<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended January 27, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission file number 0-21910
KIDS MART, INC.
(F/K/A FROST HANNA ACQUISITION GROUP, INC.)
(Exact name of registrant as specified in its charter)
Florida 65-0406710
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
801 Sentous Avenue, City of Industry, California 91748
(Address of principal executive offices) (Zip code)
(818) 854-3166
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share.
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---------------- --------------
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K or any amendment to this Form 10-K. [ x ]
AS OF MAY 6, 1996, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NON-AFFILIATES OF THE ISSUER BASED ON THE AVERAGE BID AND ASK PRICES OF
$4.125 AND $4.125, RESPECTIVELY, OF SUCH COMMON STOCK IS $13,425,489
BASED UPON AN AVERAGE PRICE OF $4.125 MULTIPLIED BY 3,254,664 SHARES OF
COMMON STOCK OUTSTANDING ON SUCH DATE HELD BY NON-AFFILIATES.
AS OF MAY 6, 1996, THE ISSUER HAD A TOTAL OF 4,943,000 SHARES OF
COMMON STOCK, PAR VALUE $.0001 PER SHARE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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KIDS MART, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business of the Company Prior to the Merger; Merger . . . . . . . . . . . . . . . . . . . . . . 1
Business of the Company Subsequent to the Merger . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . . . . . . . . . . . . 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management's Discussion and Analysis or Plan of Operation of the Company . . . . . . . . . . . . . 7
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . 8
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 12
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 14. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBITS
</TABLE>
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PART I
1. Description of Business
Kid's Mart, Inc. (f/k/a Frost Hanna Acquisition Group, Inc.) (the
"Company" or "FH"), a Florida corporation, is a value oriented chain of
children's specialty apparel stores generally located in strip shopping
centers. It currently operates 296 children's apparel stores in 20 states
under the names Little Folks (14 stores) and Kids Mart (282 stores).
BUSINESS OF THE COMPANY PRIOR TO THE MERGER; MERGER
The Company was formed in April 1993 to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating business. In September 1993, the Company
consummated an initial public offering of its equity securities from which it
derived net proceeds of approximately $6,519,800 (the "Net Proceeds"). As per
the terms of the related prospectus, $5,730,313 (representing approximately 80%
of the Net Proceeds, inclusive of interest earned thereon) was held in escrow
at December 31, 1995 pending the consummation of the business combination
described below and was released to the Company upon consummation of the merger
also described below.
LFS Acquisition Corp. ("LFS"), a Delaware corporation, was formed on
May 26, 1995 for the purpose of acquiring the Holtzman's Little Folk Shop, Inc.
("Holtzman's") business from Woolworth Corporation ("Woolworth"). On May 31,
1995, LFS acquired (the "Acquisition") all of the outstanding shares of capital
stock of Holtzman's from Woolworth and certain of Holtzman's operating assets
and liabilities from Kinney Shoe Corporation, a wholly owned subsidiary of
Woolworth ("Kinney"). Prior to this transaction, Holtzman's had transferred
certain of its assets and liabilities to Kinney. The preliminary purchase
price of the Acquisition was $22.825 million ($20.975 million to Woolworth plus
$1.850 million in transaction fees) consisting of a cash payment of $11.670
million, $4.304 million currently payable (see Note 9 to the Financial
Statements) and the issuance of a subordinated note in the amount of
$5.001 million to Woolworth. This purchase price, excluding transaction fees,
increased from the initial agreed-upon estimated purchase price of $16.670
million due to opening balance sheet adjustments of approximately $4.300
million (principally inventory, other assets and accrued liabilities). The
purchase price was subject to adjustment based on the final book value of
Holtzman's at May 31, 1995, as defined. In addition, LFS may pay an additional
purchase price to Woolworth (of up to $1.250 million) based on excess cash
flow, as defined.
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The Acquisition was financed with the $5.001 million promissory note
to Woolworth, the $4.304 million currently payable to Woolworth, a $4.42
million borrowing from the Company's revolving credit facility, $4.25 million
of short-term bridge loans advanced by a group of private lenders, as well as
Woolworth, and the purchase of $3.0 million in common stock of the Company by
the former stockholders of LFS. In addition, LFS paid $1.850 million in
transaction fees associated with the Acquisition.
On January 3, 1996, the Company consummated a business combination
(the "Business Combination") with LFS pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") dated May 31, 1995. The
Company's shareholders approved the Business Combination at a special meeting
held on January 3, 1996. Since the former LFS investors own the controlling
interest of FH's common stock, the Merger is accounted for as a "reverse
acquisition" whereby LFS is the "accounting acquirer" and FH is the "legal
acquirer." Because LFS is the "accounting acquirer" the consolidated financial
statements presented in this document are those of LFS, not FH.
As a result of the Business Combination, $4.297 million was paid out
to satisfy principal and interest on the bridge loans.
Pursuant to the Merger Agreement (i) FH Sub Delaware, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company merged, with and into
LFS (the "Merger"), as a result of which LFS became a wholly-owned subsidiary
of the Company, (ii) the Company issued an aggregate of 2,678,000 shares of its
Common Stock to the owners of all of the issued and outstanding shares of
capital stock of LFS, which constitutes approximately 54% of the outstanding
shares of Common Stock of the Company without giving effect to the issuance of
1,204,300 shares of the Company's Common Stock issuable upon the exercise of
certain warrants held by (a) the underwriter of the Company's initial public
offering (110,000 shares) and (b) the initial LFS investors (1,094,300 shares)
and (iii) the Company changed its name to Little Folks Shops, Inc. On January
23, 1996 the Company changed its name to Kids Mart, Inc. Assuming full
exercise of all of the outstanding warrants to purchase shares of the Company's
Common Stock, the former LFS security holders own approximately 61.4% of the
outstanding shares of the Company's Common Stock. Additional information with
respect to the Business Combination is set forth in the Proxy Statement of the
Company, dated December 14, 1995, which has been filed with the Securities and
Exchange Commission. The Company's principal offices are located at 801
Sentous Avenue, City of Industry, California 91748 and its telephone number is
(818) 854-3166.
BUSINESS OF THE COMPANY SUBSEQUENT TO THE MERGER
GENERAL. On January 3, 1996, the Company changed its fiscal year end
from December 31 to the Saturday closest to the last day of January.
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The Company is a value oriented strip shopping center chain of
children's specialty apparel. It currently operates 296 children's apparel
stores in 20 states under the names Little Folks (14 stores) and Kids Mart (282
stores). Of these, 72% of the stores are located primarily in strip shopping
centers while the remaining 28%, including all the Little Folks stores, are
located in enclosed malls.
The Company's largest market is California where it maintains 43% of
its stores and derived approximately 45% of its revenue during the eight months
ended January 27, 1996. Sales of apparel and accessories represent 87% and 13%
of the Company's revenue, respectively.
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its sales and net income. A
disproportionate amount of the Company's sales and net income are realized
during the months of November and December. The Company has also experienced
periods of increased sales activity in early spring and early fall.
Furthermore, sales and net income are generally weakest during the second
quarter. Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of results that may be achieved for a
full fiscal year.
BUSINESS STRATEGY. The Company's objective is to become one of the
dominant specialty retailers of value oriented children's apparel in the United
States and thereby maximize profitability and growth. In pursuit of this
objective, the Company intends to do the following: focus on establishing a
coordinated merchandising plan in order to build a discernible style and
fashion; increase the percentage of higher margin private label merchandise;
improve vendor pricing and terms wherever possible; decrease corporate and
store operating costs; institute a timely and systematic markdown strategy
thereby creating shelf space for fresh and faster moving merchandise;
capitalize on its 930,000 "Preferred Customer" cardholders by conducting a
targeted marketing effort to these proven customers; and add a limited number
of unique toys and stuffed animals to most of its stores. In light of the
losses from operations in the Holtzman's business, there is no assurance that
the Company will be able to accomplish these goals. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.
MARKETING. The Company believes it has a loyal customer base. The
Company maintains a "Preferred Card" program that has approximately 930,000
card holders. Of these, approximately 820,000 holders have shopped at one or
more of the Company's stores during
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the past 18 months. Sales of the card, which can be purchased on a yearly
basis for $6.00 per card, resulted in revenue of $2.3 million for the eight
months ended January 27, 1996. Purchase of the card entitles the holder to a
10% discount on all regular price purchases and other special privileges. The
Company maintains a data base that includes demographic and purchasing data on
these cardholders and the Company intends to conduct periodic targeted
marketing campaigns utilizing this list.
The Company positions itself in the market by offering fashions with a
coordinated and stylish look at moderate prices. It accomplishes this by
consistently offering customers value at a reasonable price, utilizing, among
other things, its position as one of the largest retailers in its market to its
advantage when dealing with vendors.
The Company's marketing strategy is to offer promotion oriented
merchandise without deteriorating margins. This is a change from previous
practice when the business was owned by Woolworth. For example, the Company's
current policy is to offer a 10% discount to Preferred Customers only to
regular price items, not to sale or markdown items as was done in the past,
which eroded margins.
As part of the Company's business strategy, management has established
a coordinated merchandising plan that combines a more focused assortment of
products with store fixturing that enables the Company to merchandise stores in
a more effective manner. In addition, management intends to operate on lower
average per store inventory levels, than under Woolworth management, to reduce
markdown exposure. An assortment of toys and stuffed animals has been added to
the merchandise mix. The success of the Company's marketing is dependent, in
part, on the level of consumer spending in general, as well as regional
economic conditions.
PRODUCT SOURCING AND MANUFACTURING. The Company has no in-house
manufacturing capability. Approximately 35% of the Company's merchandise is
currently manufactured to its private label specifications by independent
factories located in the United States and throughout the world. The Company
utilizes a buying agent in Hong Kong. The Company has no long-term contracts
with its private label manufacturing sources and competes with other companies
for production facilities and import quota capacity. Approximately 35% of its
private label capacity is produced by fewer than 30 manufacturers.
STORE LOCATION AND OPERATION. The Company currently operates 296
stores in 20 states, consisting of 14 Little Folks Stores and 282 Kids Mart
stores. See "Description of Property." All 14 Little Folks stores and 68 Kids
Mart stores are located in enclosed malls. The remainder of the 214 Kids Mart
stores are located in strip shopping centers. Kids Mart stores are open eleven
hours each day, Monday through Saturday, and seven hours on Sunday. Store
hours are longer during the Christmas holiday season and during
back-to-school-programs.
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The Company seeks store sites that are highly visible, well-signed and
provide easy customer access. The Company has favored locations in strip
centers with established anchor tenants next to heavily trafficked roads and
within convenient reach of its customer base. Management chooses strip
locations over mall locations because occupancy costs are less, strip center
leases are typically more favorable than mall leases, and these locations match
its core customer's shopping needs.
As part of the Company's business strategy, management plans to
improve its selling environment. Its goal is to create an attractive selling
environment where merchandise will be presented in an attractive and
coordinated manner in a store environment that is appealing to its customers.
STORE MANAGEMENT. All stores are operating under the direct
management of the Company. Each store has a manager and an assistant manager
who are in daily operational control and have familiarity with the stores'
customers and product line. Each store employs, on average, two full time and
four part time employees. The average total payroll hours are 156 per week.
The store managers report to a district manager, who is responsible for
supervising the operation of the Company's stores and who reports to a regional
manager. LFS currently has 19 district managers and two regional managers.
MERCHANDISING. The Company's policy is to stock each store with a
broad selection and full range of sizes for children from infancy to 11 years
of age. The Company's stores carry a full range of clothing and accessories
for children, including pants, jeans, tops, skirts, dresses, coveralls,
sweaters, shorts, socks, belts, hats, outerwear, backpacks, sunglasses and many
other items carried both on a seasonal and year round basis. Management
intends to increase the infant merchandise because this category typically
generates higher gross margins.
The Company believes that its predecessor's merchandising strategy did
not maximize opportunities. Examples include the following:(i) markdowns were
not taken on a timely basis; (ii) the merchandise presentation was not
coordinated and did not tell a fashion or color story; and (iii) virtually all
stores were merchandised the same, with little consideration given to a
region's ethnic characteristic or seasonal selling pattern. This merchandising
strategy resulted in below average inventory turnover and stores becoming
overfilled with clearance merchandise. Some stores lost as much as 30% of
selling space to clearance racks. Management is actively addressing and
seeking to remedy these problems.
Management recorded a markdown reserve of approximately $4.0 million,
at cost, in the period ended January 27, 1996 to recognize the markdown
liability associated with excess seasonal inventory. The Company believes that
the excess inventory represented by this reserve, in addition to excess
inventory marked down during the eight months ended January 27, 1996, resulted
from Woolworth's failure to reduce purchase order quantities prior to the
Acquisition. See "Legal Proceedings." The inventory represented by the $4.0
million markdown reserve is currently being liquidated in a one-time clearance
sale in 30 of the Company's stores.
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PRIVATE LABEL MERCHANDISE. Private label merchandise is produced by a
large number of manufacturers in the United States and abroad. Currently,
approximately 35% of the merchandise sold by the Company is private label,
primarily under the Way Cool, U BET and Bebe terrifique labels. The Company
plans to gradually increase the percentage of private label merchandise to 65%
over the next three years if warranted. This emphasis on private label
merchandise should result in better gross profit margins, better direct
sourcing from manufacturers and better control over styles, fabrics and colors.
The use of private label merchandise, however, brings with it the associated
burdens of quality control and favorable delivery schedules. The Company
intends to monitor both these issues closely.
The Company currently has a product development department that is
responsible for working with manufacturers to design merchandise to be sold
under The Company's private labels. Management plans to significantly increase
the presence of the product development department in the Company's business,
building the department from five to nine employees.
Management works closely with the product development team to (i)
develop product concepts; (ii) select colors and fabrics; (iii) create test
garments; (iv) prepare financial plans for each line of clothing on an
item-by-item and seasonal basis; and (v) contract production to both domestic
and overseas manufacturers on a competitive bidding basis.
TOYS. The Company plans to offer a small selection of
creative toys and unique stuffed animals or stuffed toys not usually found in
traditional toy stores. These toys are designed for newborn children to 11
year olds. Presently the Company intends to generate one-third to one-half of
toy sales from impulse items under $500 each, and the remainder from more
expensive toys primarily carried during the fourth quarter.
PURCHASING. Buyers obtain store and chain-wide inventory information
on a daily basis. Based upon this data, the merchandise managers compare
budgeted to actual sales and make merchandising decisions, including re-order,
markdowns and changes in the buying plans for upcoming seasons. The Company
has coordinated the buying functions to improve uniformity and coordination in
product offerings. For example, one buyer is responsible for girls' tops and
bottoms, so that outfit coordination will improve. Management believes that in
the past, there has been inconsistency in the assortment of merchandise and
that this has been the result of a lack of coordination among the buying team.
The Company is currently upgrading its MIS (Management Information Systems).
The projected cost of this upgrade, which will include financial and
merchandise system software, main system hardware and POS
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(point of sale) hardware and software is expected to be up to $5.5 million.
The Company intends to lease a significant portion of this equipment and fund
the remaining portion from internally generated sources of funds.
ADVERTISING. The Company operates an in-house advertising and
marketing department with a staff of five. The department creates all of the
Company's printed materials, including mailers, newspaper advertisements, and
in store displays. The Company's marketing strategy is aimed at attracting
customers to the store by stressing promotional pricing, value, and fashion.
Many of the Company's sales are at the beginning of the important selling
seasons, including Christmas, back-to-school, and spring and summer. The
Company's stores will feature wall and selling-floor displays that coordinate
merchandise in order to promote multiple sales. The Company historically spent
significant amounts of its advertising dollars on national programs. Current
management plans to reduce national advertising in favor of local and point of
purchase programs which it believes are more effective and less costly while
giving the in-house advertising and marketing department a much greater role
than in the past.
WAREHOUSING AND DISTRIBUTION. The Company leases a single 120,000
square foot warehouse and distribution center located in City of Industry,
California. Management believes that the warehouse has current capacity to
serve over 500 stores and is therefore sufficient for the Company's needs. The
facility also contains executive, administrative and buying offices.
Merchandise purchased by the Company is received at this facility and
prepared for distribution to its stores. The functions performed at the
facility include quality control inspection, ticketing, packing and shipping.
The facility's automated sortation system ensures the proper flow of
merchandise from receipt to shipment. Shipments to each store are made by
trucks operated principally by common carriers. The Company ships to stores
two to five times per week, depending on seasonal volume.
TRANSITIONAL SERVICES. Woolworth as agreed to provide the Company
with the following services, for certain agreed upon fees, until May 31, 1996:
retail accounting; store repairs; Management Information Systems (MIS); store
audits; office services; and store cash management. Management believes that
access to these transitional services has provided operational continuity to the
Company and allowed the Company ample time to review each system and procedure
to determine whether each should be brought in-house or contracted to third
parties. Pursuant to a letter from Woolworth dated April 30, 1996, Woolworth has
terminated the agreement effective May 31, 1996. The Company is seeking an
agreement with Woolworth to extend the Transitional Service Agreement until the
system conversion is completed. If no alternative is developed and Woolworth
does not extend this agreement immediately, the Company will experience severe
disruption to its business.
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The company is currently in the process of installing new
merchandising and financial system software. In addition, the Company is in the
final stages of negotiating an agreement for the acquisition and installation
of state-of-the-art point of sale software and hardware systems for its stores.
These systems will offer greater functionality and flexibility than systems
currently available to the Company under the Transitional Services Agreement
with Woolworth. Implementation of these systems is a high priority with
Management.
The Company intends to invest approximately $4.5 million to $5.5
million on certain information systems improvements, including point of sale
hardware and software, merchandise and finance systems software, main system
hardware and office work stations. Approximately $0.7 million has been spent up
to May 11, 1996 on these systems. Management has negotiated terms for lease
financing on the point of sale hardware and software which represents
approximately $3.0 million of the total systems investment, however final
documentation of the lease agreement is still being completed. Management
intends to fund the remainder of the systems investment from internally
generated sources of funds. There is no assurance that this documentation will
be completed, or if it is completed, that the terms thereof will be favorable
to the Company.
PERSONNEL. The Company has 831 full-time equivalent employees
comprised of 148 full-time employees in the corporate office and distribution
facility, and 22 full-time field supervision personnel and 661 full-time
employees at store level. Additionally, the Company has 1,223 part-time
employees at the store level.
IMPACT OF COMPETITION. All aspects of the children's apparel
specialty retail industry are highly competitive. The Company competes with a
number and variety of retailers, mass merchandisers and warehouse clubs,
including several national chains, some of which have greater financial and
marketing resources than the Company. The principal competitors of the Company
include Baby Gap/Gap Kids, Gymboree, Kids "R" Us, Children's Place, Little
Things, Mervyns, Wal-Mart, J.C. Penney, Ross Stores, Target, Venture and
Marshall's. Competition exists primarily in the areas of price, product
selection and service. Competitive factors could require price reductions or
increases in expenditures for marketing and customer service that could
adversely affect the Company's operating results.
TRADEMARKS. The Company owns the right to the following trademarks:
Bebe Terrifique, Kids Mart, Little Folk, Little Folks, Little Folk Shop, Little
Folk Shops, Way Cool, U Bet and others.
RESTRICTION ON IMPORTS. The Company's operations are subject to the
customary risks of doing business abroad, including fluctuation in the value of
currencies, customs duties and related fees, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, work stoppages and
in certain parts of the world, political instability. The Company believes
that it has reduced these risks by diversifying its offshore purchases among
various countries and factories. These factors have not had a material adverse
impact upon the
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Company's operations to date. Imports into the United States are also affected
by the cost of transportation, the imposition of import duties and increased
competition for greater production abroad. The countries from which the
Company's products are imported may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duty or tariff levels, which could affect the Company's operations and its
ability to import products at current or increased levels. The Company cannot
predict the likelihood or frequency of any such events occurring. The
Company's imported products are subject to United States customs duties and, in
the ordinary course of its business, the Company may, from time to time, be
subject to claims for duties and other charges.
2. Description of Property
The Company currently operates 296 stores in 20 states,
consisting of 14 Little Folks Stores and 282 Kids Mart stores. Kids Mart
stores are open eleven hours each day, Monday through Saturday, and seven hours
on Sunday. Store hours are longer during the Christmas holiday season and
during the back-to-school period.
The Company's stores range in size from 1,800 to 6,000 square
feet, averaging approximately 2,600 square feet and are merchandised to
maximize selling space utilization.
The Company seeks store sites which are highly visible,
well-signed and provide easy customer access. The Company has favored
locations in strip centers with established anchor tenants next to heavily
trafficked roads and within convenient reach of its customer base. Management
prefers strip locations over mall locations because occupancy costs are less
expensive, strip center leases are typically more favorable than mall leases,
and these locations match its core customer's shopping needs.
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The table below sets forth the location of the Little Folks and Kids
Mart stores by state as of April 19, 1996.
<TABLE>
<CAPTION>
TOTAL LITTLE KIDS
NUMBER FOLK MART
STATE OF STORES STORES STORES
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
California 127 12 115
Texas 31 - 31
Illinois 24 - 24
Florida 17 - 17
Ohio 18 - 18
Louisiana 12 - 12
Michigan 9 - 9
Maryland 10 1 9
Arizona 8 1 7
Missouri 6 - 6
Virginia 6 - 6
Wisconsin 2 - 2
Indiana 5 - 5
New Mexico 3 - 3
Oklahoma 3 - 3
Utah 4 - 4
Washington 4 - 4
Oregon 3 - 3
Nevada 3 - 3
Georgia - - -
Kentucky 1 - 1
---------------------------------------------
Total 296 14 282
</TABLE>
TYPES AND NUMBER OF LEASES
NUMBER OF STORE LEASES
<TABLE>
<CAPTION>
TYPE OF LEASE LEASES
------------- ------
<S> <C>
Short-Term (12 months or less) 39
Month-to-Month 57
Long-Term 200
---
TOTAL 296
</TABLE>
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Lease payments for the 12 months ended January 27, 1996 were $17.1
million, which included approximately $1.2 million of rent for stores now
closed. Management currently expects lease expenditures to be $15.6 million
for the fiscal year ending February 3, 1997. Since the date of the Acquisition,
the Company has successfully renegotiated leases on 81 stores and intends to
renegotiate the leases on the remaining stores during the next 12 months,
however, there is no assurance that the Company will be successful in these
efforts.
The Company has ceased store operations at nine previously
unprofitable stores. The remaining term of the leases on these stores vary
from less than six months to over three years. As of January 27, 1996 the
total rent liability associated with these leases was $471,375. The Company
has recorded a charge to expense as of January 27, 1996 of $430,235 to reflect
the impact of these closures. The Company is attempting to negotiate favorable
terms with the various landlords but it is possible that because the Company
has ceased operations in these nine locations, the individual landlords may
declare the Company in default under the terms of these leases.
Within the context of the lease renegotiations described above, with
respect to the stores currently operating on month-to-month or short term
leases, the Company will attempt to secure longer term leases on terms
favorable to the Company, for those stores which fit the Company's performance
requirements. In the event landlords representing these centers refuse to
extend terms on these leases, the Company would experience a significant
reduction in sales volume with a resulting negative impact on earnings.
3. Legal Proceedings
On December 5, 1995, LFS filed a complaint against Woolworth and
Kinney in Superior Court for the County of Los Angeles. The complaint alleges
fraud, negligent misrepresentation, and breach of contract against both
Woolworth and Kinney. LFS contends that Woolworth's and Kinney's wrongful
and/or negligent conduct materially hampered LFS's cash flow. In particular,
LFS believes that before its acquisition of the Little Folks/Kids Mart
business, Woolworth failed to disclose the significant negative impact that
accounting for point of sale markdowns in the period in which the inventory was
reduced in price would have made. Additionally, LFS believes that Woolworth
caused serious damage to the business in the weeks before the acquisition by
conducting extended clearance sales at the stores. Although these sales appear
to have been directed primarily at the liquidation of old inventory, Woolworth
damaged the stores' consumer base by failing to inform customers of the
special, one-time opportunity these sales represented. LFS also believes that
Woolworth failed to adjust the acquisition of new inventory to reflect the
slower sales of new merchandise during
11
<PAGE> 14
the sales of older inventories, leaving LFS with excess inventory at the time
it acquired the business. Finally, LFS believes that Woolworth breached its
transitional services agreement.
Woolworth and Kinney have filed a general denial of all of the
material allegations of the complaint. On January 23, 1996 Woolworth filed and
served a cross-complaint against LFS alleging causes of action for money paid
on behalf of another, account stated, breach of contract, and unjust
enrichment, and seeks recovery of a minimum of $5,591,119 for payroll taxes,
sales and use taxes, customs duties and other taxes, charges and expenses
paid by Woolworth on behalf of LFS. LFS filed a general denial to
this cross-complaint on February 23, 1996 and asserted several affirmative
defenses. Although the Company believes its position to be valid and that it
has meritorious claims, no assurance can be given as to the outcome, cost or
effect this controversy with Woolworth will have on the business and prospects
of the Company.
The Company and Woolworth are currently engaged in settlement
negotiations. While a settlement has not been reached as of the date of the
filing of this 10-K, management believes that a settlement is possible.
The Company has been notified that certain stores in California have
materials containing asbestos. The asbestos material is generally in trace
quantities, and no remediation is expected to be required on the understanding
that such material is properly secured.
The Company and Woolworth are currently engaged in discussions in an
effort to reach an immediate settlement of their respective claims. There is
no assurance that such discussion will result in a settlement or that a
settlement favorable to the Company will be reached.
In the event that settlement is not reached within the next several
days the Company will consider alternate means of continuing the business
including, without limitation, the possible filing of a petition for
reorganization of the Company under Chapter 11 of the Federal Bankruptcy laws.
4. Submission of Matters to a Vote of Security-Holders
On January 3, 1996 the Company held a special meeting of
stockholders. At that meeting the stockholders voted on the proposals described
below. The results of the stockholder vote on each proposal is set forth after
such description.
1. To approve the Merger, including an amendment to the Articles of
Incorporation of the Company to change the Company's name to "Little Shops,
Inc."
FOR: 1,342,100 shares. AGAINST: 9,900 shares. ABSTAIN: 3,200 shares.
2. To approve and adopt the Company's Restated Articles of
Incorporation.
FOR: 1,316,750 shares. AGAINST: 25,200 shares. ABSTAIN: 13,250 shares.
3. To approve and adopt the 1995 Frost Hanna Acquisition Group, Inc.
Stock Option Plan.
FOR: 1,300,016 shares. AGAINST: 42,234 shares. ABSTAIN: 12,950 shares.
12
<PAGE> 15
PART II
5. Market for Common Equity and Related Stockholder Matters
The principal market in which the Company's common stock, par value
$.0001 per share ("Common Stock"), is traded is the over-the-counter market
under the symbol KIDM. The Company has considered applying for the listing of
the Common Stock on the American Stock Exchange, but determined not to do so
because it does not appear to be eligible for trading thereon. The Common Stock
commenced trading on September 7, 1993. The following table shows the reported
low bid and high bid quotations per share of Common Stock for the periods
indicated. The high and low bid prices for the periods indicated are
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. These quotations have been obtained
from the OTC Bulletin Board.
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Low Bid High Bid
--- --- ---- ---
<S> <C> <C>
First Quarter $7.375 $8.25
Second Quarter 6.75 8.25
Third Quarter 5.50 7.25
Fourth Quarter 4.50 6.50
YEAR ENDED DECEMBER 31, 1995
First Quarter 3.00 5.25
Second Quarter 5.00 7.00
Third Quarter 4.75 7.50
Fourth Quarter 3.375 6.25
INTERIM PERIOD (DUE TO CHANGE
IN FISCAL YEAR END)
January 1, 1996 through
January 27, 1996 4.375 5.125
YEAR ENDING FEBRUARY 1, 1997
FIRST QUARTER (THROUGH 3.875 4.40
APRIL 30, 1996)
</TABLE>
13
<PAGE> 16
ON May 6, 1996 THE CLOSING BID AND ASK PRICES OF THE COMMON STOCK
WERE $4.125 AND $4.125, RESPECTIVELY. ON THAT DATE, THERE WERE 92
RECORD HOLDERS OF COMMON STOCK, INCLUSIVE OF THOSE BROKERAGE FIRMS AND/OR
CLEARING HOUSES HOLDING SHARES OF COMMON STOCK FOR THEIR CLIENTELE (WITH EACH
SUCH BROKERAGE HOUSE AND/OR CLEARING HOUSE BEING CONSIDERED AS ONE HOLDER).
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any,
its capital requirements and financial condition and such other factors as the
Board of Directors may consider. Under the Company's lending arrangements, the
Company will not be permitted to declare any dividends without the lender's
prior consent.
6. Selected Financial Data (Not Available)
7. Management's Discussion and Analysis or Plan of Operation of
the Company
EIGHT MONTHS ENDED JANUARY 27, 1996
For the reasons described in the letter from Deloitte & Touche LLP
("Deloitte"), the Company's certified independent public accountants, which
letter is attached to this 10-K as Exhibit 99.2, Deloitte has informed the
Company that it is unable to complete its audit of the financial statements for
the eight months ended January 27, 1996.
The financial information below has been derived from the Company's
unaudited financial statements, which, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the results for the unaudited.
Net sales for the period were $87.7 million. The Company operated 296
stores at January 27, 1996, a net reduction of 35 stores from May 31, 1995, the
date of the Acquisition.
Gross profit as a percentage of sales for the eight month period ended
January 27, 1996 was 30.7%. The gross profit is low primarily due to the high
level of markdowns recorded during the period to maintain inventory currency.
Gross profit results include a year end markdown reserve of approximately $4.0
million, at cost, recorded as a result of excess seasonal inventory. The
14
<PAGE> 17
Company believes that significant amounts taken during the period to maintain
inventory currency, including the $4.0 million markdown reserve, resulted from
extraordinary high levels of purchase orders placed prior to the Acquisition.
Selling, general and administrative expenses ("SG&A") were $36.5
million for the eight month period ended January 27, 1996. As a percentage of
net sales, SG&A was 41.6%. SG&A includes a $0.4 million charge related to the
closing of nine unprofitable stores.
Depreciation and amortization expense for the eight month period ended
January 27, 1996 was $5.6 million. Depreciation and amortization includes a
$4.0 million writedown of goodwill.
Interest expense for the eight month period ended January 27, 1996 was
$1.7 million.
Operating losses were $16.6 million for the eight month period ended
January 27, 1996.
The Company has experienced comparative store sales decreases of 14.9%
during the fiscal quarter ended April 27, 1996 as compared to the quarter ended
April 29, 1995. The company believes that the primary reason for the
comparative store sales decline is an artificially high comparable sales base
last year resulting from the significant promotional activity and the heavy
liquidation sales that occurred in all stores prior to the Acquisition. Despite
the decline in comparative store sales, the Company achieved significantly
higher gross profit ratios during the quarter ended April 27, 1996 and, after
giving effect to the inventory currency is better than at the quarter ended
April 29, 1995. First quarter results will be discussed more fully in the
Company's 10-Q filing for the quarter ended April 27, 1996.
The Company believes that the poor financial performance of
Holtzman's, while under the ownership of Woolworth, was due, in large part, to
purchasing excessive amounts of inventory. The results of this purchasing
pattern were a high degree of promotional sales, low margins and generally poor
inventory productivity. The Company has taken steps to reduce purchases to
levels more appropriate to sales capacity and concentrate its efforts towards
stronger gross profit performance and inventory productivity. Management
believes this action will also result in lower material handling expenses
versus last year.
The Company's strategies to achieve stronger gross margin ratios and
improved inventory productivity are intended to support profitable sales
growth. In view of the impact of clearance activities on last year's sales and
the resulting negative gross profit impact, evaluation of this year's
comparative store sales performance should be combined with gross profit
results.
In the event of a settlement of the dispute with Woolworth discussed
herein in "Legal Proceedings," the foregoing financial information will be
significantly restated. Management expects that such restatement, if any, would
have a positive impact on the financial information described herein. There is
no assurance that such a settlement will be reached, or that if reached, that
it will be on terms beneficial to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are primarily related to the need to
purchase and pay for inventory prior to its sales, the costs associated with
the computer system hardware and software installation and the funding of
normal operating expenses. The Company's cash requirements fluctuate based on
the seasonality of its sales and the required build up of inventory in advance
of peak sale periods.
The Company has experienced difficulty in obtaining adequate credit
support from its factors. As a result, the Company has been required to
operate on shortened payment terms from its vendors, creating significant cash
flow constraints. The Company has been able to obtain merchandise to satisfy
planned requirements to date. However, should the Company be unable to obtain
adequate credit support from suppliers during the Back-to-School and holiday
seasons, the Company's business could be materially and adversely affected.
The Company has experienced substantial losses since its acquisition
of the Little Folks/Kids Mart business. While the Company believes it has
taken appropriate steps towards
15
<PAGE> 18
profitability, no assurance can be given as to when, if ever, the Company can
become profitable.
Following the date of the recapitalization, the Company has
experienced substantial losses in connection with inventory writedowns which
the Company's management believes are related to current litigation with
Woolworth, and cash flow constraints. As a result of the inventory writedowns,
the Company was not in compliance with its debt covenants as of January 27,
1996. However, the Company obtained a waiver of this covenant violation and
additionally, the Company has obtained new amendments to their debt covenants
through April 1997. In addition, the Company is in discussions with Foothill
regarding an extension of its line of credit. On April 27, 1996 the Company was
in compliance with all of its debt covenants.
In the event the Company resolves its dispute with Woolworth as
described in "Legal Proceedings" above, the Company believes its liquidity and
capital resources will improve dramatically.
8. Financial Statements
The auditor's report on the Company's financial statements for the
eight months ended January 27, 1996 is not included because such report rests
peculiarly within knowledge of Deloitte and Deloitte has informed the Company
that it will be unable to provide such report, because as stated reasons stated
in a letter dated May 13, 1996 and attached to this 10-K as Exhibit 99.2 the
necessary financial statements and other information is not known and
unavailable.
Financial Statements for the Kids Mart/Little Folks division for (i)
the four month period ended May 31, 1995 and (ii) the fiscal years ended
January 28, 1995 and January 29, 1994 (the "Disputed Financial Statements") are
not included because such financial information rests peculiarly within
knowledge of Woolworth and its certified public accountant KPMG Peat Marwick,
LLP ("KPMG") and KPMG informed the Company that it would only provide such
information if the Company would furnish a letter to KPMG to the effect that
the Disputed Financial Statements were prepared in accordance with GAAP. The
Company believes that the Disputed Financial Statements were not prepared in
accordance with GAAP. See "Legal Proceedings."
The Company has requested from KPMG, on numerous occasions, that KPMG
furnish the Company with the Disputed Financial Statements for inclusion in the
Company's Annual Report on Form 10-K for the fiscal year ended January 27,
1996.
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
In connection with the Merger, Deloitte, the certified
independent public accountants of LFS, was appointed as the certified
independent public accountants of the Company replacing Arthur Andersen.
During the Company's fiscal years ended December 31, 1995 and December 31, 1994
and the interim period preceding the change in accountants, there were no
disagreements with Arthur Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which disagreements,
16
<PAGE> 19
if not resolved to the satisfaction of Arthur Andersen, would have caused Arthur
Andersen to make reference to the subject matter of the disagreements in
connection with its reports. The Company has authorized Arthur Andersen to
respond fully to the inquiries of Deloitte or any other successor accountant
concerning the subject matter described above.
17
<PAGE> 20
PART III
10. Directors and Executive Officers of the Company; Compliance
with Section 16(a) of the Exchange Act
EXECUTIVE OFFICERS AND DIRECTORS
Pursuant to the Merger Agreement the persons identified below were
appointed to the Board of Directors of the Company on January 3, 1996 to serve
until their successors are duly elected and qualified. Set forth below in
certain information concerning each person who is presently an executive
officer or director of the Company.
<TABLE>
<CAPTION>
Name Age Position
- - -------------------------------------------------------------------------------
<S> <C> <C>
Bernard Tessler 46 Chairman of the Board, President,
Chief Executive Officer
Robert S. Kelleher 47 Vice President, Chief Financial
Officer, Chief Operating Officer
Jeffrey Koffman 31 Director
Eric M. Specter 38 Director
Stephen L. Pistner 64 Director
Donald S. Rosenberg 62 Director
</TABLE>
Bernard Tessler has been Director, Chairman, President and Chief
Executive Officer of LFS since it was formed, and of the Company since January
3, 1996. From 1991 to 1993, Mr. Tessler was Vice-President-General Merchandise
Manager (Children's Apparel, Sporting Goods, Seasonal, "Crafts and More") of
Ames Department Stores Inc. ("Ames"). Mr. Tessler was responsible for the
$700 million children's division of Ames. From 1987 to 1991, Mr. Tessler was
President and Chief Executive Officer of Children's Creative Workshop, Ltd., a
publicly held consulting firm, where he worked with diverse retailers in
developing new children and toy store concepts. From 1983 to 1987, Mr. Tessler
was Chairman of the Board and President of Enchanted Village Stores, Inc., a
publicly held company with 23 children's toy stores.
Robert Kelleher joined LFS on July 3, 1995 as Chief Administrative
Officer and Chief Financial Officer. Mr. Kelleher has been appointed Chief
Operating Officer of the Company
18
<PAGE> 21
effective April 1, 1996; he will continue to hold the position of Chief
Financial Officer. Prior to joining LFS, Mr. Kelleher was employed from 1980
to 1995 by Contempo Casuals, Inc., a subsidiary of the Neiman Marcus Group.
Contempo Casuals was a chain of over 240 junior women's apparel specialty
stores. Most recently, Mr. Kelleher held the position of President and Chief
Operating Officer. Prior to that he was Executive Vice President and Chief
Financial Officer.
Jeffrey Koffman served as a financial analyst with Security Pacific
from 1987 to 1989. In 1989, Mr. Koffman became Vice President of Pilgrim
Industries and in 1990, he became the President of that company. From 1994 to
present, Mr. Koffman has served in the capacities of Executive Vice President
of Tech Aerofoam Products and Executive Vice President, and more recently,
President, of Apparel America, Inc.
Eric M. Specter has been Vice President and Chief Financial Officer of
Charming Shoppes, Inc. since December 1995 and, prior to that time he served as
Vice President Corporate Controller since 1985 and has been employed by that
company since 1983. Prior to that he was an associate in the accounting firm
of Touche Ross & Company.
Stephen L. Pistner currently operates the consulting firm of Pistner
and Associates. From April 1990 to December 1992, Mr. Pistner was Chairman of
the Board and Chief Executive Officer of Ames Department Stores, Inc. From
1981 to 1985, Mr. Pistner was Chairman and Chief Executive Officer of
Montgomery Ward and Company, and later served as Chairman of McCrory
Corporation.
Donald S. Rosenberg is an attorney and a partner in Rosenberg, Reisman
& Stein, Miami, Florida, where he has worked since 1956. Mr. Rosenberg is a
member of the Board of Directors of the Skylake State Bank and Chairman of its
Audit Committee. He serves as a member of the Board of Trustees, Executive
Committee, Finance Committee and Investment Committee of Barry University,
Miami, Florida and is a member of the Board of Trustees of the Zoological
Society of Florida.
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the fiscal year ended January 27, 1996 and Form
5 and amendments thereto furnished to the Company with respect to the fiscal
year ended January 27, 1996, and certain representations made to the Company,
no person required to file such forms failed to do so on
19
<PAGE> 22
a timely basis, as disclosed in such Forms, during the fiscal year ended
January 27, 1996 or prior years.
11. Executive Compensation
The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to the Chief Executive Officer and each of the Company's four most highly
paid executive officers.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation Awards Payouts
- - ----------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Principal Salary Bonus Compen- Stock Options/ LTIP Compen-
Position Year ($) ($) sation($) Award(s) SARs(#) Payouts($) sation($)**
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Bernard Tessler 1995 300,000*
Robert S. Kelleher 1995 245,000* 7,200
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation for their services as
directors; however, they will be entitled to receive stock options under the
Company's Stock Option Plan and may receive monetary compensation in the
future.
EMPLOYMENT ARRANGEMENTS
The Company (then LFS) entered into an employment agreement, dated as
of May 31, 1995 with Bernard Tessler, pursuant to which the Company has agreed
to employ Mr. Tessler as President and Chief Executive Officer for a term which
commenced on May 31, 1995 and will continue through May 31, 1999, unless sooner
terminated in accordance with its terms. Thereafter, Mr. Tessler's employment
with the Company would continue until terminated by the Company upon not less
than one year's notice. For compensation for his services, Mr. Tessler will
receive, among other things, an annual salary of $300,000 and any bonus to
which he will be entitled under the Company's Management Incentive Plan (see
below). If Mr. Tessler's employment with the Company is terminated without
cause by the Company or by
* Pursuant to an aggrement with the Company (then LFS), Mr. Tessler has received
short-term advances in the amount of $63,663 to cover expenses related to his
relocation to California on behalf of the Company. In addition, Messrs.
Tessler and Kelleher received compensation in respect of the fiscal year ended
January 27, 1996 in the amount of $69,192, representing a housing allowance
and car allowance.
**
20
<PAGE> 23
Mr. Tessler for good reason, Mr. Tessler will be entitled, among other things,
to a termination payment equal to the greater of (i) the balance due under the
remainder of the term of the agreement or (ii) one year's compensation. Mr.
Tessler is also entitled to a $5,000 per month housing allowance. Mr. Tessler
is prohibited from competing with the Company for a period of one year
following termination.
MANAGEMENT INCENTIVE PLAN
The Company is in the process of instituting a performance based
incentive award program. While specific details of the plan have not been
finalized, achievement of profitability targets will be a primary factor in
determining bonus compensation. It is contemplated that a substantial number
of employees will participate in this plan.
1995 STOCK OPTION PLAN
The shareholders of the Company approved the adoption of the 1995
Stock Option Plan at a meeting on January 3, 1996. No grants were made
pursuant to such plan in the year ended December 31, 1995. Members of the
Board of Directors who are not employees of the Company, are automatically
entitled to receive options to purchase 2,000 shares for each year they serve
on the Board.
12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of April 30, 1996,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of its outstanding shares of Common
Stock, (ii) each director and (iii) all executive officers and directors as a
group:
<TABLE>
<CAPTION>
Name of Beneficial Amount and Nature of Percent of
Owner (1) Beneficial Ownership (2) Common Stock
----------------------- ------------------------- ----------------
<S> <C> <C>
CSHC, Inc. (3) 783,040 15.8%
450 Winks Lane
Philadelphia, PA 19020
Donald S. Rosenberg (4) 22,500 0.5%
1 S.E. 3rd Avenue
Suite 2600
Miami, FL. 33131
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
Name of Beneficial Amount and Nature of Percent of
Owner (1) Beneficial Ownership (2) Common Stock
----------------------- ------------------------- ----------------
<S> <C> <C>
Bernard Tessler 773,025 15.6%
801 Sentous Avenue
City of Industry, CA 91748
Whitehorn, Inc. (5) 159,770 3.2%
300 Plaza Drive
Vestal, NY 13850
Jeffrey Koffman (6) 109,771 2.2%
150 E. 52nd Street
New York, NY 10022
Robert S. Kelleher -- --
801 Sentous Avenue
City of Industry, CA 91748
All executive officers and 1,688,336 34.2%
directors as a group
(7 persons)
</TABLE>
______________
(1) Unless otherwise noted, all persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned by them. No persons named in the table are acting
as nominees for any persons or are otherwise under the control of any
person or group of persons.
(2) Excludes Common Stock issuable upon exercise of outstanding warrants.
If such warrants were exercised, the percentage of ownership of all
outstanding Common Stock would be as follows: CSHC, Inc., 12.7%,
Donald S. Rosenberg, 0.4%, Bernard Tessler, 16.7%, Whitehorn, Inc.,
3.5%, Jeffrey Koffman, 2.6%, and all executive officers and directors
as a group, 32.4%.
(3) CSHC, Inc. is controlled by Charming Shoppes, Inc. of which Mr. Eric
M. Specter, a Director of the Company, is a Vice President and Chief
Financial Officer. Mr. Specter disclaims beneficial ownership of
these shares.
(4) Members of Mr. Rosenberg's immediate family own 218,000 additional
shares of Common Stock. Mr. Rosenberg disclaims beneficial ownership
of such shares.
22
<PAGE> 25
(5) Whitehorn, Inc. is controlled by members of the Koffman family. Mr.
Jeffrey Koffman, a Director of the company, disclaims beneficial
ownership of these shares.
(6) Members of the Koffman family or entities controlled by the Koffman
family own an additional aggregate 582,331 shares of Common Stock.
Mr. Jeffrey Koffman disclaims beneficial interest in these shares.
13. Certain Relationships and Related Transactions
Between December 1993 and January 1996, the Company maintained its
executive offices in approximately 1,100 square feet of office space located at
7700 West Camino Real, Suite 222, Boca Raton, Florida 33431. The Company
leased this space from an unaffiliated third party for a monthly rental of
approximately $1,260. In January 1994, an affiliate of the Company ("FHM")
agreed to sublease from the Company approximately one half of such office space
for a monthly rental of approximately $630. Upon consummation of the Merger,
the Company assigned to FHM, and FHM assumed, the Company's obligations under
the lease
Mr. Jeffrey Koffman, a director, acts as a consultant to the Company
for which he is paid $4,166.67 per month. Rosenberg, Reisman & Stein, a law
firm of which Donald S. Rosenberg, a director of the Company, is a partner, has
represented the Company in certain legal matters for which he was paid
$48,011.75 from May 31, 1995 to December 31, 1995. From December 31, 1995 to
March 29, 1996, Rosenberg, Reisman & Stein has been paid $18,736.25.
Rosenberg, Reisman & Stein may continue to provide legal services to the
Company in the future.
14. Exhibits, List and Reports on Form 8-K
(a) Exhibits
(1) Financial Statements.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated January 8, 1996
relating to the Merger, a change in certifying accountants and the
change in the Company's fiscal year end.
23
<PAGE> 26
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KIDS MART, INC.
By /s/ Bernard Tessler
----------------------------
Bernard Tessler,
Chief Executive Officer
Date: May 13, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bernard Tessler Chairman, Chief Executive Officer May 13, 1996
- - -----------------------------------------
Bernard Tessler and Director
/s/ Robert S. Kelleher Vice President, Chief Operating Officer May 13, 1996
- - -----------------------------------------
Robert S. Kelleher and Chief Financial Officer
/s/ Jeffrey Koffman Director May 13, 1996
- - -----------------------------------------
Jeffrey Koffman
/s/ Stephen L. Pistner Director May 13, 1996
- - -----------------------------------------
Stephen L. Pistner
/s/ Eric M. Specter Director May 13, 1996
- - -----------------------------------------
Eric M. Specter
/s/ Donald S. Rosenberg Director May 13, 1996
- - -----------------------------------------
Donald S. Rosenberg
</TABLE>
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
------ ---------------------- -----------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated May 31 1995 by and
between the Company and LFS Acquisition Corp. (incorporated by reference to
Exhibit A-1 to the Company's Proxy Statement dated December 14, 1995).
3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form SB-2, File No.
33-63736-A, filed with the Securities and Exchange Commission on July 2,
1993).
3.2 Amended and Restated Articles of Incorporation of the Company (incorporated
by reference to Exhibit C-1 to the Company's Proxy Statement dated December
14, 1995).
3.3 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form SB-2, File No. 33-63736-A, filed
with the Securities and Exchange Commission on July 2, 1993).
9 Stockholders' Agreement, dated May 30, 1995, among LFS Acquisition Corp.,
Bernard Tessler, Sentani Trading Ltd., Jeffrey Koffman, Allison Koffman, Jack
Koffman, Janice Payson, Barbara Koffman, Tech Aerofoam, Inc., David Koffman,
Ruthanne Koffman, Whitehorn, Inc., Financo, Inc. and Marvin Traub
(incorporated by reference to Exhibit 9 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995)
10.1 1995 Stock Option Plan of the Company (incorporated by reference to Exhibit
B-1 to the Company's Proxy Statement dated December 14, 1995).
10.2 Employment Agreement between LFS Acquisition Corp. and Bernard Tessler dated
May 31, 1995 (incorporated by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
------ ---------------------- -----------
<S> <C>
10.3 Transitional Services Agreement between LFS Acquisition Corp. and Woolworth
Corporation dated as of May 31, 1995 (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995)
16.1 Letter of Arthur Andersen LLP (incorporated by reference to Exhibit 99.1 to
the Company's Form 8-K dated January 8, 1996).
27 Financial Data Schedule (Not Applicable)
99.1 Letter of Arthur Andersen LLP (incorporated by reference to Exhibit 99.1 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995)
99.2 Letter of Deloitte & Touche LLP, dated May 13, 1996
</TABLE>
26
<PAGE> 1
Exhibit 99.2
May 13, 1996
Kids Mart, Inc.
801 Sentous Avenue
City of Industry, CA 91748
Attention of: Mr. Bernard Tessler, Chief Executive Officer
Dear Sirs:
We are currently in the process of completing our audit of the consolidated
financial statements of Kids Mart, Inc. (the "Company") for the eight-month
period ended January 27, 1996.
The Company, formerly Frost Hanna Acquisition Group, Inc., acquired all the
outstanding shares of capital stock of Holtzman's Little Folk Shop, Inc.
("Holtzman's") from Woolworth Corporation ("Woolworth") and certain of
Holtzman's operating assets and liabilities from Kinney Shoe Corporation, a
wholly owned subsidiary of Woolworth ("Kinney"), on May 31, 1995 (the
"Acquisition"). The preliminary purchase price of the Acquisition was
$22,825,000. This purchase price was subject to adjustment based on the final
book value of Holtzman's at May 31, 1995.
Subsequent to the Acquisition, disagreements have arisen between the Company
and Woolworth regarding the determination of Holtzman's net assets at May 31,
1995. Additionally, the Company filed a complaint against Woolworth and Kinney
in Superior Court for the County of Los Angeles on December 5, 1995 alleging
fraud, negligent misrepresentation, and breach of contract against both
Woolworth and Kinney. On January 23, 1996, Woolworth filed and served a
cross-complaint against the Company alleging causes of action for money paid on
behalf of another and seeks recovery of charges and expenses paid by Woolworth
on behalf of the Company.
Additionally, the Company receives information systems, accounting and
administrative services from Woolworth pursuant to the terms of a transition
service agreement. The initial term of the transition service agreement expires
on May 31, 1996. We were informed by management of the Company that on April
30, 1996 Woolworth notified the
<PAGE> 2
Company of its decision to terminate the transition service agreement as of May
31, 1996 and discontinue providing these support services to the Company. The
Company notified Woolworth of its interest in extending the transition services
agreement until the Company completes the process of performing these functions
internally.
Based on further conversations with management of the Company and Kaye,
Scholer, Fierman, Hays & Handler, LLP, legal counsel for the Company, we
understand that the Company and Woolworth are in negotiations to determine the
final purchase price of the Acquisition and extend the term of the transition
services agreement, thereby discharging all outstanding complaints and
cross-complaints between the Company and Woolworth. We also were informed by
management of the Company that resolution of these issues between the Company
and Woolworth is believed to be imminent. The final resolution of these issues,
which is presently not determinable, will have a significant impact on the
Company's consolidated financial statements for the eight-month period ended
January 27, 1996.
Because of the significance that the resolution of these issues will have on
the consolidated financial statements of the Company, until a final resolution
is reached we are unable to complete our audit of the consolidated financial
statements of Kids Mart Inc. for the eight-month period ended January 27, 1996.
Very truly yours,
/s/ Deloitte & Touche LLP
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Deloitte & Touche LLP
