNESOTA CORPORATION

AND

KENNETH J. KOCHER

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into
as of the 31st day of July, 1998, by and between HAT WORLD, INC., a Minnesota
corporation (the "Employer"), and Kenneth J. Kocher, a South Dakota resident
(the "Employee").

RECITALS

A. Employee is presently employed by Employer, and Employee and
Employer desire to continue Employee's employment on the terms and conditions
set forth in this Agreement.

AGREEMENT

1. EMPLOYMENT. Employer hereby agrees to employ Employee as Chief
Financial Officer and Treasurer of Employer in accordance with the terms and
conditions set forth in this Agreement. Employee shall perform such duties and
responsibilities as may from time to time be assigned to him by Employer.
Employee accepts such employment subject to the general supervision, orders,
advice, and direction of Employer and to the terms and conditions set forth in
this Agreement.

1
<PAGE>

3. COMPENSATION AND RELATED MATTERS.

(a) employ or seek to employ any person who was, during the "Service
Period" (as hereinafter defined), an employee of Employer; or

(b) induce, cause, solicit, advise or influence any person to leave
employment with Employer who was, during the "Service Period" (as hereinafter
defined), an employee of Employer; or

2
<PAGE>

3
<PAGE>

8. SEVERANCE BENEFITS.

(c) Nothing in this Agreement shall be construed as affecting
Employee's right to severance compensation or benefits under any other written
agreements between Employer and Employee.

(d) For purposes of this Agreement, "misconduct" means:

(iii) the conviction of Employee of, or the plea by Employee of
nolo contendere to, a felony or a crime involving moral turpitude; or

(iv) any violation by Employee in any material respect of any of
Employer's policies or of any term or provision of any employment or other
agreement between Employee and Employer; or

4
<PAGE>

To Employer: Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108
Attn.: Board of Directors

To Employee: Kenneth J. Kocher
3405 Micah Lane
Sioux Falls, SD 57103

5
<PAGE>

interest. This Agreement, being personal to Employee, may not be assigned by
Employee.

"EMPLOYER"

HAT WORLD, INC.

By:
-----------------------------------
George N. Berger
Chairman & Corporate Secretary

"EMPLOYEE"

---------------------------------------
Kenneth J. Kocher

6
<PAGE>

SCHEDULE A

COMPENSATION

1. BASE SALARY. Unless the Agreement is earlier terminated, Employer
shall pay to Employee an annual salary (less any applicable local, state and
federal taxes), payable in installments and as prorated to reflect any partial
months of employment hereunder, Sixty Thousand Dollars ($60,000) for the period
commencing July 1, 1998 to June 30, 2001.

2. BASE SALARY ADJUSTMENTS. The annual base salary shall increase or
decrease as the number of stores operated by Employer increases or decreases as
follows:

Hat World Stores Operated Base Pay Increases
------------------------- ------------------
50 to 99 stores 10.00% to $66,000 Annually
100 to 149 stores 10.00% to $72,600 Annually
150 to 199 stores 15.00% to $83,490 Annually
200 to 249 stores 15.00% to $96,014 Annually

For 1998, the Employee shall receive a performance bonus as
determined by the actual EBITDA Percent as follows:

A-1
<PAGE>

(a) Number of Shares: 40,000 shares of Common Stock (based on the
number of shares outstanding as of July 1, 1998)

(b) Exercise Price: $13.00 per share

(c) Expiration Date: The Option, to the extent unexercised, shall
expire at 12:00 noon, Indianapolis time, on December 31, 2001.

(d) Exercisability: The Option shall be exercisable so long as
Employee remains employed by Employer and in accordance with the following
vesting schedule:

Date of Vesting Number of Shares
--------------- ----------------
July 1, 1998 10,000
June 30, 1999 10,000
June 30, 2000 10,000
June 30, 2001 10,000

5. PRIOR OPTIONS. All options granted by prior employment agreements
and option grants, and not heretofore cancelled or expired, shall continue in
full force and effect.

A-2

EXHIBIT 10.6

1998
EMPLOYMENT AGREEMENT

BETWEEN

HAT WORLD, INC.
A MINNESOTA CORPORATION

AND

J. GLENN CAMPBELL

<PAGE>

EMPLOYMENT AGREEMENT

RECITALS

A. Employee is presently employed by Employer, and Employee and
Employer desire to continue Employee's employment on the terms and conditions
set forth in this Agreement.

AGREEMENT

1. EMPLOYMENT. Employer hereby agrees to employ Employee as Senior Vice
President, Operations of Employer in accordance with the terms and conditions
set forth in this Agreement. Employee shall perform such duties and
responsibilities as may from time to time be assigned to him by Employer.
Employee accepts such employment subject to the general supervision, orders,
advice, and direction of Employer and to the terms and conditions set forth in
this Agreement.

1
<PAGE>

3. COMPENSATION AND RELATED MATTERS.

(a) employ or seek to employ any person who was, during the "Service
Period" (as hereinafter defined), an employee of Employer; or

(b) induce, cause, solicit, advise or influence any person to leave
employment with Employer who was, during the "Service Period" (as hereinafter
defined), an employee of Employer; or

2
<PAGE>

3
<PAGE>

8. SEVERANCE BENEFITS.

(c) Nothing in this Agreement shall be construed as affecting
Employee's right to severance compensation or benefits under any other written
agreements between Employer and Employee.

(d) For purposes of this Agreement, "misconduct" means:

(iii) the conviction of Employee of, or the plea by Employee of
nolo contendere to, a felony or a crime involving moral turpitude; or

(iv) any violation by Employee in any material respect of any of
Employer's policies or of any term or provision of any employment or other
agreement between Employee and Employer; or

4
<PAGE>

To Employer: Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108
Attn.: Board of Directors

To Employee: J. Glenn Campbell
101 Valley Circle
Brownsburg, IN 46112

5
<PAGE>

interest. This Agreement, being personal to Employee, may not be assigned by
Employee.

"EMPLOYER"

HAT WORLD, INC.

By:
-----------------------------------
George N. Berger
Chairman & Corporate Secretary

"EMPLOYEE"

---------------------------------------
J. Glenn Campbell

6
<PAGE>

SCHEDULE A

COMPENSATION

1. BASE SALARY. Unless the Agreement is earlier terminated, Employer
shall pay to Employee an annual salary (less any applicable local, state and
federal taxes), payable in installments and as prorated to reflect any partial
months of employment hereunder, Seventy Thousand Dollars ($70,000) for the
period commencing July 1, 1998 to June 30, 2001.

2. BASE SALARY ADJUSTMENTS. The annual base salary shall increase or
decrease as the number of stores operated by Employer increases or decreases as
follows:

Hat World Stores Operated Base Pay Increases
------------------------- ------------------
50 to 99 stores 10.00% to $77,000 Annually
100 to 149 stores 10.00% to $84,700 Annually
150 to 199 stores 15.00% to $97,405 Annually
200 to 249 stores 15.00% to $112,016 Annually

For 1998, the Employee shall receive a performance bonus as
determined by the actual EBITDA Percent as follows:

A-1
<PAGE>

(a) Number of Shares: 20,000 shares of Common Stock (based on the
number of shares outstanding as of July 1, 1998)

(b) Exercise Price: $13.00 per share

(c) Expiration Date: The Option, to the extent unexercised, shall
expire at 12:00 noon, Indianapolis time, on December 31, 2001.

(d) Exercisability: The Option shall be exercisable so long as
Employee remains employed by Employer and in accordance with the following
vesting schedule:

Date of Vesting Number of Shares
--------------- ----------------
July 1, 1998 5,000
June 30, 1999 5,000
June 30, 2000 5,000
June 30, 2001 5,000

5. PRIOR OPTIONS. All options granted by prior employment agreements
and option grants, and not heretofore cancelled or expired, shall continue in
full force and effect.

A-2

EXHIBIT 10.7

1998
EMPLOYMENT AGREEMENT

BETWEEN

HAT WORLD, INC.
A MINNESOTA CORPORATION

AND

SCOTT A. MOLANDER

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into
as of the 31st day of July, 1998, by and between HAT WORLD, INC., a Minnesota
corporation (the "Employer"), and Scott A. Molander, an Indiana resident (the
"Employee").

RECITALS

A. Employee is presently employed by Employer, and Employee and
Employer desire to continue Employee's employment on the terms and conditions
set forth in this Agreement.

AGREEMENT

1. EMPLOYMENT. Employer hereby agrees to employ Employee as Senior Vice
President, Systems & Planning of Employer in accordance with the terms and
conditions set forth in this Agreement. Employee shall perform such duties and
responsibilities as may from time to time be assigned to him by Employer.
Employee accepts such employment subject to the general supervision, orders,
advice, and direction of Employer and to the terms and conditions set forth in
this Agreement.

<PAGE>

3. COMPENSATION AND RELATED MATTERS.

(a) employ or seek to employ any person who was, during the "Service
Period" (as hereinafter defined), an employee of Employer; or

(b) induce, cause, solicit, advise or influence any person to leave
employment with Employer who was, during the "Service Period" (as hereinafter
defined), an employee of Employer; or

2
<PAGE>

3
<PAGE>

8. SEVERANCE BENEFITS.

(c) Nothing in this Agreement shall be construed as affecting
Employee's right to severance compensation or benefits under any other written
agreements between Employer and Employee.

(d) For purposes of this Agreement, "misconduct" means:

(iii) the conviction of Employee of, or the plea by Employee of
nolo contendere to, a felony or a crime involving moral turpitude; or

(iv) any violation by Employee in any material respect of any of
Employer's policies or of any term or provision of any employment or other
agreement between Employee and Employer; or

4
<PAGE>

To Employer: Hat World, Inc.
4912 S. Minnesota Ave.
Sioux Falls, SD 57108
Attn.: Board of Directors

To Employee: Scott A. Molander
8450 North Park Avenue
Indianapolis, IN 46240

5
<PAGE>

interest. This Agreement, being personal to Employee, may not be assigned by
Employee.

"EMPLOYER"

HAT WORLD, INC.

By:
-----------------------------------
George N. Berger
Chairman & Corporate Secretary

"EMPLOYEE"

---------------------------------------
Scott A. Molander

6
<PAGE>

SCHEDULE A

COMPENSATION

1. BASE SALARY. Unless the Agreement is earlier terminated, Employer
shall pay to Employee an annual salary (less any applicable local, state and
federal taxes), payable in installments and as prorated to reflect any partial
months of employment hereunder, Seventy Thousand Dollars ($70,000) for the
period commencing July 1, 1998 to June 30, 2001.

2. BASE SALARY ADJUSTMENTS. The annual base salary shall increase or
decrease as the number of stores operated by Employer increases or decreases as
follows:

For 1998, the Employee shall receive a performance bonus as
determined by the actual EBITDA Percent as follows:

A-1
<PAGE>

(a) Number of Shares: 20,000 shares of Common Stock (based on the
number of shares outstanding as of July 1, 1998)

(b) Exercise Price: $13.00 per share

(c) Expiration Date: The Option, to the extent unexercised, shall
expire at 12:00 noon, Indianapolis time, on December 31, 2001.

(d) Exercisability: The Option shall be exercisable so long as
Employee remains employed by Employer and in accordance with the following
vesting schedule:

Date of Vesting Number of Shares
--------------- ----------------
July 1, 1998 5,000
June 30, 1999 5,000
June 30, 2000 5,000
June 30, 2001 5,000

5. PRIOR OPTIONS. All options granted by prior employment agreements
and option grants, and not heretofore cancelled or expired, shall continue in
full force and effect.

A-2

EXHIBIT 24.0

[EIDE BAILLY LLP LETTERHEAD]

--------------------------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS

CONSENT OF INDEPENDENT AUDITOR

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 15, 1999, in the Registration Statement (Form
SB-2 No.33-______) and related Prospectus of Hat World Corporation for the
registration of 1,150,000 shares of its common stock.

/s/ Eide Bailly LLP

Eden Prairie, Minnesota
June 13, 1999