<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended April 27, 1996. 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 (IRS Employer
incorporation or organization) Identification No.)
801 SENTOUS AVENUE, CITY OF INDUSTRY, CALIFORNIA 91748
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (818) 854-3166
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES. [X] NO. [ ]
There were 4,943,000 shares of common stock, par value $0.0001 per share of the
registrant issued and outstanding as of October 22, 1996.
<PAGE> 2
The Registrant hereby amends its Quarterly Report on Form 10-Q for the
fiscal quarter ended April 27, 1996 in its entirety as follows:
KIDS MART, INC.
FORM 10-Q/A
INDEX
PAGES
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security-Holders 13
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 14
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
KIDS MART, INC.
<TABLE>
<CAPTION>
APRIL 27, JANUARY 27,
CONSOLIDATED BALANCE SHEETS 1996 1996
- ------------------------------------------------------------------------------------------------------------
(In thousands, except share and par value amounts)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,335 $ 502
Receivable from Woolworth Corporation 1,670 1,670
Merchandise inventories (Note 3) 15,868 17,144
Prepaid expenses and other current assets 1,569 1,888
------- -------
Total current assets 20,442 21,204
Property and equipment, net 6,585 6,106
Other assets, net 287 299
------- -------
$27,314 $27,609
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under credit facility $10,099 $ 8,849
Accounts payable 7,455 5,562
Accrued expenses and other current liabilities (Note 4) 3,614 4,546
Deferred revenue 1,359 1,237
------- -------
Total current liabilities 22,527 20,194
Deferred rent 353 278
Redeemable common stock 50 50
------- -------
Total liabilities 22,930 20,522
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, par value $.0001 per share; 100,000,000 shares authorized;
1,000,000 issued and outstanding; liquidation preference of $10,000,000
Common stock, $.0001 par value; 100,000,000 shares authorized;
4,943,000 shares issued and outstanding
Additional paid-in capital 12,783 12,783
Accumulated deficit (8,399) (5,696)
------- -------
Total stockholders' equity 4,384 7,087
------- -------
$27,314 $27,609
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
KIDS MART, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 27,
QUARTER ENDED 1996
- ------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C>
Net sales $ 26,403
Cost of sales 15,942
--------
Gross profit 10,461
Selling, general and administrative expenses 12,200
Depreciation and amortization 546
--------
Loss from operations (2,285)
Interest expense 418
--------
NET LOSS $ (2,703)
========
PER SHARE DATA:
Average shares outstanding 4,943
========
Net loss per common share $ (0.55)
========
Dividends per common share None
========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
KIDS MART, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
APRIL 27,
QUARTER ENDED 1996
- ---------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $(2,703)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 546
Merchandise inventories markdown reserve (539)
Changes in operating assets and liabilities:
Merchandise inventories 1,815
Prepaid expenses and other current assets 319
Other assets (20)
Accounts payable 1,893
Accrued expenses and other current liabilities (932)
Deferred revenue 122
Deferred rent 75
-------
Net cash provided by operating activities 576
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (993)
-------
Net cash used in investing activities (993)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility 1,250
-------
Net cash provided by financing activities 1,250
-------
NET INCREASE IN CASH 833
-------
CASH, BEGINNING OF PERIOD 502
-------
CASH, END OF PERIOD $ 1,335
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 405
Income taxes paid $ --
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED APRIL 27, 1996
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE EIGHT MONTHS ENDED JANUARY
27, 1996)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION
References to the "Company" are to Kids Mart, Inc. on a consolidated
basis. All significant intercompany transactions and balances have been
eliminated. See notes to the audited consolidated financial statements
presented in the Company's Annual Report on Form 10-K as of and for the
eight months ended January 27, 1996.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the consolidated financial statements, during the quarter
ended April 27, 1996, the Company incurred net losses of $2,703, and
had a working capital deficiency of $2,085 as of April 27, 1996.
Additionally, subsequent to April 27, 1996, the Company continued to
experience operating losses and cash flow constraints. Net losses were
$8,557 for the six months ended July 27, 1996. Current liabilities
exceeded current assets by $7,883, and the Company had a stockholders'
deficiency of $1,470 as of July 27, 1996. As of the date of this
filing, the Company is in violation of certain covenants under its
credit facility (see Note 5). These factors among others may indicate
that the Company will be unable to continue as a going concern for
a reasonable period of time.
In response to these conditions, the Company has taken steps to reduce
expenses and increase liquidity. The Company has, among other things,
increased the percentage of higher margin private label merchandise and
closed 37 stores during the eight months ended January 27, 1996. In
addition, subsequent to April 27, 1996, the Company closed 17 stores,
reduced its work force, renegotiated certain of its store leases,
entered into a sale/leaseback transaction (see Note 5), entered into an
agreement with a vendor to convert amounts payable to this vendor to
common stock (see Note 5), implemented a store closure plan (the "Store
Closure Plan") whereby it closed 97 stores (see Note 5), is
renegotiating its loan covenants with its lender, and is exploring
various interim and permanent financing opportunities with several
financial advisors.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to successfully negotiate its loan covenants with its
lender and payment terms with its vendors and landlords, to obtain
additional financing or equity as may be required, and ultimately, to
attain profitable operations. Management is continuing its efforts to
obtain additional funds so that the Company can meet its obligations
and sustain operations (see Note 5).
2. SUMMARY OF ACCOUNTING POLICIES
The Company is a retailer of children's apparel. It operated a chain of
296 specialty children's apparel stores in 20 states as of April 27,
1996. See Note 5 for information regarding the closure of 97 of the
Company's stores during the third quarter of fiscal year 1996.
The Company's fiscal year is the 52/53-week period ending on the
Saturday nearest January 31.
The Company's accounting and reporting policies conform to generally
accepted accounting principles prescribed for commercial and industrial
companies, and predominant retail industry practice. The interim period
consolidated financial statements are unaudited. 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
4
<PAGE> 7
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED APRIL 27, 1996
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE EIGHT MONTHS ENDED JANUARY
27, 1996)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results
could differ from those estimates. It is the opinion of Company
management that all adjustments consisting of normal recurring accruals
necessary for a fair presentation of the results of operations have
been reflected therein.
Consolidated statements of operations and cash flows for the quarter
ended April 29, 1995, (the "Disputed Financial Statements") have not
been reported. Preparation and delivery of the Disputed Financial
Statements was an issue in the Company's dispute with Woolworth
described in "Part II. Item 1. Legal Proceedings."
Currently, Woolworth is preparing and its certified public accountants,
KPMG Peat Marwick, LLP, are auditing the Disputed Financial Statements,
which have not been completed as of the date of this filing. When the
Company receives the Disputed Financial Statements from Woolworth, the
Company intends to include them in an amendment to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 27, 1996.
Prior period amounts have been restated to conform to current
period presentation.
3. MERCHANDISE INVENTORIES
Merchandise inventories included markdown reserves of $625 and $1,164
as of April 27, 1996, and January 27, 1996, respectively.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the
following as of the dates indicated:
<TABLE>
<CAPTION>
April 27, January 27,
1996 1996
-------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accrued payroll and related expenses $1,360 $1,114
Accrued advertising expenses 706 810
Accrued sales tax 695 603
Other accrued expenses 853 2,019
-------------------------------------------------------------
Total $3,614 $4,546
=============================================================
</TABLE>
5. SUBSEQUENT EVENTS
On July 24, 1996, the Company entered into a sale/leaseback transaction
whereby it sold certain equipment to a leasing company for $288. The
Company leased back such equipment under an operating lease which
provides for 24 monthly payments of $14 each. The Company issued a
warrant to the leasing company to purchase 50,000 shares of the
Company's common stock at $7.00 per share.
On September 11, 1996, the Company entered into an agreement with a
vendor whereby the vendor agreed to convert $650 of amounts due from
the Company to 433,333 shares of common stock. In exchange, the Company
agreed to use its best efforts to purchase annually a minimum of
$10,000 of merchandise inventories, as defined, from the vendor.
5
<PAGE> 8
KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE QUARTER ENDED APRIL 27, 1996
(UNAUDITED, EXCEPT FOR INFORMATION AS OF AND FOR THE EIGHT MONTHS ENDED JANUARY
27, 1996)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
On September 17, 1996, the Company implemented the Store Closure Plan
under which the Company reduced its workforce at its distribution
center and administrative offices and closed 97 stores. The Company
recorded $5,366 for lease termination costs, property and equipment
write-off and other closing costs in connection with the Store
Closure Plan as a charge to operations during the third quarter
ending October 26, 1996.
On September 30, 1996, the Company was in violation of its amended
credit facility, for failing to have arranged $2,000 of interim
financing or substantially completed a private placement of the
Company's securities by that date. Subsequent to September 30, 1996,
the Company is in violation of certain other covenants. The Company's
lender has not declared the Company in default, and has cooperated with
management while the Company continues to pursue interim and permanent
financing.
* * * * *
6
<PAGE> 9
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
PRIVATE SECURITIES LITIGATION REFORM ACT. This Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby. See "Part II. Item 5. Other Information --
Private Securities Litigation Reform Act."
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the quarter ended April 27, 1996. This information should
be read in conjunction with the audited consolidated financial statements of the
Company and the notes thereto as of and for the eight months ended January 27,
1996.
The Company reported a net loss of $2.7 million on net sales of $26.4 million
for the quarter ended April 27, 1996. The Company had a working capital
deficiency of $2.1 million as of the quarter ended April 27, 1996.
The Company has continued to experience operating losses and cash flow
constraints subsequent to April 27, 1996. Net losses were $8.6 million for the
six months ended July 27, 1996. As of July 27, 1996, current liabilities
exceeded current assets by $7.9 million, and the Company had a stockholders'
deficiency of $1.5 million. The Company is in violation of certain of its loan
covenants under its credit facility with Foothill Capital Corporation
("Foothill"), the Company's principal lender, and anticipates violation of
other covenants for the remainder of fiscal year 1996. These conditions raise
substantial doubt about the Company's ability to continue as a going concern
for a reasonable period of time.
In response to the Company's going concern issues, management implemented the
Store Closure Plan during the third quarter of fiscal year 1996 whereby it
closed 97 stores (the "Closed Stores") and reduced staff at its distribution
center and administrative offices. The Store Closure Plan required, during the
third quarter of fiscal year 1996, a charge to operations of approximately $5.4
million, principally related to store rent liability, closing costs, and
separation pay. The Company received the consent of Foothill to the Store
Closure Plan.
RECENT DEVELOPMENTS
CONTINUING LOSSES AND CASH FLOW CONSTRAINTS. The Company has experienced
substantial losses and cash flow constraints since it purchased the Little Folks
and Kids Mart business from Woolworth Corporation and Kinney Shoe Corporation
(collectively, "Woolworth") in May 1995 (the "Acquisition"). No assurance can be
given as to when, if ever, the Company will become profitable.
The Company has experienced difficulties in obtaining adequate credit support
from its vendors. As a result, the Company has been required to operate on
shortened payment terms, creating significant cash flow constraints. Through
early May 1996, the Company had been able to obtain sufficient merchandise to
satisfy its requirements. However from late May through the date of this
filing, the Company has been unable to obtain adequate credit support to
achieve its planned level of inventory purchases, which severely impacted its
1996 back-to-school season. The Company's failure to achieve adequate sales
levels in the 1996 holiday season would have a material adverse effect on its
business.
The Company's recurring losses, cash flow constraints, and loan covenant
violations raise substantial doubt about its ability to continue as a going
concern. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to successfully renegotiate its loan covenants, to obtain additional
financing or equity as may be required, and ultimately, to attain profitable
operations. In the event that the Company is not successful in, among other
things, arranging immediate interim financing such that it will be able to
purchase inventory for the 1996 holiday season, arranging permanent financing
for inventory purchases thereafter, and attaining credit support from its
vendors, it will consider alternate means of continuing the business including
further expense reductions, negotiations with landlords and vendors to reach
7
<PAGE> 10
agreement on delaying payments, closing additional stores, as well as any other
options available to the Company. In the event the Company is unsuccessful in
obtaining immediate interim financing for the 1996 holiday season, or if
such financing is obtained but the required level of permanent financing is not
obtained, the Company will consider the filing of a petition for reorganization
under Chapter 11 of the Federal bankruptcy laws. See "--Liquidity and Capital
Resources."
LITIGATION. Due to, among other things, significant cash flow constraints
and implementation of the Store Closure Plan, the Company has been unable to
make required payments to certain vendors and landlords. In response, certain
of these vendors and landlords have sued the Company for such past due
amounts. The Company does not dispute the nature of these claims and has
recorded the liabilities in its consolidated financial statements. In many
of the actions, the Company has held discussions with the vendors, landlords,
or their attorneys to reach a mutually satisfactory resolution. While
management believes that none of these claims, individually, is material,
taken as a whole, the successful prosecution of these claims would have a
material adverse effect on the Company's cash flow.
TRANSITIONAL SERVICES. In the past, Woolworth has provided the Company with
information systems and accounting and administrative services pursuant to a
transition service agreement (the "Service Agreement"). The term of the
Service Agreement was originally through September 28, 1996 but automatically
extended for successive one-month periods until terminated by either party
upon 30 days written notice. Upon due notice by Woolworth, the agreement
was terminated on October 26, 1996. Thereupon, the Company converted to its
own information systems for merchandising and financial accounting. The
Company and Woolworth are currently working on the final conversion issues.
In accordance with the Service Agreement, Woolworth will continue to provide
to the Company through the first quarter of fiscal year 1997, certain
information services with respect to store point-of-sale systems and price
data.
8
<PAGE> 11
FINANCIAL CONDITION
The Company's working capital deficiency was $2.1 million as of April 27, 1996,
as compared to working capital of $1.0 million as of January 27, 1996. Its
current ratio and debt-to-equity ratio were 0.91 and 5.23, respectively, at
April 27, 1996; and 1.05 and 2.90, respectively, at January 27, 1996. By July
27, 1996, the Company's working capital deficiency was $7.9 million, its current
ratio and debt-to-equity ratio were 0.65 and (15.72), respectively.
The Company reported a receivable from Woolworth of approximately $1.7 million
at April 27, 1996 and January 27, 1996, for cash placed in escrow at the closing
of the Acquisition. This cash was released to the Company on May 31, 1996, in
connection with the settlement of its dispute with Woolworth. See "Part II. Item
1. Legal Proceedings." Woolworth has refused to pay the Company $0.5 million for
amounts collected on behalf of the Company under the terms of the Service
Agreement. In its consolidated balance sheets as of April 27, 1996, and January
27, 1996, the Company reported a receivable from Woolworth for $0.5 million,
which it has deducted from payments owed to Woolworth under the terms of the
Service Agreement. If it is determined that the Company must release Woolworth
from the $0.5 million liability, there would be a material adverse impact on the
Company's results of operations and cash flows. The Company has not recorded a
loss provision in its consolidated financial statements for the quarter ended
April 27, 1996, based upon management's belief that the possibility of such loss
is remote.
Merchandise inventories decreased approximately $1.3 million or 7.4% from $17.1
million at January 27, 1996, to $15.9 million at April 27, 1996, due to the
Company's efforts to bring inventory to planned levels and improve inventory
turnover.
9
<PAGE> 12
Pursuant to the Store Closure Plan, the Company transferred the remaining
inventory from the Closed Stores to the remaining open stores. Prior to the
Store Closure Plan, average store retail inventory was approximately $78.3
thousand, which was $25.7 thousand below planned retail store inventory for
September 1996. The inventory consolidation brought the average retail store
inventory up to approximately $112.1 thousand. However, there can be no
assurance that the increased inventory levels will improve the Company's sales
and operating results or that the Company's inventory levels will not drop below
acceptable levels in the future.
Property and equipment increased $0.5 million, net since January 27, 1996. The
Company purchased approximately $1.0 million of property and equipment,
including $0.6 million for software and computer equipment, $0.3 million for
store leaseholds and equipment, and $0.1 million for office equipment. In July
1996, the Company entered into a sale/leaseback transaction whereby it sold
certain leasing equipment to a leasing company for $0.3 million. See "--Recent
Developments--Other Developments."
Accounts payable increased to $7.5 million at April 27, 1996, from $5.6 million
at January 27, 1996. This increase was partly offset by a $0.9 million decrease
in accrued expenses. Overall, accounts payable and accrued expenses increased
approximately 9.5% since year end largely due to cash flow constraints. The
Company is holding discussions with vendors to apprise them of the Company's
financing strategies and to arrange payment terms to sustain operations while
the Company arranges financing.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements are primarily related to the need to purchase
and pay for inventory prior to its sale, lease payments for store rent, 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 funds its operations from
retail sales; it does not offer its customers credit terms.
The Company is party to a revolving credit facility with Foothill for up to $20
million for working capital advances, of which as much as $10 million can be
used for obligations under letters of credit. Aggregate borrowings are limited
to the lesser of $20 million or specified percentages of eligible merchandise
inventories, as defined. All loans made pursuant to the credit facility are
secured by substantially all of the Company's assets and bear interest at a
reference rate plus 2 percent. The credit facility expires on May 31, 1999, and
can then be renewed for successive one-year periods unless terminated by either
party pursuant to the terms of such agreement. The credit facility contains
various restrictions concerning the Company's ability to assume additional
indebtedness and specifies limits on capital expenditures. The credit facility
also contains various covenants that require the Company to maintain certain
minimum levels of working capital and tangible net worth, as defined, and to
maintain certain minimum financial ratios, among others. As of the date of this
filing, the Company is in violation of certain of these covenants.
During April and June 1996, the Company amended its revolving credit facility
with Foothill. These amendments modified certain covenants, extended the term of
the agreement from May 31, 1998 to May 31, 1999, and granted the Company
additional borrowings for up to $2.0 million during the period from June 10,
1996 to February 15, 1997. The Company issued to Foothill warrants to purchase
100,000 shares of Common Stock at $6 per share as consideration for these
amendments. In conjunction with arranging the overdraft facility, the Company's
credit facility was amended to require the Company to raise at least $2.0
million in subordinated debt or common stock
10
<PAGE> 13
equity on or before September 30, 1996, or to have substantially completed a
private placement of the Company's securities by that date. Although the Company
has raised $0.9 million of the $2.0 million needed through the transactions
discussed below, the Company is presently in violation of this covenant.
On July 24, 1996, the Company entered into a sale/leaseback transaction whereby
it sold certain equipment to a leasing company for $0.3 million, and leased it
back under an operating lease for 24 months. As consideration for this
transaction, the Company issued a warrant to the leasing company to purchase
50,000 shares of Common Stock at $7 per share.
On September 11, 1996, the Company entered into an agreement pursuant to which
one of its vendors converted $0.65 million of amounts due to the vendor to
433,333 shares of Common Stock. In exchange, the Company will use its best
efforts to purchase annually a minimum of $10 million of merchandise
inventories, as defined, from this vendor. Further, the vendor shall have the
right to have its nominee installed as a director to the Company's Board of
Directors within three months of execution of the agreement. Thereafter, unless
the vendor has reduced its investment in the Company by more than 50% the
Company shall nominate said nominee to the Board of Directors to be voted upon
by the shareholders of the Company at each annual meeting.
Foothill has cooperated with the Company to maintain the overdraft facility
while management continues to pursue interim and permanent financing. However,
there can be no assurance that Foothill will waive or amend the various
covenants in which the Company is currently in violation, or that Foothill will
not declare the Company in default under the credit facility and seek to
exercise its remedies thereunder, including foreclosure of the Company's assets.
At April 27, 1996, the Company had drawn down approximately $10.1 million at
10.25% under the credit facility and had approximately $0.9 million of remaining
availability. At October 22, 1996, the Company had $12.5 million outstanding
under the credit facility, including $0.4 million of borrowings in excess of its
$2.0 million overdraft facility. As of the date of this filing, the Company was
in violation of certain performance-based covenants under its credit facility.
The Company also anticipates other covenant violations during the remainder of
fiscal year 1996.
The Company has experienced difficulties in obtaining adequate credit support
from its vendors. As a result, the Company has been required to operate on
shortened payment terms, creating significant cash flow constraints. Through
early May 1996, the Company had been able to obtain sufficient merchandise to
satisfy its requirements. However from late May through the date of this filing,
the Company has been unable to obtain adequate credit support to achieve its
planned level of inventory purchases, which severely impacted its 1996
back-to-school season. The Company's failure to achieve adequate sales levels in
the 1996 holiday season would have a material adverse effect on its business.
In order to purchase inventory for the 1996 holiday season and thereafter,
the Company requires immediate financing. Management has held discussions with
financial advisors and potential investors with respect to immediate interim
financing through short-term subordinated debt, equity investment, or debt
restructuring. However, the Company has not yet consummated any transactions
with respect to such interim financing, and accordingly, there can be no
assurance that the Company can obtain such financing, that such financing
would be timely, or that such financing, if obtained, would be sufficient to
enable the Company to continue as a going concern for a reasonable period of
time.
The Company also requires substantial long-term investment so that it can meet
its obligations and sustain operations. Toward this end, the Company has entered
into an engagement letter with a financial advisor and placement agent with
respect to a proposed $10 million to $15 million private placement of the
Company's securities. The placement agent's obligations under the engagement
letter are subject to a number of qualifications, including, but not limited to,
the placement agent's successful completion of its due diligence review and the
successful negotiation of a definitive placement agent agreement. There can be
no assurance that such private placement will be consummated, that it would be
on terms favorable to the Company or that it would be sufficient to enable the
Company to continue as a going concern for a reasonable period of time.
In the event that the Company is not successful in, among other things,
arranging immediate interim financing such that it will be able to purchase
inventory for the 1996 holiday season, arranging permanent financing for
inventory purchases thereafter, and attaining credit support from its vendors,
it will consider alternate means of continuing the business including further
expense reductions, negotiations with landlords and vendors to reach agreement
on delaying payments, closing additional stores, as well as any other options
available to the Company. In the event the Company is unsuccessful in obtaining
immediate interim financing for the 1996 holiday season, or if such financing
is obtained, but the required level of permanent financing is not obtained,
the Company will consider the filing of a petition for reorganization under
Chapter 11 of the Federal bankruptcy laws.
11
<PAGE> 14
RESULTS OF OPERATIONS
The Company has historically experienced and expects to continue to experience
seasonal fluctuations in its sales and operating results. A disproportionate
amount of the Company's sales and operating results 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
operating results 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.
The Company reported a net loss of $2.7 million on net sales of $26.4 million
for the quarter ended April 27, 1996. The Company operated 296 stores at
April 27, 1996.
The Company reported a net loss of $8.6 million on net sales of $47.4 million
for the six months ended July 27, 1996. The Company operated 282 stores at
July 27, 1996. After giving effect to the Store Closure Plan and other store
closures, the Company operates 182 stores.
Selling, general and administrative expenses were $12.2 million for the quarter
ended April 27, 1996. Selling, general and administrative expenses were $24.5
million, for the six months ended July 27, 1996.
Depreciation and amortization was $0.5 million for the quarter ended April 27,
1996. Depreciation and amortization was $1.0 million for the six months ended
July 27, 1996.
Interest expense was $0.4 million for the quarter ended April 27, 1996. Interest
expense was $0.8 million for the six months ended July 27, 1996.
In response to the Company's going concern issues, management implemented the
Store Closure Plan during the third quarter of fiscal year 1996 whereby it
closed 97 stores and reduced staff at its distribution center and administrative
offices. The Store Closure Plan required, during the third quarter of fiscal
year 1996, a charge to operations of approximately $5.4 million, principally
related to store rent liability, closing costs, and separation pay. The Company
received the consent of Foothill, the Company's principal lender, to the Store
Closure Plan. See "--Recent Developments --Store Closure Plan."
Management based its decision on which stores to close by reviewing each store's
performance for the twelve-month period from the Acquisition through May 31,
1996, with respect to sales, gross margins, occupancy costs, and store
contribution. The worst performing stores were identified for closure. Certain
other Closed Stores were determined based on geographic or other market and cost
considerations.
The aggregate rent liability for the Closed Stores is approximately $13.2
million and the average remaining lease term is approximately 29 months. In
connection with the Store Closure Plan, the Company will undertake to negotiate
with the various landlords the outstanding lease liability of the Closed Stores.
There can be no assurance that such negotiations will be successful. Failure to
reach acceptable agreements with these landlords would have a material adverse
effect on the Company's business.
The Company reduced staff at its distribution center and administrative offices,
resulting in an annualized reduction in payroll and benefits expense of
approximately $1.4 million.
There are a number of risks associated with the Store Closure Plan, including,
but not limited to, the inability of the Company to successfully negotiate
favorable terms with respect to the lease terminations, the inability of the
Company to generate adequate revenues to cover expenses and generate profits,
and the possibility that due to the staff reductions and store closings, the
Company may not be able to attract or retain qualified personnel.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 5, 1995, LFS, the Company's predecessor-in-interest,
filed a complaint against Woolworth in Superior Court for the County
of Los Angeles. The complaint alleged fraud, negligent
misrepresentation, and breach of contract in connection with the
Acquisition. LFS contended that before the Acquisition, Woolworth
conducted extended clearance sales which damaged the Company's
consumer base, failed to disclose to LFS the financial impact
resulting from inventory markdowns and purchased excess
inventory which LFS acquired in the Acquisition. In addition, LFS
claimed that Woolworth breached the Service Agreement. Woolworth filed
a general denial of all of the material allegations of the complaint
and served a cross-complaint against LFS.
On May 30, 1996, the Company and Woolworth entered into a Mutual
Release and Settlement Agreement (the "Settlement Agreement"). Pursuant
to the Settlement Agreement, Woolworth agreed to release to the Company
$1.7 million placed in escrow at the closing of the Acquisition, cancel
the $9.3 million of Company debt and liabilities incurred in connection
with the Acquisition, and also cancel $4.4 million of other amounts
advanced by Woolworth on behalf of the Company during the eight months
ended January 27, 1996. In exchange, the Company issued to Woolworth
one million shares of Series A convertible nonvoting preferred stock.
These shares were valued at $3.5 million, representing their fair
market value at the date of issuance. The Company has reflected the
impact of the Settlement Agreement on its consolidated financial
statements as of May 31, 1995, the date of the Acquisition.
Woolworth has refused to pay the Company $0.5 million for amounts
collected on behalf of the Company under the terms of the Service
Agreement. In its consolidated balance sheets as of April 27, 1996 and
January 27, 1996, the Company reported a receivable from Woolworth for
$0.5 million, which it has deducted from payments owed to Woolworth
under the terms of the Service Agreement. If it is determined that the
Company must release Woolworth from the $0.5 million liability, there
could be a material adverse impact on the Company's results of
operations and cash flows. The Company has not recorded a loss
provision in its consolidated financial statements for the quarter
ended April 27, 1996, based upon management's belief that the
possibility of such loss is remote.
The Company has been notified that certain stores that it leases 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.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable
13
<PAGE> 16
ITEM 5. OTHER INFORMATION
PRIVATE SECURITIES LITIGATION REFORM ACT. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Certain information included in other parts
of this Form 10-Q and other materials filed or to be filed by the
Company with the Securities and Exchange Commission contains statements
that are forward-looking, such as statements relating to the Company's
Store Closure Plan, statements relating to the Company's need for
additional financing and statements regarding the Company's anticipated
potential loan covenant violations, among others. Such forward- looking
information involves important risks and uncertainties that could
significantly affect anticipated results in the future, and
accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, the risk of
continuing losses and cash flow constraints despite the Company's
efforts to improve operations, including the Store Closure Plan, the
inability to obtain interim financing or permanent financing such that
the Company will be able to purchase inventory for the 1996 holiday
season and thereafter, and attain credit support from its factors,
failure to negotiate acceptable payment terms with vendors and
landlords, and failure to negotiate waivers or amendments to loan
covenants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
Exhibit 3(i) Articles of Amendment to the Amended and Restated
Articles of Incorporation of Kids Mart, Inc. dated
May 23, 1996.
Exhibit 10.9 Stock Acquisition Agreement by and between Kids
Mart, Inc. and Woolworth Corporation, dated as of
May 10, 1996.
Exhibit 27 Financial Data Schedule.
14
<PAGE> 17
SIGNATURE
Pursuant to the requirements 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.
DATE: 30 October, 1996 KIDS MART, INC.
(Registrant)
By: /s/ BERNARD TESSLER
--------------------
Bernard Tessler
Chairman and Chief Executive Officer
By: /s/ ROBERT S. KELLEHER
-----------------------
Robert S. Kelleher
Vice President, Chief Operating Officer,
and Chief Financial Officer
15
<PAGE> 1
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
KIDS MART, INC.
---------------
(Determining the preferences, limitations and relative rights of a series of
Preferred Stock of the Corporation to be designated as "Series A Convertible
Preferred Stock," pursuant to Section 607.0602 of the Florida Business
Corporation Act)
---------------
Kids Mart, Inc., a corporation organized and existing under the Florida
Business Corporation Act (the "Corporation"), in accordance with Sections
607.0602 and 607.1006 of the Florida Business Corporation Act, does hereby
adopt these Articles of Amendment and certifies that:
FIRST: The name of the Corporation is Kids Mart, Inc.
SECOND: The Amendment and Restated Article of Incorporation of the
Corporation are hereby amended to include, immediately following "ARTICLE III -
Capital Stock" thereof, a new "ARTICLE IIIA - Series A Convertible Preferred
Stock" thereof, to read in its entirety as follows:
ARTICLE IIIA - Series A Convertible
Preferred Stock
-----------------------------------
1. DESIGNATION AND NUMBER OF SHARES. There shall be a series of
Preferred Stock of the Corporation designated as "Series A Convertible
Preferred Stock" (the "Convertible Preferred Stock"). The Convertible
Preferred Stock shall be perpetual and the number of shares constituting such
series shall be 1,000,000. The par value of the Convertible Preferred Stock,
as provided in Article III hereof, shall be $.0001 per share.
2. RANK. The Convertible Preferred Stock shall rank, with respect
to rights to receive dividends and rights to receive distributions upon the
liquidation,
<PAGE> 2
winding up or dissolution of the Corporation (whether voluntary or
involuntary): (a) senior to the Common Stock, par value $.0001 per share (the
"Common Stock"), of the Corporation and senior to any class or series of
Preferred Stock issued by the Corporation whose terms provide specifically that
such class or series will rank junior to the Convertible Preferred Stock with
respect to rights to receive payment of dividends or liquidation preference or
whose terms fail to specify the ranking of such class or series relative to the
Convertible Preferred Stock with respect to rights to receive payment of
dividends or liquidation preference (together with the Common Stock, the
"Junior Stock"), (b) on a parity with any class or series of Preferred Stock
issued by the Corporation whose terms provide specifically that such series
will rank on a parity with the Convertible Preferred Stock with respect to
rights to receive payment of dividends and liquidation preference (the "Parity
Stock") and (c) junior to any class or series of Preferred Stock issued by the
Corporation whose terms provide specifically that such class or series will
rank senior to the Convertible Preferred Stock with respect to rights to
receive payment of dividends or liquidation preference (the "Senior Stock").
Senior Stock and Parity Stock may be issued by the Corporation only with the
requisite consent of the holders of the shares of Convertible Preferred Stock
in accordance with Section 6(b)(i) of this Article IIIA.
3. DIVIDENDS AND DISTRIBUTIONS; CERTAIN PURCHASES. When and as
dividends or distributions are declared upon the Common Stock, whether payable
in cash, securities or other property (other than in Common Stock), the holders
of the Convertible Preferred Stock shall be entitled to receive, for each share
of Convertible Preferred Stock held by them, and amount of cash, securities or
other property equal to the amount of such cash, securities or other property
payable or distributable with respect to the number of shares of Common Stock
into which such share of Convertible Preferred Stock is convertible on the
record date for such dividend or distribution. The record date for any such
dividend or distribution with respect to the Convertible Preferred Stock shall
be the same as the record date for the relevant dividend or distribution
payable or distributable with respect to the Common Stock. Without limiting
the generality of the foregoing, in case the Corporation shall issue to holders
of shares of the outstanding Common Stock generally any rights, options or
warrants entitling them to subscribe for or purchase (i) shares of Common
Stock, (ii) any assets of the Corporation or (iii) any securities of the
Corporation (other than Common Stock) or of any corporation or entity other
than the Corporation, whether or not such rights, options or warrants are
immediately exercisable (hereinafter collectively called "Common
Distributions"), the Corporation shall issue to the holders of outstanding
shares of the Convertible Preferred Stock the Common Distribution to which they
would have been entitled if they had converted the shares of Convertible
Preferred Stock held by them into Common Stock immediately prior to the record
date for the purpose of determining shareholders entitled to receive such
Common Distribution.
<PAGE> 3
So long as any Convertible Preferred Stock shall be
outstanding, the Corporation shall not declare any dividends on any Junior
Stock (other than the Common Stock), or make any payment on account of, or set
apart money for, a sinking fund or other similar fund or agreement for the
purchase, redemption or other retirement of any shares of such Junior Stock, or
make any distribution in respect thereof, whether in cash or property or in
obligations or stock of the Corporation, other than a distribution consisting
solely of such Junior Stock.
So long as any Convertible Preferred Stock shall be outstanding,
the Corporation shall not, and shall not permit any corporation or other entity
directly or indirectly controlled by the Corporation to, purchase, redeem or
otherwise acquire for value any Common Stock or other Junior Stock or rights,
options or warrants exercisable for or convertible into Common Stock or other
Junior Stock; provided, however, that the foregoing shall not restrict or
prohibit the Corporation from (i) issuing Common Stock or other Junior Stock
upon the exercise or conversion of any such rights, options or warrants in
accordance with their terms or (ii) purchasing, redeeming or otherwise
acquiring, for amounts not in excess of their Current Market Price, shares of
Common Stock from any employee of the Corporation, upon such person ceasing to
be an employee of the Corporation, pursuant to the terms of a bona fide
employment or other agreement with such employee that has previously been
approved by the Corporation's Board of Directors; provided, however, that the
aggregate purchases, redemptions and acquisitions pursuant to this clause (ii)
in the initial five-year period following the Issue Date (as defined below)
shall in no event exceed 250,000 shares of Common Stock (as adjusted for stock
splits, combinations, dividends or reclassifications having a record date after
the Issue Date) or (iii) purchasing up to 9,900 shares of Common Stock at prices
not in excess of the book value per share on November 15, 1995 (estimated to be
$5.02 per share) from former stockholders of Frost Hanna Acquisition Group, Inc.
who voted against the merger approved at the special meeting of shareholders
held on January 3, 1996.
4. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution, reorganization or winding up of the Corporation, whether voluntary
or involuntary, the holders of Convertible Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to
shareholders, before any distribution of assets shall be made to the holders of
the Common Stock or of any other shares of Junior Stock, a liquidating
distribution in an amount equal to $10.00 per share (the "Liquidation
Preference"), plus an amount equal to any accrued and accumulated but unpaid
dividends thereon to the date of final distribution to such holders, whether or
not declared, without interest. The holders of the Convertible Preferred Stock
shall not be entitled to receive the Liquidation Preference and such accrued
dividends, however, until the liquidation preference of any outstanding Senior
Stock issued with the requisite consent of the holders of the shares of
Convertible Preferred Stock in accordance with
3
<PAGE> 4
Section 6(b)(i) hereof shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full.
If, upon any voluntary or involuntary liquidation, dissolution,
reorganization or winding up of the Corporation, the assets available for
distribution are insufficient to pay in full the amounts payable with respect
to the Convertible Preferred Stock and any other outstanding shares of Parity
Stock issued with the requisite consent of the holders of the shares of
Convertible Preferred Stock in accordance with Section 6(b)(i) hereof, the
holders of the Convertible Preferred Stock and of such other Parity Stock shall
share ratably in any distribution of assets of the Corporation in proportion to
the full respective preferential amounts to which they are entitled.
After payment to the holders of the Convertible Preferred Stock
of the full preferential amounts provided for in this Section 4, the holders of
the Convertible Preferred Stock shall not be entitled to any further
participation in any distribution of assets by the Corporation.
For purposes of this Section 4, neither the consolidation,
merger or other business combination of the Corporation with or into another
person nor a sale or transfer of all or substantially all of the assets of the
Corporation will be deemed a liquidation, dissolution or winding up of the
Corporation.
5. REDEMPTION.
The shares of Convertible Preferred Stock shall not be
redeemable.
6. VOTING.
(a) No General Voting Rights. Except as otherwise provided in
this Section 6 or as otherwise required by law, the Convertible Preferred Stock
shall have no voting rights.
(b) Other Voting Rights. Without the consent or affirmative
vote of the holders of at least a majority of the outstanding shares of
Convertible Preferred Stock (or such greater number as required by the Articles
of Incorporation or applicable law), voting separately as a class to the
exclusion of holders of any other shares of capital stock of the Corporation
(either in writing without a meeting, if permitted by the Articles of
Incorporation and applicable law, or by vote at any meeting called for that
purpose), the Corporation may not:
(i) create, authorize, issue, or increase the authorized amount
of, any Senior Stock or any Parity Stock, or any obligation of security
convertible or exchange-
4
<PAGE> 5
able into Senior Stock or Parity Stock, or reclassify any of its authorized
stock into Senior Stock or Parity Stock;
(ii) permit any direct or indirect subsidiary of the
Corporation to issue any shares of its capital stock, or any obligation or
security convertible or exchangeable into shares of its capital stock, to any
person or entity other than the Corporation or a wholly owned subsidiary of the
Corporation;
(iii) issue any rights, options or warrants to purchase or
otherwise acquire (or any other obligations or securities convertible or
exchangeable into) any Common Stock, except (x) for issuances as distributions
upon the Common Stock as permitted by and complying with the provisions of
Section 3 of this Article IIIA, (y) in the case of options, options to acquire
up to an aggregate of 600,000 shares of Common Stock (as adjusted for stock
splits, combinations, dividends or reclassifications having a record date after
the Issue Date) pursuant to the Frost Hanna Acquisition Group, Inc. 1995 Stock
Option Plan (as it exists on the Issue Date, as amended from time to time), or
(z) in the case of warrants, warrants to acquire up to an aggregate of 500,000
shares of Common Stock (as adjusted for stock splits, combinations, dividends
or reclassifications having a record date after the Issue Date) at a per share
exercise price not less than the Current Market Price for the Common Stock on
the date prior to the date of issuance of such warrants;
(iv) amend any of the terms, conditions or provisions of any
warrants of the Corporation outstanding as of the Issue Date or any warrants of
the Corporation issued pursuant to clause (z) of the immediately preceding
paragraph (iii) of this Section 6(b) so as to lower the exercise price thereof
or extend the exercise period; or
(v) amend, alter or repeal (by any means whatsoever, including,
without limitation, by merger, consolidation or Fundamental Change (as defined
below) any provision of the Articles of Incorporation (including this Article
IIIA), if such action would (x) increase or decrease the aggregate number of
authorized shares of Convertible Preferred Stock, (y) increase or decrease the
par value of such shares or (z) amend, alter, repeal or change the powers,
rights, privileges or preferences of the holders of shares of Convertible
Preferred Stock so as to affect them adversely.
For purposes of the foregoing provisions of this Section 6, each
share of Convertible Preferred Stock shall have one vote per share.
7. CONVERSION RIGHTS.
(a) General. From and after the issuance thereof, each holder
of a share of Convertible Preferred Stock shall have the right, at the option of
such holder, at any time to convert, upon the terms and provisions of this
Section 7, one or more shares of
<PAGE> 6
Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock of the Corporation (and such other securities and property as such holder
may be entitled to as hereinafter provided). Such conversion of shares of
Convertible Preferred Stock to shares of Common Stock shall be made at a
conversion rate of one share of Convertible Preferred Stock for a number of
shares of Common Stock equal to (i) $10.00 divided by (ii) the conversion price
applicable per share of Common Stock at the time of conversion (the "Conversion
Price"). The Conversion Price shall initially be $10.00. The Conversion Price
shall be adjusted in certain instances as provided below.
(b) Mechanics of Conversion. In order to convert shares of Convertible
Preferred Stock into Common Stock, the holder or holders thereof shall surrender
the certificate or certificates evidencing such shares of Convertible Preferred
Stock at the office of the transfer agent for the Convertible Preferred Stock,
which certificate or certificates shall be duly endorsed to the Corporation or
in blank, or accompanied by proper instruments of transfer, accompanied by (i) a
written notice to the Corporation that the holder elects so to convert all or a
specified number of such shares of Convertible Preferred Stock and specifying
the name or names (with address or addresses) in which a certificate or
certificates evidencing shares of Common Stock are to be issued and (ii) if
required pursuant to Section 7(g) hereof, an amount sufficient to pay any
transfer or similar tax (or evidence reasonably satisfactory to the Corporation
demonstrating that such taxes have been paid). If more than one share of
Convertible Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Convertible Preferred Stock so surrendered.
Subject to the next paragraph hereof, shares of Convertible Preferred
Stock shall be deemed to have been converted immediately prior to the close of
business on the day of the surrender of such shares of conversion in accordance
with the foregoing provisions (the "Surrender Date"), and the person or persons
entitled to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the surrender of a
certificate or certificates for conversion and the receipt of the notice
relating thereto (and in any event within five business days thereafter), the
Corporation shall deliver or cause to be delivered to the person or persons
entitled to receive the same: (i) a certificate or certificates for the number
of full shares of Common Stock issuable upon such conversion; (ii) any cash
owed in lieu of any fraction of a share, determined in accordance with Section
7(f) hereof; (iii) if less than the full number of shares of Convertible
Preferred Stock evidenced by the surrendered certificate or certificates is
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by such surrendered certificate or certificates less
the number of shares being converted; and (iv) an
6
<PAGE> 7
amount in cash equal to the full cumulative dividends, if any, accrued but
unpaid on such shares of Convertible Preferred Stock through the effective date
of conversion.
(c) Adjustments to Conversion Price. The Conversion Price shall be
adjusted from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or
other distribution on any class of capital stock of the Corporation
(including the Common Stock) in Common Stock, the Conversion Price in
effect at the close of business on the date fixed for the determination
of shareholders entitled to receive such dividend or other distribution
shall be reduced to a price determined by multiplying such Conversion
Price by a fraction of which the numerator shall be the number of shares
of Common Stock outstanding at the close of business on the date fixed
for such determination and of which the denominator shall be the sum of
such number of shares and the total number of shares constituting such
dividend or other distribution, such reduction to become effective at
the opening of business on the day following the date fixed for such
determination. In the event that such dividend or distribution is not
so paid or made, the Conversion Price shall be readjusted to be the
Conversion Price which would then be in effect if such date fixed for
the determination of shareholders entitled to receive such dividend or
other distribution had not been fixed.
(ii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
Conversion Price in effect at the close of business on the date upon
which such subdivision becomes effective shall be proportionately
reduced, and, conversely, in case outstanding shares of Common Stock
shall each be combined into a smaller number of shares of Common Stock,
the Conversion Price in effect at the close of business on the date upon
which such combination becomes effective shall be proportionately
increased, such reduction or increase, as the case may be, to become
effective at the opening of business on the day following the date upon
which such subdivision or combination becomes effective.
(iii) In case the Corporation shall issue or sell any shares of
Common Stock for a consideration per share less than the Current Market
Price as of the date of such issue or sale, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced by multiplying such
Conversion Price by a fraction the numerator of which shall be the sum
of (x) the number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the Current Market Price
7
<PAGE> 8
immediately prior to such issue or sale plus (y) the aggregate
consideration received by the Corporation upon such issue or sale, and
the denominator of which shall be the product of the total number of
shares of Common Stock outstanding immediately after such issue or sale
multiplied by the Current Market Price immediately prior to such issue
or sale. Notwithstanding the foregoing, the provisions of this Section
7(c)(iii) shall not cause or require any adjustment to the Conversion
Price in connection with:
(A) any issuance of shares of Common Stock as
consideration for the acquisition of the business, assets or
stock of another corporation or business entity, provided that
(1) not more than 10% of the equity or voting stock of such
other corporation or business entity is directly or indirectly
owned, in the aggregate, by persons who are then serving, or who
at any time between the Issue Date and the date of such issuance
served, as a director or officer of the Corporation, and (2) the
Corporation receives, at the time of consummation of such
acquisition, a fairness opinion of a nationally recognized
investment banker to the effect that the consideration to be
paid by the Corporation in such acquisition is fair, from a
financial point of view, to the Corporation and the holders of
its Common Stock;
(B) the issuance or sale of up to an aggregate
(measured over the period in which any shares of Convertible
Preferred Stock are outstanding) of 2,000,000 shares of Common
Stock (as adjusted for stock splits, combinations, dividends or
reclassifications having a record date after the Issue Date),
for less than the Current Market Price as of the date of such
issue or sale, provided that (1) all such issuances or sales are
to persons who are not then serving, and who have not at any
time between the Issue Date and the date of such issuance or
sale served, as directors or officers of the Corporation and (2)
the per share proceeds to the Corporation of each such issuance
or sale is in excess of one-fourth of the then applicable
Conversion Price;
(C) any issuance of shares of Common Sock (i) upon
conversion of the Convertible Preferred Stock, (ii) upon
exercise of any warrants of the Corporation outstanding as of
the Issue Date or (iii) upon exercise or conversion of any
rights, options or warrants of the Corporation permitted,
pursuant to the provisions of this Article IIIA, to be issued or
outstanding; or
(D) any underwritten public offering of Common Stock.
8
<PAGE> 9
(iv) If any Fundamental Change (as defined below) shall occur, then,
as a condition of such Fundamental Change, lawful and adequate provisions shall
be made whereby each holder of shares of Convertible Preferred Stock shall have
the right to receive, upon the basis and upon the terms and conditions
specified herein, in lieu of the shares of Common Stock immediately theretofore
receivable upon conversion of such shares of Convertible Preferred Stock, only
such cash, shares of stock, securities or assets (whether of the Corporation or
another issuer) as may be issued or payable as a result of such Fundamental
Change with respect to or in exchange for such number and class of shares of
Common Stock issuable upon conversion of the shares of Convertible Preferred
Stock immediately prior to the occurrence of the Fundamental Change. In the
case of any Fundamental Change, appropriate provision shall be made with
respect to the rights and interests of the holders of shares of Convertible
Preferred Stock to the end that the provisions hereof (including without
limitation provisions for adjustment of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of any conversion
rights hereunder.
(v) Notwithstanding any other provision of this Section 7, no
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least 1% in the Conversion Price;
provided, however, that any adjustments which by reason of this paragraph (v)
are not required to be made shall be carried forward and taken into account in
determining whether any subsequent adjustment shall be required. Once the
cumulative effect of any such adjustments that are carried forward would result
in an increase or decrease of at least 1% in the Conversion Price, then the
Conversion Price shall be changed to reflect all adjustments called for by this
Section 7 and not previously made.
(vi) Notwithstanding any other provision of this Section 7, no
adjustment to the Conversion Price shall reduce the Conversion Price below the
then par value per share of the Common Stock, and any such purported adjustment
shall instead reduce the Conversion Price to such par value.
(vii) Whenever the Conversion Price is adjusted as provided herein, the
Corporation shall compute the adjusted Conversion Price in accordance with this
Section 7 and shall prepare a certificate signed by the Treasurer of the
Corporation setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjust-
9
<PAGE> 10
ment is based, and the corporation shall mail a copy of such certificate as
soon as practicable to the holders of record of the shares of Convertible
Preferred Stock.
(viii) In any case in which this Section 7 shall require that an
adjustment shall become effective on the day following a record date for an
event, the Corporation may defer until the occurrence of such event (i) issuing
to the holder of any share of Convertible Preferred Stock, if such share is
converted after such record date and before the occurrence of such event, the
additional Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above Common Stock issuable upon
such conversion before giving effect to such adjustment and (ii) paying to such
holders any amount in cash in lieu of a fractional share of Common Stock
pursuant to paragraph (f) of this Section 7; provided, however, that, upon
request of any such holder, the Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to receive
such additional Common Stock and such cash, upon the occurrence of the event
requiring such adjustment.
(d) Prior Notice of Certain Events. In case at any time:
(i) the Corporation shall (x) declare any dividend or any other
distribution on its Common Stock or (y) declare or authorize a redemption or
repurchase of any of the then outstanding shares of Common Stock or any other
Junior Stock; or
(ii) the Corporation shall authorize the granting to all holders of
Common Stock of rights or warrants to subscribe for or purchase any shares of
stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a subdivision
or combination of the outstanding Common Stock), or of any consolidation or
merger to which the Corporation is a party and for which approval of any
shareholders of the Corporation shall be required, or of the sale or transfer
of all of substantially all of the assets of the Corporation for which approval
of any shareholder shall be required or of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or other
property; or
(iv) of the voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
10
<PAGE> 11
then, in any such case, the Corporation shall cause to be mailed to the holders
of record of the Convertible Preferred Stock, at their last addresses as they
shall appear upon the stock transfer books of the Corporation, at least twenty
(20) days prior to the applicable record date or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, redemption, repurchase or granting
of rights or warrants or, if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distribution, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, liquidation, dissolution
or winding up. No failure to mail such notice or any defect therein or in the
mailing thereof shall affect the validity of the corporate action required to be
specified in such notice.
(e) Reservation of Shares, etc. The Corporation shall at all
times reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock, solely for the purpose of effecting the
conversion of shares of Convertible Preferred Stock, the full number of shares
of Common Stock then deliverable upon the conversion of all shares of
Convertible Preferred Stock then outstanding. If the Corporation shall issue
any securities or make any change in its capital structure which would change
the number of shares of Common Stock into which each share of the Convertible
Preferred Stock shall be convertible as herein provided, the Corporation shall
at the same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Convertible Preferred
Stock on the new basis.
If any shares of Common Stock required to be reserved for
purposes of conversion of the Convertible Preferred Stock hereunder require
stockholder approval or approval of any governmental authority under any
Federal or State law before such shares may be issued upon conversion, the
Corporation will in good faith and as expeditiously as possible endeavor and
cooperate with the holders to cause such shares to be duly approved as
necessary. If the Common Stock is listed on the New York Stock Exchange or any
other national securities exchange, the Corporation will, in good faith and as
expeditiously as possible, endeavor, if permitted by the rules of such
exchange, to list and keep listed on such exchange, upon official notice of
issuance, all shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock.
(f) No Fractional Shares. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon conversion
of Convertible
11
<PAGE> 12
Preferred Stock. Instead of any fraction of a share which would otherwise be
issuable upon conversion of any shares of Convertible Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the Closing Price (as defined below) of a
share of Common Stock (or, if there is no such Closing Price, the fair market
value of a share of Common Stock, as determined in good faith by the Board of
Directors or in any manner prescribed by the Board of Directors) at the close
of business on the Trading Day immediately preceding the date of conversion.
(g) Transfer Taxes, etc. The Corporation will pay any and all
taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of shares of Convertible Preferred Stock pursuant
hereto. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of
Convertible Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established to the
satisfaction of the Corporation that such tax has been paid.
(h) Automatic Conversion. If the Closing Price for the Common
Stock is above the then applicable Conversion Price for each Trading Day in
any period of six consecutive months following the Issue Date and, in any
event, upon the fifth anniversary of the Issue Date, each share of Convertible
Preferred Stock shall automatically be converted into shares of Common Stock
based on the then applicable Conversion Price. Upon the occurrence of such
event, the outstanding shares of Convertible Preferred Stock shall be converted
into Common Stock automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Convertible Preferred Stock are either delivered to
the Corporation or its transfer agent as provided below, or the holder thereof
notifies the Corporation or its transfer agent that such certificates have been
lost, stolen, mutilated or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. Upon the occurrence of such automatic
conversion of the Convertible Preferred Stock, each holder of Convertible
Preferred Stock shall surrender the certificates representing such shares at
the office of the Company or any transfer agent for the Convertible Preferred
Stock. Thereupon, there shall be issued and delivered to such holder promptly
at such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates representing the number of shares
of Common Stock into which the shares of Convertible Preferred Stock
surrendered were convertible on the date on which such automatic conversion
occurred.
12
<PAGE> 13
8. EXCHANGES. Certificates representing shares of Convertible
Preferred Stock shall be exchangeable, at the option of the holder, for a new
certificate or certificates of the same or different denominations representing
in the aggregate the same number of shares of Convertible Preferred Stock.
9. OUTSTANDING SHARES. For purposes of this Article IIIA, all
shares of Convertible Preferred Stock shall be deemed outstanding except for,
from the date of issuance of certificates representing Common Stock in exchange
for certificates representing Convertible Preferred Stock surrendered for
conversion pursuant to Section 7 hereof, such shares of Convertible Preferred
Stock which have been so converted into Common Stock or other securities or
property pursuant to Section 7 hereof.
10. STATUS OF CONVERTIBLE PREFERRED STOCK UPON RETIREMENT. Shares of
Convertible Preferred Stock which are acquired by the Corporation or converted
pursuant to Section 7 shall return to the status of authorized and unissued
shares of Preferred Stock of the Corporation, without designation as to series.
Upon the acquisition by the Corporation or conversion pursuant to Section 7 of
all outstanding shares of Convertible Preferred Stock, all provisions of this
Article IIIA shall cease to be of further effect.
11. DEFINITIONS. For purposes of this Article IIIA, the following
terms shall have the meanings indicated:
(a) "Closing Price" with respect to any securities on any day
shall mean the closing sale price regular way on such day or, in case no such
sale takes place on such day, the average of the reported closing bid and asked
prices, regular way, in each case on the New York Stock Exchange, or, if such
security is not listed or admitted to trading on such Exchange, on the principal
national securities exchange or quotation system on which such security is
quoted or listed or admitted to trading, or, if not quoted or listed or admitted
to trading on any national securities exchange or quotation system, the average
of the closing bid and asked prices of such security on the over-the-counter
market on the day in question as reported by the National Quotation Bureau
Incorporated, or a similarly generally accepted reporting service, or if not so
available, in such manner as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors of the Corporation for
that purpose.
(b) "Current Market Price" shall mean, for purposes of any
computation under Section 6(b)(iii)(z), the average of the daily Closing Prices
per share of Common Stock on the day in question, and for purposes of any other
computation hereunder, the average of the daily Closing Prices per share of
Common Stock for the ten consecutive Trading Days immediately prior to the date
in question.
13
<PAGE> 14
(c) "Fundamental Change" shall mean the occurrence of any
transaction or event or series of transactions or events pursuant to which all
or substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or constitute solely the right to receive cash, securities
(including Common Stock in combination with other consideration), property or
other assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise).
(d) "Issue Date" shall mean May 23, 1996.
(e) "Trading Day" shall mean (x) if the applicable security is
listed or admitted for trading on the New York Stock Exchange or another
national securities exchange, a day on which the New York Stock Exchange or
another national securities exchange is open for business or (y) if the
applicable security is quoted on the Nasdaq National Market of The Nasdaq Stock
Market, a day on which trades may be made on such Nasdaq National Market or (z)
if the applicable security is not so listed, admitted for trading or quoted, any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York or the State of Florida are authorized or obligated by law
or executive order to close.
THIRD: The Amendment to the Amended and Restated Articles of
Incorporation of the Corporation set forth above was adopted on the 23rd day of
May, 1996.
FOURTH: Prior to the issuance of any shares of the Series A
Convertible Preferred Stock, these Articles of Amendment were adopted by the
Board of Directors of the Corporation without shareholder action and shareholder
action was not required.
14
<PAGE> 15
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and these Articles of Amendment to be executed in its name by
its President and attested to by its Secretary this 23rd day of May, 1996.
KIDS MART, INC.
By: /s/ JEFFREY KOFFMAN
-----------------------------------
Name: Jeffrey Koffman
Title: Secretary
Attest:
/s/ BERNARD TESSLER
- ----------------------------------
Name: Bernard Tessler
Title: President
15
<PAGE> 1
STOCK ACQUISITION AGREEMENT
by and between
KIDS MART, INC.
and
WOOLWORTH CORPORATION
Dated as of May 10, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. ISSUANCE AND ACQUISITION OF SHARES .......................... 1
1.1. Issuance and Acquisition of Shares ................. 1
1.2. Closing ............................................ 2
1.3. Restrictive Legend ................................. 3
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY .............. 4
2.1. Due Organization, etc. ............................. 4
2.2. Authorization; Execution and Delivery of
Agreement ........................................ 4
2.3. No Conflict; No Consent ............................ 5
2.4. Capital Stock ...................................... 6
2.5. Certain Financial Information ...................... 6
2.6. No Brokers ......................................... 7
2.7. Litigation and Claims .............................. 7
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER ............ 8
3.1. Due Organization, etc. ............................. 8
3.2. Authorization; Execution and Delivery of
Agreement ........................................ 8
3.3. No Conflict; No Consent ............................ 8
3.4. No Brokers ......................................... 9
3.5. Investment Purposes ................................ 9
3.6. Litigation and Claims .............................. 10
IV. REGISTRATION RIGHTS ........................................ 10
4.1 "Piggyback" Registration; Shelf Registration ....... 10
4.2. Demand Registration ................................ 12
4.3. General Provisions ................................. 13
4.4 Information, Documents, etc. ....................... 13
4.5 Expenses ........................................... 14
4.6. Cooperation ........................................ 14
4.7. Action to Suspend Effectiveness; Supplement to
Registration Statement ........................... 15
4.8. Indemnification .................................... 16
4.9. Registration Rights of Transferees ................. 20
4.10. Changes in Common Stock ............................ 21
4.11. Standstill ......................................... 21
V. COVENANTS OF THE COMPANY ................................... 21
5.1. Financial Statements and Other Reports ............. 21
5.2. Operation of Business .............................. 22
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.3. Cooperation in Sale Transactions ................... 23
5.4. Hart-Scott-Rodino Filings .......................... 23
VI. COVENANTS OF THE PURCHASER ................................. 23
6.1. Transfer Restrictions .............................. 24
VII. CONDITIONS PRECEDENT TO CLOSING ............................ 24
7.1. Conditions With Respect to Both Parties ............ 24
7.2. Conditions With Respect to the Purchaser ........... 25
7.3. Condition With Respect to the Company .............. 25
VIII. TERMINATION ................................................ 25
8.1. Termination ........................................ 26
8.2 Effect of Termination .............................. 26
IX. GENERAL PROVISIONS ......................................... 26
9.1. Public Disclosure and Confidentiality .............. 26
9.2. Certain Definitions ................................ 27
9.3. Survival of Representations, Warranties and
Agreements ....................................... 28
9.4. Notices ............................................ 28
9.5. Entire Agreement; Counterparts; Assignment ......... 29
9.6. Governing Law ...................................... 29
9.7. Severability of Provisions ......................... 30
9.8. Modification; Waiver ............................... 30
9.9. Expenses ........................................... 30
9.10. Equitable Relief ................................... 30
9.11. Joint Drafting ..................................... 30
</TABLE>
Exhibit A - Articles of Amendment designating terms, rights and
preferences of Series A Convertible Preferred Stock
Exhibit B - Opinion of Rosenberg, Reisman & Stein
Exhibit C - Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP
Exhibit D - Opinion of General Counsel of the Purchaser
Exhibit E - Opinion of Skadden, Arps, Slate, Meagher & Flom
ii
<PAGE> 4
STOCK ACQUISITION AGREEMENT
STOCK ACQUISITION AGREEMENT (this "Agreement") dated as of May 30, 1996
by and between KIDS MART, INC., a Florida corporation (the "Company"), and
WOOLWORTH CORPORATION, a New York corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Purchaser and the Company are concurrently herewith
entering into a Mutual Release and Settlement Agreement dated as of the date
hereof (the "Settlement Agreement");
WHEREAS, in connection with entering into the Settlement Agreement, the
Company wishes to issue to the Purchaser, and the Purchaser wishes to acquire
from the Company, an aggregate of 1,000,000 shares of a new series of the
Preferred Stock, $.0001 par value, of the Company, designated as "Series A
Convertible Preferred Stock" and having the terms, rights and preferences
specified in Exhibit A hereto (the "Preferred Stock");
WHEREAS, the Purchaser and the Company are entering into this Agreement
to provide for such issuance and acquisition and to establish various rights and
obligations in connection therewith.
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
I. ISSUANCE AND ACQUISITION OF SHARES
1.1 Issuance and Acquisition of Shares. Upon the terms and
subject to the conditions set forth in this Agreement, and for good and
valuable consideration received in connection with the transactions
contemplated by the Settlement Agreement, the Company agrees to issue, sell and
deliver to the Purchaser, and the Purchaser agrees to acquire and purchase from
the Company, 1,000,000 previously unissued shares of the Preferred Stock (the
"Shares"), free and clear of all liens, security interests, pledges, voting
agreements, claims, options and encumbrances of every kind, character and
<PAGE> 5
description whatsoever other than the transfer restrictions created by this
Agreement ("Encumbrances").
1.2 Closing. (a) The closing of the acquisition by the Purchaser
of the Shares (the "Closing") shall take place at the offices of Skadden, Arps,
Slate, Meagher & Flom, 919 Third Avenue, New York, NY at 3:00 p.m. (i) on May
30, 1996 or (ii) in the event that all of the conditions set forth in Article
VII of this Agreement shall not have been satisfied or waived on or prior to
such time on May 30, 1996, as soon as practicable after all such conditions
shall have been satisfied or waived (the date of the Closing being referred to
herein as the "Closing Date").
(b) At the Closing, the Company will deliver to the
Purchaser the following:
(i) a fully-executed copy of the Articles of Amendment
attached as Exhibit A hereto (the "Articles of Amendment"), and an
officer's or director's certificate of the Company certifying that the
Articles of Amendment have been duly filed with the Department of State,
State of Florida and are fully effective; and
(ii) an opinion of Rosenberg, Reisman & Stein, outside
counsel to the Company, substantially in the form of Exhibit B hereto;
(iii) an opinion of Kaye, Scholer, Fierman, Hays &
Handler, LLP, special counsel to the Company, substantially in the form
of Exhibit C hereto; and
(iv) the other documents and instruments contemplated
by the Settlement Agreement to be delivered (or caused to be delivered)
by the Company.
(c) At the Closing, the Purchaser will deliver to the
Company
(i) the documents and instruments contemplated by the
Settlement Agreement to be delivered (or caused to be delivered) by the
Purchaser;
2
<PAGE> 6
(ii) an opinion of the Purchaser's General Counsel,
substantially in the form of Exhibit D hereto; and
(ii) an opinion of Skadden, Arps, Slate, Meagher &
Flom, special counsel to the Purchaser, substantially in the form of
Exhibit E hereto.
(d) Within five business days of the Closing, the Company
will deliver one or more stock certificates representing the Shares bearing the
legends described in Section 1.3 hereof.
1.3 Restrictive Legend. Any certificate evidencing the Shares, or
shares of Common Stock issuable upon conversion of the Shares, shall bear
legends substantially in the following form:
THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW.
THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS PURSUANT TO THAT CERTAIN STOCK ACQUISITION AGREEMENT DATED
AS OF MAY 23, 1996 BY AND BETWEEN KIDS MART, INC. (THE "COMPANY") AND
WOOLWORTH CORPORATION, ON FILE AT THE COMPANY'S OFFICES.
At such time as any of the Shares or of the Common Stock (as
hereinafter defined) issuable upon conversion of the Shares shall no longer be
subject to one or both of the restrictions referred to in such legends, and
upon receipt of an opinion of counsel reasonably acceptable to the Company to
such effect, the Company shall take and cause to be taken, at the request of
any holder of such Shares, such action as shall be necessary so that such
holder shall be issued certificates representing such Shares that do not refer
to such restriction(s).
3
<PAGE> 7
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as of the date
hereof and as of the Closing Date as follows:
2.1. Due Organization, etc. The Company and each of its
Subsidiaries (as hereinafter defined) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, and each has all requisite corporate power and authority to own,
operate and lease its respective properties and assets and to conduct its
respective businesses as now conducted. "Subsidiary" means a corporation or
other business arrangement a majority of the outstanding voting securities or
ownership interests of which is owned, directly or indirectly, by the Company,
by one or more other Subsidiaries or by the Company and one or more other
Subsidiaries.
2.2. Authorization; Execution and Delivery of Agreement. (a) The
execution and delivery of this Agreement and the Settlement Agreement and the
consummation of the transactions contemplated hereby (including the issuance of
the Shares to the Purchaser) and thereby (i) are within the corporate power and
authority of the Company (and in the case of the Settlement Agreement, LFS
Acquisition Corp., a Delaware corporation ("LFS")), (ii) do not require the
approval or consent of any stockholders of the Company or LFS and (iii) have
been duly authorized by all necessary corporate action on the part of the
Company and LFS. Each of this Agreement and the Settlement Agreement has been
duly executed and delivered by the Company (and in the case of the Settlement
Agreement, LFS) and each of this Agreement and the Settlement Agreement
constitutes the legal, valid, binding and enforceable obligation of the Company
(and in the case of the Settlement Agreement, LFS).
(b) The Shares have been duly authorized by all necessary
corporate action on the part of the Company, and, when issued and delivered by
the Company pursuant to this Agreement, the Shares will be validly issued,
fully paid and non-assessable, and the Purchaser will at such time acquire
valid title to the Shares, free and clear of any Encumbrances.
4
<PAGE> 8
(c) The Company has taken and will continue to take all
necessary action to reserve in connection with the possible conversion of the
Shares a sufficient number of shares of authorized but unissued Common Stock.
2.3. No Conflict; No Consent. The execution and delivery of this
Agreement and the Settlement Agreement and the consummation of the transactions
contemplated hereby (including the issuance of the Shares to the Purchaser) and
thereby do not conflict with, or result in any violation of or default under,
or permit the acceleration of any obligation under or the creation or
imposition of any Encumbrance on any of the properties or assets of the Company
or any Subsidiary under, (i) any provision of the articles of incorporation or
by-laws of the Company or any Subsidiary, (ii) any indenture, lease, mortgage,
deed of trust, loan agreement or other agreement or instrument, or any permit,
of the Company or any Subsidiary or (iii) any judgment, order, decree, statute,
law, ordinance, rule or regulation of any federal, state, local or regulatory
authority (each, an "Authority") to which the Company or any of its
Subsidiaries is a party or by which any of them is bound, other than, in the
case of clauses (ii) and (iii), where such conflict, violation, default,
acceleration or Encumbrance would not, individually or in the aggregate, have a
material adverse effect on the condition, financial or otherwise, of the
business, operations, affairs, properties or assets (collectively, the
"Condition") of the Company and its Subsidiaries taken as a whole or on the
benefits intended to be afforded to the Purchaser under this Agreement or the
Settlement Agreement. No consent, approval, order or authorization of, or
registration, declaration, filing with or notice to, any Authority or third
party is required to be made or obtained by the Company or any Subsidiary in
order to execute or deliver this Agreement or the Settlement Agreement or to
consummate the transactions contemplated hereby or thereby, other than (v) such
as may be required under Article IV hereof in connection with certain
registration rights, (w) the filing of a Form D pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), (x) as a result of
the periodic reporting requirements under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (y) filing of the Articles of Amendment with
the Department of State, State of Florida and (z) filing of a
5
<PAGE> 9
stipulation or discontinuance and dismissal with prejudice as contemplated by
the Settlement Agreement.
2.4. Capital Stock. (a) The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, par value $.0001 per share
("Common Stock"), of which 4,943,000 shares are issued and outstanding, and
100,000,000 shares of Preferred Stock, $.0001 par value, of which no shares are
issued and outstanding. All of the issued and outstanding shares of Common
Stock have been validly issued and are fully paid and non-assessable. All of
the outstanding shares of capital stock of LFS, consisting solely of shares of
common stock, are owned directly by the Company. All outstanding capital stock
of each other Subsidiary of the Company is owned directly or indirectly by the
Company.
(b) There are not authorized or outstanding any subscriptions,
options, conversion rights, warrants or other agreements, securities or
commitments of any nature whatsoever (whether oral or written and whether firm
or conditional) obligating the Company or any Subsidiary to issue, deliver or
sell, or cause to be issued, delivered or sold, to any person any shares of
Common Stock or any other shares of the capital stock of the Company or any
shares of the capital stock of any Subsidiary, or any securities convertible
into or exchangeable for any such shares, or obligating the Company or any
Subsidiary to grant, extend or enter into any such agreement or commitment,
except for as of May 23, 1996: (i) warrants to purchase 110,000 shares of
Common Stock at $6.60 per share; (ii) warrants to purchase 600,000 shares of
Common Stock at $6.00 per share; and (iii) warrants to purchase 494,300 shares
of Common Stock at $6.00 per share. There are no outstanding options under the
Company's 1995 Stock Option Plan. No class or capital stock or stockholder of
the Company or any Subsidiary of the Company is entitled to preemptive rights,
rights of first refusal, rights of first offer or similar rights with respect
to any issuance by the Company or such Subsidiary of its capital stock.
2.5. Certain Financial Information. The financial information as
set forth below, provided by the Company and LFS to representatives of the
Purchaser in May 1996, in contemplation of entry into settlement of claims
among the Company, LFS, Jack Koffman, the Purchas-
6
<PAGE> 10
er and Kinney Shoe Corporation ("Kinney"), was prepared and provided in good
faith by the Company and LFS and was based upon assumptions believed by
management to reasonable: (i) Quarterly Projected Cash Flow 1996, (ii) Projected
Income Statement, Balance Sheet and Cash Flow on an Annual Basis for Fiscal
1996, 1997 and 1998, (iii) Quarterly Balance Sheet for Fiscal 1996 with and
without settlement, (iv) Quarterly Income Statement for 1996 and Balance Sheet
for 1997 and 1998, (v) Inventory Aging Schedule 4/27/96 as adjusted, (vi)
Monthly Income Statements for 1996, 1997 and 1998 and Operating Summary of
3-year plan, including store closings, (vii) Comp Store Sales Analysis and
(viii) Analysis of clearance liquidation. The parties to this Agreement
recognize that the preceding preliminary financial information constitutes
forward looking information and that actual results could differ materially from
current expectations. Among the factors that could impact actual results are the
following: adjustments in the Company's accounts as the result of the year-end
audit and of closing the Company's books, for both the fourth quarter and the
fiscal year, including adjustments related to reconciliations of supplier
accounts, and any charges associated with potential restructurings and/or asset
dispositions.
2.6 No Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
the Company.
2.7 Litigation and Claims. There is no claim, prosecution, suit,
action, arbitration, proceeding, investigation or review pending or, to the
knowledge of the Company, threatened against the Company, any of its
Subsidiaries or any of their respective properties or assets which questions the
validity of this Agreement, the Settlement Agreement, the Shares or any action
taken or to be taken pursuant hereto or thereto, seeks to prohibit or impose any
limitations on the Purchaser's ownership of the Shares, seeks to prohibit or
make illegal the acceptance for payment, purchase of or payment for the Shares
or which is reasonably likely to have a material adverse effect on the
transactions contemplated by this Agreement or the Settlement Agreement or on
the Condition of the Company and its Subsidiaries taken as a whole.
7
<PAGE> 11
III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company as of the date
hereof and as of the Closing Date as follows:
3.1. Due Organization, etc. Each of the Purchaser and Kinney is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation.
3.2. Authorization; Execution and Delivery of Agreement. The
Purchaser (and Kinney, in the case of the Settlement Agreement) has all
requisite corporate power and authority to execute this Agreement and the
Settlement Agreement and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Settlement
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Purchaser (and in the case of the Settlement Agreement, Kinney). Each
of this Agreement and the Settlement Agreement has been duly executed and
delivered by the Purchaser (and in the case of the Settlement Agreement,
Kinney) and constitutes the legal, valid, binding and enforceable obligation of
the Purchaser (and in the case of the Settlement Agreement, Kinney).
3.3. No Conflict; No Consent. The execution and delivery of this
Agreement and the Settlement Agreement and the compliance by the Purchaser (and
in the case of the Settlement Agreement, Kinney) with its obligations hereunder
and thereunder do not conflict with, or result in any violation of or default
under, or permit the acceleration of any obligation under, or the creation or
imposition of any Encumbrance on any of the properties or assets of the
Purchaser (or in the case of the Settlement Agreement, Kinney) under, (i) any
provision of the certificate of incorporation or bylaws of the Purchaser or
Kinney, (ii) any indenture, lease, mortgage, deed of trust, loan agreement or
other agreement or instrument, or any permit, of the Purchaser or Kinney or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
of any Authority to which the Purchaser or Kinney is a party or by which either
is bound, other
8
<PAGE> 12
than, in the case of clauses (ii) and (iii), where such conflict, violation,
default, acceleration or Encumbrance would not, individually or in the
aggregate, have a material adverse effect on the acquisition of the Shares by
the Purchaser, the benefits intended to be afforded to the Company hereunder or
under the Settlement Agreement or the compliance by the Purchaser (or in the
case of the Settlement Agreement, Kinney) with its obligations hereunder or
under the Settlement Agreement. No consent, approval, order or authorization
of, or registration, declaration, filing with or notice to, any Authority or
third party is required to be made or obtained by the Purchaser or Kinney in
order to execute or deliver this Agreement or the Settlement Agreement or for
the Purchaser (or in the case of the Settlement Agreement, Kinney) to comply
with its obligations hereunder or thereunder, other than (w) filings pursuant to
the Securities Act in connection with the acquisition of the Shares and any
conversion thereof and any sale thereof or of the Common Stock received upon
conversion, (x) as may be required as a result of reporting requirements under
the Exchange Act, including pursuant to Sections 13(d) and 16 thereof, (y) any
filings that may be required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), in connection with any conversion of
the Preferred Stock into Common Stock and (z) filing of a stipulation of
discontinuance and dismissal with prejudice as contemplated by the Settlement
Agreement.
3.4. No Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
the Purchaser. Morgan Stanley & Co. Incorporated has acted as financial advisor
to the Purchaser in connection with a review of the Company's business plan.
3.5. Investment Purposes. The Purchaser is acquiring the Shares
solely for its own account for the purpose of investment and not with a view to
the public distribution thereof. The Purchaser acknowledges the Purchaser's
understanding that the offering and sale of the Shares hereunder are intended to
be exempt from registration under the Securities Act by virtue of Section 4(2)
of the Securities Act and the provisions of
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<PAGE> 13
Regulation D promulgated thereunder and represents that it is an "accredited
investor" (as defined in such regulation). The Purchaser has not relied upon
any representations, warranties or statements other than those set forth in
this Agreement, the Settlement Agreement and/or any certificates, opinions or
other documents to be delivered pursuant hereto or thereto.
3.6. Litigation and Claims. There is no claim, prosecution, suit,
action, arbitration, proceeding, investigation or review pending or, to the
knowledge of the Purchaser, threatened against the Purchaser, any of its
Subsidiaries or any of their respective properties or assets which questions
the validity of this Agreement, the Settlement Agreement or any action taken or
to be taken pursuant hereto or thereto, or which is reasonably likely to have a
material adverse effect on the transactions contemplated by this Agreement or
the Settlement Agreement.
IV. REGISTRATION RIGHTS
The Company covenants and agrees to provide the following registration
rights at any time from and after the date hereof:
4.1. "Piggyback" Registration; Shelf Registration. (a) Whenever the
Company proposes to file a registration statement relating to Common Stock
under the Securities Act, other than (i) a registration statement required to
be filed in respect of employee benefit plans of the Company on Form S-8 or any
similar form from time to time in effect, (ii) any registration statement on
Form S-4 or similar successor form relating to securities issued in connection
with a reorganization, (iii) any form that does not permit the inclusion of
Purchaser's Stock (as defined below) or (iv) any other form of registration
statement filed in connection with an exchange offer or an offering of
securities solely to the Company's existing stockholders, the Company shall, at
least 15 days prior to such filing, give written notice of such proposed filing
to the Purchaser. Upon receipt by the Company not more than seven days after
such notice of a written request from the Purchaser for registration of
Purchaser's Stock, the Company shall include such Purchaser's Stock in such
registration statement or in a
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<PAGE> 14
separate registration statement concurrently filed, and shall use all
reasonable efforts to cause such registration statement to become effective
with respect to such Purchaser's Stock, unless the managing underwriter
therefor concludes in its reasonable judgment that compliance with this Section
4.1 would materially adversely affect such offering. If such registration
involves an underwritten offering, the Purchaser shall, as a condition to the
inclusion of such Purchaser's Stock in such registration, agree to sell
Purchaser's Stock to the underwriters selected by the Company at the same price
and on the same terms of underwriting applicable to the Company and any other
persons selling Common Stock pursuant thereto. Notwithstanding the foregoing,
at any time after giving written notice of its intention to register Common
Stock, the Company may, at its election, by the delivery of written notice to
the Purchaser, (1) in the case of a determination not to effect registration,
relieve itself of its obligation to register Purchaser's Stock in connection
with such registration, or (2) in the case of a determination to delay such
registration, delay the registration of such Purchaser's Stock for the same
period as the delay in the registration of such other Common Stock.
"Purchaser's Stock" means any shares of Common Stock to be issued upon
conversion of the Preferred Stock and for which the Purchaser requests
registration pursuant to this Section 4.1 or Section 4.2 hereof, it being
understood that (i) the Purchaser may request such registration with respect to
such shares of Common Stock prior to effecting any conversion of the Shares and
(ii) any such conversion need not be effected until immediately prior to the
sale of shares pursuant to the applicable registration statement.
(b) Without limiting the generality of Section 4.1(a), if the
Company files any shelf registration statement for the Common Stock or warrants
issued in connection with the January 1996 acquisition of LFS, or for the
underwriter's warrants issued in connection with the Company's initial public
offering; it will include in such registration statement all shares of Common
Stock issuable upon conversion of the Shares and use its reasonable best
efforts to cause such registration statement to remain current and effective
for a period of two years following its effectiveness.
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<PAGE> 15
4.2. Demand Registration. (a) If at any time following the date
occurring 180 days after the Closing Date the Company shall receive a written
request from the holders of more than 500,000 Shares (or more than 500,000
shares of Common Stock issued upon conversion of the Shares, as adjusted for
stock dividends, subdivisions or reclassifications having a record date after
the Closing Date) requesting the Company to register Purchaser's Stock under
the Securities Act on Form S-1, S-2 or S-3 or any other similar form then in
effect and applicable to the Company, the Company agrees that it will use all
reasonable efforts to cause the prompt registration of such Purchaser's Stock;
it being understood that the Company currently can provide no assurance as to
its ability to provide the financial statements that would be required in
connection with such registration. The Company may postpone for a limited
time, which in no event shall in the aggregate be longer than 90 days,
compliance with a request for registration pursuant to this Section 4.2 if (i)
such compliance would materially adversely affect (including, without
limitation, through the premature disclosure thereof) a proposed financing
reorganization, recapitalization, merger, consolidation or similar transaction
or (ii) the Company is conducting a public offering of capital stock and the
managing underwriter concludes in its reasonable judgment that such compliance
would materially adversely affect such offering. Notwithstanding anything in
this Section 4.2 to the contrary, the Company shall not be required to: (x)
comply with more than one request pursuant to this Section 4.2, (y) comply with
this Section 4.2 during any period in which transfer of securities is
restricted pursuant to Section 4.11 or (z) prepare or cause to be prepared
audited financial statements of the Company other than those prepared in the
normal course of the Company's business at its fiscal year end. Any
underwriter selected by Purchaser to act as such in connection with a
registration pursuant to this Section 4.2 shall require the prior approval of
the Company which approval shall not be unreasonably withheld.
(b) The registration rights set forth in this Section 4.2
shall not be available to the Purchaser at any time (the "Holding Period Date")
that, in the unqualified written opinion of counsel for the Company (which
counsel must be reasonably acceptable to the Purchaser), the Purchaser is able
to sell any and all
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<PAGE> 16
shares of Common Stock held by it pursuant to paragraph (k) of Rule 144 under
the Securities Act or otherwise without restriction (including, without
limitation, any restriction with respect to current public information regarding
the Company, amount of securities sold, manner of sale or provision of notice of
proposed sale) while being deemed not to be engaged in a distribution of such
shares and therefore not to be an underwriter thereof within the meaning of
Section 2(11) of the Securities Act.
4.3 General Provisions. The Company will use all reasonable efforts
to cause any registration statement referred to in Section 4.2 to become
effective and to remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the earlier of 180 days from the
effective date of the registration statement and the date on which the Purchaser
completes its distribution of Purchaser's Stock. A request under Section 4.2(b)
shall not be deemed utilized unless a registration statement with respect
thereto becomes effective. The Company will use all reasonable efforts to effect
such qualifications under applicable blue sky or other state securities laws as
may be reasonably requested by the Purchaser (provided that the Company shall
not be obligated to file a general consent to service of process or qualify to
do business as a foreign corporation or otherwise subject itself to taxation in
any jurisdiction solely for the purpose of any such qualification) to permit or
facilitate such sale or other distribution. The Company will cause the
Purchaser's Stock to be listed on any national securities exchange or quoted on
any stock quotation system on which the shares of Common Stock are listed or
quoted.
4.4 Information, Documents, etc. Upon making a request for
registration pursuant to Sections 4.1 or 4.2, the Purchaser shall furnish to the
Company such information as the Company may reasonably request and as shall be
required in connection with any registration, qualification or compliance
referred to in this Article IV. The Company agrees that it will furnish to the
Purchaser the number of prospectuses, offering circulars or other documents, or
any amendments or supplements thereto, incident to any registration,
qualification or compliance referred to in this Article IV as the Purchaser
from time to time may reasonably request.
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<PAGE> 17
4.5. Expenses. The Company will bear all expenses of registrations
pursuant to this Article IV (other than underwriting discounts and commissions
and brokerage commissions and fees, if any, payable with respect to shares of
Purchaser's Stock sold by the Purchaser and legal and audit fees incurred by
the Purchaser in connection with such registration, it being understood,
however, that legal fees reimbursable pursuant to Section 4.8 shall remain the
responsibility of the Company), including, without limitation, registration
fees, printing expenses, expenses of compliance with blue sky or other state
securities laws, and legal and audit fees incurred by the Company in connection
with such registration and amendments or supplements in connection therewith.
4.6. Cooperation. In connection with any registration of
Purchaser's Stock pursuant to this Article IV, the Company agrees to:
(a) enter into such customary agreements (including an
underwriting agreement containing such representations and warranties by the
Company and such other terms and provisions, including indemnification
provisions, as are customarily contained in underwriting agreements for
comparable offerings and, if no underwriting agreement is entered into, an
indemnification agreement on such terms as is customary in transactions of such
nature) and take all such other actions as the Purchaser or the underwriters,
if any, participating in such offering and sale may reasonably request in order
to expedite or facilitate such offering and sale;
(b) use its best efforts to furnish, at the request of any
underwriters participating in such offering and sale, (i) a comfort letter or
letters, dated the date of the final prospectus with respect to the Purchaser's
Stock and/or the date of the closing for the sale of the Purchaser's Stock from
the independent certified public accountants of the Company and addressed to any
underwriters participating in such offering and sale, which letter or letters
shall state that such accountants are independent with respect to the Company
within the meaning of Rule 1.01 of the Code of Professional Ethics of the
American Institute of Certified Public Accountants and shall address such
matters as the underwriters may reasonably request and as may be customary in
transac-
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<PAGE> 18
tions of a similar nature for similar entities and (ii) an opinion, dated the
date of the closing for the sale of the Purchaser's Stock, of the counsel
representing the Company with respect to such offering and sale (which counsel
may be the General Counsel of the Company or other counsel reasonably
satisfactory to the Purchaser), addressed to any such underwriters, which
opinion shall address such matters as they may reasonably request and as may be
customary in transactions of a similar nature for similar entities; and
(c) make available for inspection by the Purchaser, the
underwriters, if any, participating in such offering and sale (which inspecting
underwriters shall, if reasonably possible, be limited to any manager or
managers for such participating underwriters), counsel for the Purchaser, one
accountant or accounting firm retained by the Purchaser and any such
underwriters, or any other agent retained by the Purchaser or such
underwriters, all financial and other records, corporate documents and
properties of the Company, and supply such additional information, as they
shall reasonably request, provided that the Company may condition any such
access upon execution of appropriate confidentiality provisions.
4.7 Action to Suspend Effectiveness; Supplement to Registration
Statement. (a) the Company will notify the Purchaser promptly of (i) any
action by the Commission to suspend the effectiveness of the registration
statement covering the Purchaser's Stock or the institution or threatening of
any proceeding for such purpose (a "stop order") or (ii) the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Purchaser's Stock for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. Immediately upon receipt of
any such notice, the Purchaser shall cease to offer or sell any Purchaser's
Stock pursuant to the registration statement in the jurisdiction to which such
stop order or suspension relates. The Company will use all reasonable efforts
to prevent the issuance of any such stop order or the suspension of any such
qualification and, if any such stop order is issued or any such qualification
is suspended, to obtain as soon as possible the withdrawal or revocation
thereof, and will notify the Purchaser and its counsel at the earliest
practicable date of the date on which the Purchaser may offer and
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<PAGE> 19
sell Purchaser's Stock pursuant to the registration statement.
(b) Within the applicable period referred to in Section 4.3
following the effectiveness of a registration statement filed pursuant to this
Article IV, the Company will notify the Purchaser promptly of the occurrence of
any event or the existence of any state of facts that, in the judgment of the
Company, should be set forth in such registration statement. Immediately upon
receipt of such notice, the Purchaser shall cease to offer or sell any
Purchaser's Stock pursuant to such registration statement, cease to deliver or
use such registration statement and, if so requested by the Company, return to
the Company, at its expense, all copies (other than permanent file copies) of
such registration statement, in each case until such registration statement has
been amended or supplemented as hereinafter provided. The Company will, as
promptly as practicable, take such action as may be necessary to amend or
supplement such registration statement in order to set forth or reflect such
event or state of facts. The Company will furnish copies of such proposed
amendment or supplement to the Purchaser and its counsel and will not file or
distribute such amendment or supplement without the prior consent of the
Purchaser, which consent shall not be unreasonably withheld.
4.8. Indemnification. (a) In the event of the registration of any
of Purchaser's Stock under the Securities Act pursuant to the provisions of
this Article IV, the Company will, to the extent permitted by law, indemnify
and hold harmless the Purchaser, its Affiliates and Associates and each other
person, if any, who controls the Purchaser for purposes of the Securities Act
(each an "indemnified person") against any losses, claims, damages or
liabilities, joint or several, to which such indemnified person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of material fact
contained or incorporated by reference in any registration statement under
which such Purchaser's Stock was registered under the Securities Act, any final
prospectus contained therein (as such may be amended or supplemented) or any
document incorporated by reference therein, or arise out of
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<PAGE> 20
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements made
therein not misleading in light of the circumstances in which made, and will
reimburse each such indemnified person for any legal or any other expenses
reasonably incurred by such indemnified person in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability (i) arises out of or is based
upon any untrue statement or alleged untrue statement or omission or alleged
omission made or incorporated by reference in such registration statement or
such final prospectus (as such may be amended or supplemented) in reliance upon
and in conformity with written information furnished to the Company by such
indemnified person specifically for use in the preparation thereof, (ii) arises
in connection with a sale of Purchaser's Stock by such indemnified person in
contravention of Section 4.7(b) hereof or (iii) financial information provided
to the Company by the Purchaser or Kinney in connection with the transactions
contemplated by the Purchase Agreement, dated as of February 3, 1995, as
amended, by and among LFS, Kinney and the Purchaser. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of such indemnified person and shall survive any transfer of such
Purchaser's Stock by the Purchaser.
(b) In the event of the registration of any Purchaser's Stock
under the Securities Act pursuant to the provisions hereof, the Purchaser will,
to the extent permitted by law, indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the registration
statement and each other person, if any, who controls the Company for purposes
of the Securities Act against losses, claims, damages or liabilities, joint or
several, to which the Company or such director, officer or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
material fact contained in any registration statement under which such
Purchaser's Stock was registered under the Securities Act, any final prospectus
contained there-
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<PAGE> 21
in (as such may be amended or supplemented) or any document incorporated by
reference therein, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading in light of the
circumstances in which made, which untrue statement or alleged untrue statement
or omission or alleged omission has been made in reliance upon and in
conformity with written information furnished to the Company by the Purchaser
specifically for use in the preparation thereof, and will reimburse the Company
and each such director, officer or controlling person for any legal or any
other expenses reasonably incurred by the Company or such director, officer or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action.
(c) If the indemnification provided for in this Section 4.8 is
unavailable to a party that would have been an indemnified party hereunder in
respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each party that would have been an
indemnifying party thereunder shall, in lieu of indemnifying such indemnified
party, contribute to the extent permitted by law to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and such
indemnified party on the other hand in connection with the statement or omission
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof). The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or such indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement of omission. Both parties acknowledge and
agree that it would not be just and equitable if contribution pursuant to this
Section 4.8(c) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 4.8(c). The amount paid or payable by an indemnified
party as a result of the loss-
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es, claims, damages or liabilities (or actions in respect thereof) referred to
above in this Section 4.8(c) shall include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claims (which shall be limited as provided in
Section 4.8(f) if the indemnifying party has assumed the defense of any such
action in accordance with the provisions thereof). No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(d) Indemnification or, if appropriate, contribution similar to
that specified in the preceding provisions of this Section 4.8 (with appropriate
modifications) shall be given by the Company and the Purchaser with respect to
statements or omissions contained in applications or other written information
filed in any state or other jurisdiction in connection with the registration or
other qualification of such Shares under applicable state securities or blue sky
laws or regulations.
(e) In the event of any underwritten offering of Purchaser's
Stock under the Securities Act pursuant to this Article IV, the Company and the
Purchaser agree, to the extent practicable, to enter into an underwriting
agreement, in customary form (or, in the case of a registration statement
pursuant to Section 4.1 in such form as the Company may determine), with the
underwriters thereof, which underwriting agreement may contain additional
provisions with respect to indemnification and contribution.
(f) Any person entitled to indemnification hereunder shall (1)
give prompt written notice to the indemnifying party after the receipt by such
person of any written notice of the commencement of any action, suit, proceeding
or investigation or threat thereof made in writing for which such person intends
to claim indemnification or contribution pursuant to this Agreement and (2)
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided, however, that any
person entitled to indemnification hereunder shall have the right to employ
separate counsel and to participate in
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<PAGE> 23
the defense of such claim, but the fees and expenses of such counsel shall be
the responsibility of such person unless (i) the indemnifying party has agreed
in writing to pay such fees or expenses or (ii) the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party has reasonably concluded that there may be a conflict of
interest between the indemnifying party and the indemnified party with respect
to such claim or that defenses are available to the indemnified party or the
indemnifying party with respect to such claim that are not available to the
other, and if the person notifies the indemnifying party in writing that such
person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such person. Whether or not such defense is assumed by
the indemnifying party, the indemnifying party will not be subject to any
liability for any settlement made without its consent (but such consent will not
be unreasonably withheld). No indemnifying party will consent to the entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to each
indemnified party of a release from all liability in respect of such claim or
litigation. If the indemnifying party is not entitled to, or elects not to,
assume the defense of a claim, it will not be obligated to pay the fees and
expenses of more than one counsel (plus one local counsel) for all indemnified
parties.
4.9. Registration Rights of Transferees. Notwithstanding anything to
the contrary contained herein, the Purchaser may assign its rights under this
Article IV with respect to any shares of Preferred Stock (or Common Stock issued
upon conversion of the Preferred Stock) sold or otherwise transferred by the
Purchaser to the transferee thereof, provided that such transferee, as a
condition of such assignment, executes and delivers to the Company an agreement
to be bound by the provisions of this Article IV as if it were the Purchaser. In
the event of any such assignment, (x) references in this Article IV to the
Purchaser shall be deemed to include any and all such transferees and (y) any
actions, demands or consents to be made or given by the Purchaser shall be
deemed made or given if made or given by holders of 50%
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<PAGE> 24
or more in economic interest of the Shares (including, for these purposes,
Shares that have been converted).
4.10. Changes in Common Stock. If, and as often as, there are any
changes in or exchanges of the Common Stock by way of stock split, stock
dividend, combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions of this Article IV (including, but
not limited to, the definition of "Purchaser's Stock"), as may be required, so
that the rights and privileges granted hereby shall continue with respect to the
Common Stock as so changed or exchanged and shall apply to any securities of the
Company or another issuer received in any such transaction.
4.11. Standstill. If so requested by the managing underwriter in an
underwritten public offering of the Company's shares, the Purchaser shall not
effect any public sale or distribution of the issue being registered or a
similar security of the Corporation or any securities convertible into or
exchangeable or exercisable for such securities, including a sale pursuant to
Rule 144 or Rule 144A (or any similar provisions then in force) of the
Securities Act, during the 10 days prior to, and during the 180-day period
beginning on, the effective date of such registration statement (except as part
of such registration).
V. COVENANTS OF THE COMPANY
The Company covenants and agrees that:
5.1. Financial Statements and Other Reports. For so long as the
Purchaser owns Preferred Stock or Common Stock representing more than five
percent of the equity of the Company,
(a) The Company will, as soon as practicable and in any event
within 50 days after the end of each quarterly period (other than the last
quarterly period) in each fiscal year, furnish to the Purchaser statements of
consolidated net income and cash flows and a statement of changes in
consolidated stockholders' equity of the Company and its Subsidiaries for the
period
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<PAGE> 25
from the beginning of the then current fiscal year to the end of such quarterly
period, and a consolidated balance sheet of the Company and its Subsidiaries as
of the end of such quarterly period, setting forth in each case in comparative
form figures for the corresponding period or date in the preceding fiscal year,
all in reasonable detail and certified by an authorized financial officer of the
Company, subject to changes resulting from year-end adjustments; provided,
however, that delivery pursuant to paragraph (c) below of a copy of the
Quarterly Report on Form 10-Q (without exhibits unless requested by the
Purchaser) of the Company for such quarterly period filed with the Commission
shall be deemed to satisfy the requirements of this paragraph (a);
(b) the Company will, as soon as practicable and in any event
within 120 days after the end of each fiscal year, furnish to the Purchaser
statements of consolidated net income and cash flows and a statement of changes
in consolidated stockholders' equity of the Company and its Subsidiaries for
such year, and a consolidated balance sheet of the Company and its Subsidiaries
as of the end of such year, setting forth in each case in comparative form the
corresponding figures from the preceding fiscal year, all in reasonable detail
and examined and reported on by independent public accountants of recognized
standing selected by the Company; provided, however, that delivery pursuant to
paragraph (c) below of a copy of the Annual Report on Form 10-Q (without
exhibits unless requested by the Purchaser) of the Company for such fiscal year
filed with the Commission shall be deemed to satisfy the requirements of this
paragraph (b); and
(c) the Company will furnish to the Purchaser copies of all
such financial statements, proxy statements, notices and reports as it shall
send to its stockholders (promptly upon transmission to stockholders) and copies
of all such registration statements (without exhibits), other than registration
statements relating to employee benefit or dividend reinvestment plans, and all
such regular and periodic reports as it shall file with the Commission
(promptly upon filing with the Commission).
5.2 Operation of Business. Until the Closing Date, the Company will
not:
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<PAGE> 26
(a) enter into or become bound by any indenture, lease,
mortgage, deed of trust, loan agreement or other agreement or instrument that
would restrict, limit or impose conditions on the Company's compliance with the
provisions of this Agreement;
(b) declare, pay or set aside for payment any dividend or
other distribution (whether in cash, stock, property or otherwise) in respect
of any shares of its capital stock;
(c) subdivide or reclassify the outstanding shares of Common
Stock;
(d) issue any shares of capital stock of the Company or of any
Subsidiary; or
(e) redeem, purchase or otherwise acquire any shares of its
capital stock or any options, warrants or other rights to purchase or subscribe
to any of the foregoing.
5.3. Cooperation in Sale Transactions. In the event that the
Purchaser wishes to sell any shares of Preferred Stock or Common Stock in
accordance with the terms and conditions of this Agreement, the Company shall
reasonably cooperate with the Purchaser by providing publicly available
information regarding the Company to the Purchaser so as to enable such sales
to be made in accordance with applicable laws, rules and regulations
(including, without limitation, Rule 144 or any similar rule promulgated under
the Securities Act), and, if such sale is being made pursuant to Rule 144, by
using its reasonable efforts to comply with the current information
requirements under Rule 144 (provided that the Company can give no assurances
as to the availability of financial statements).
5.4. Hart-Scott-Rodino Filings. If a filing under the HSR Act is
required in connection with the acquisition of the Shares or any conversion of
the Shares, the Company agrees, upon request of the Purchaser, to take all
actions necessary to make, and to assist the Purchaser in making, any and all
such filings.
VI. COVENANTS OF THE PURCHASER
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<PAGE> 27
The Purchaser covenants and agrees that:
6.1. Transfer Restrictions. In any sale or transfer by the
Purchaser of Shares, or of the shares of Common Stock received upon conversion
of the Shares, the Purchaser will ensure that the purchaser or transferee
thereof, together with all other persons or entities with which such purchaser
or transferee forms a "group" as such term is used in Section 13(d) of the
Exchange Act), do not acquire in a single transaction or series of transactions
from the Purchaser more than 250,000 Shares (or 250,000 shares of the Common
Stock received upon conversion of the Shares, as adjusted for stock splits,
combinations, dividends or reclassifications having a record date after the
Closing Date). The Purchaser shall not engage in any transaction designed to
evade the provisions of this Section 6.1. The restrictions of this Section
6.1, however, shall not apply to the following transactions: (i) any
registered, underwritten resale of the Shares (or of the Common Stock received
upon conversion of the Shares) involving a public distribution pursuant to the
registration rights granted in Article IV hereof or (ii) any pledge of the
Shares (or the Common Stock received upon conversion of the Shares) provided
that the pledgee agrees to be bound by the restrictions of this Section 6.1 if
and when it acquires the pledged Shares or shares as if it were the Purchaser.
In any transaction subject to the restrictions of this Section 6.1 that occurs
prior to the Holding Period Date, the Purchaser agrees that as a condition of
such sale or transfer, the purchaser or transferee (and any subsequent
purchaser or transferee) must execute and deliver to the Company an agreement
to be bound by the provisions of this Section 6.1 as if it were the Purchaser.
VII. CONDITIONS PRECEDENT TO CLOSING
7.1. Conditions With Respect to Both Parties. The obligations of
both parties to consummate the Closing are subject to the following conditions:
(a) there shall not have been issued or be in effect (i) any
judgment, decree or order issued by any federal, state, local or foreign court
of competent jurisdiction or (ii) any statute, rule or regulation enacted or
promulgated by any federal, state, local or
24
<PAGE> 28
foreign legislative, administrative or regulatory body of competent
jurisdiction that, in either of cases (i) or (ii), prohibits the consummation
of the transactions contemplated hereby or makes such consummation illegal; and
(b) the Settlement Agreement shall have been entered into by
the Purchaser and the Company and be in full force and effect.
7.2. Conditions With Respect to the Purchaser. The obligation of
the Purchaser to consummate the Closing shall be subject to the condition
(unless such condition is expressly waived in writing by the Purchaser) that at
the Closing the representations and warranties of the Company herein shall have
been true and correct in all material respects as of the date hereof and shall
be true and correct in all material respects as of the Closing Date as if made
on and as of such date; the Company shall have performed in all material
respects all of its covenants and obligations under this Agreement to be
performed at or prior to the Closing; and the Purchaser shall have received at
the time of the Closing certificates from the Company reasonably satisfactory
in form to the Purchaser certifying to the satisfaction of all of the
conditions set forth in this Section 7.2.
7.3 Condition With Respect to the Company. The obligation of the
Company to consummate the Closing shall be subject to the condition (unless
such condition is expressly waived in writing by the Company) that at the
Closing the representations and warranties of the Purchaser herein shall have
been true and correct in all material respects as of the date hereof and shall
be true and correct in all material respects as of the Closing Date as if made
on and as of such date; the Purchaser shall have performed in all material
respects all of its covenants and obligations under this Agreement to be
performed at or prior to the Closing; and the Company shall have received at
the time of the Closing certificates from the Purchaser reasonably satisfactory
in form to the Company certifying to the satisfaction of all of the conditions
set forth in this Section 7.3.
VIII. TERMINATION
25
<PAGE> 29
8.1. Termination. This Agreement may be terminated:
(a) at any time prior to the Closing Date by the mutual
consent of the Purchaser and the Company;
(b) by either the Purchaser or the Company if the Closing
shall not have occurred on or before May 31, 1996 (unless such failure of the
Closing to occur is by reason of a breach of this Agreement or the Settlement
Agreement by the party seeking to terminate); or
(c) at any time prior to the Closing Date (i) by the Purchaser
if there has been a breach in any material respect on the part of the Company
in or of any of the representations and warranties of the Company set forth
herein, which breach cannot be or has not been promptly cured after notice by
the Purchaser of such breach, or if there has been any failure on the part of
the Company to comply in any material respect with any of its obligations or to
perform in any material respect any of its covenants hereunder, or (ii) by the
Company if there has been a breach in any material respect on the part of the
Purchaser set forth herein, which breach cannot be or has not been promptly
cured after notice by the Purchaser of such breach, or if there has been any
failure on the part of the Purchaser to comply in any material respect with any
of its obligations or perform in any material respect any of its covenants
hereunder.
8.2. Effect of Termination. In the event of termination of this
Agreement as provided above, this Agreement shall forthwith become void and
there shall be no liability on the part of either the Purchaser or the Company
(or their respective officers or directors), except for liability arising from
a breach of this Agreement.
IX. GENERAL PROVISIONS
9.1. Public Disclosure and Confidentiality. Each party hereby
agrees that, except as may be reasonably viewed by the disclosing party as
appropriate in view of the requirements of applicable law or regulations of any
national securities exchange on which their securities may be listed, no press
release or public an-
26
<PAGE> 30
nouncement or communication will be made or caused to be made concerning the
execution or performance of this Agreement or the Settlement Agreement or the
terms hereof or thereof unless specifically approved in advance by both
parties. In the event that a party reasonably views disclosure as appropriate
as contemplated by the previous sentence, such disclosing party shall use its
reasonable efforts to provide a copy of such disclosure to the other party
within a reasonable period of time prior to such disclosure.
9.2. Certain Definitions. For purposes of this Agreement, the
following terms shall have the meanings indicated:
"Affiliate" has the meaning ascribed to it in Rule 12b-2 promulgated
under the Exchange Act, as in effect on the date hereof; provided, however,
that the Purchaser shall not be deemed to be an Affiliate of the Company.
"Associate" has the meaning ascribed to it in Rule 12b-2 promulgated
under the Exchange Act, as in effect on the date hereof; provided, however,
that the Purchaser shall not be deemed to be an Associate of the Company.
The terms set forth below are defined in the Sections indicated
adjacent thereto:
Term Section
---- -------
Agreement Preamble
Authority 2.3
Closing 1.2(a)
Closing Date 1.2(a)
Common Stock 2.4
Company Preamble
Condition 2.3
Encumbrances 1.1
Exchange Act 2.3
Holding Period Date 4.2(b)
indemnified person 4.8(a)
Kinney 2.5
LFS 2.2
Preferred Stock Recitals
Purchaser Preamble
27
<PAGE> 31
<TABLE>
<S> <C>
Purchaser's Stock 4.1
Securities Act 2.3
Settlement Agreement Recitals
Shares 1.1
stop order 4.7(a)
Subsidiary 2.1
</TABLE>
9.3. Survival of Representations, Warranties and Agreements. Each
representation and warranty in this Agreement and each agreement or covenant in
this Agreement which does not by its own terms expire on or prior to the Closing
Date shall survive the Closing.
9.4. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or sent by
certified mail, telex or telecopy (and promptly confirmed by certified mail,
return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to the Purchaser, to it at:
Woolworth Corporation
233 Broadway
New York, NY 10279
Attention: General Counsel
Telecopier: (212) 553-2152
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
Attention: Peter J. Neckles
Telecopier: (212) 735-2000
(b) if to the Company, to it at:
Kids Mart, Inc.
801 S. Sentous Avenue
City of Industry, CA 91748
Attention: Bernard Tessler
Telecopier: (818) 854-3832
with a copy to:
28
<PAGE> 32
Kaye, Scholer, Fierman, Hays
& Handler, LLP
425 Park Avenue
New York, NY 10022
Attention: Mitchel H. Perkiel
Telecopier: (212) 836-8689
9.5. Entire Agreement; Counterparts; Assignment. (a) This Agreement
(including the documents and instruments referred to or incorporated herein),
together with the Settlement Agreement (and the exhibits and documents referred
to therein), constitutes the entire agreement, and supersedes all of the prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof.
(b) This Agreement may be executed in two or more
counterparts which together shall constitute a single agreement.
(c) This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, heirs and permitted
assigns, but otherwise (except for transferees of Preferred Stock and/or Common
Stock under Article IV) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder. This Agreement is not
assignable except (i) to transferees of Preferred Stock and/or Common Stock from
the Purchaser to the extent contemplated by Section 4.9 hereof, (ii) by consent
of each of the parties hereto or (iii) by operation of law; provided, however,
that the Purchaser may assign its rights and obligations hereunder to any
Affiliate or Associate of the Purchaser; and provided further that any
transferee to whom this Agreement is assigned must, as a condition to such
assignment, execute and deliver to the Company an agreement to be bound by the
terms of this Agreement. Any purported assignment of this Agreement in
violation of this Section 9.5(c) shall be null and void.
9.6. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES CREATED HEREBY SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE
OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
29
<PAGE> 33
9.7. Severability of Provisions. If any provision or any portion of
any provision of this Agreement or the application of any such provision or any
portion thereof to any person or circumstance, shall be held invalid or
unenforceable, to the extent permitted by law, the remaining portion of such
provision and the remaining provisions of this Agreement, or the application of
such provision or portion of such provision as is held invalid or unenforceable
to persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby.
9.8. Modification; Waiver. No modification of or amendment to this
Agreement shall be valid unless in a writing signed by the parties hereto
referring specifically to this Agreement and stating the parties' intention to
modify or amend the same. Any waiver of any term or condition of this
Agreement must be in a writing signed by the party or parties sought to be
charged with such waiver referring specifically to the term or condition to be
waived, and no such waiver shall be deemed to constitute the waiver of any
other breach of the same or of any other term or condition of this Agreement.
9.9. Expenses. Except as otherwise expressly provided in this
Agreement, each party hereto shall pay its own expenses incidental to the
preparation of this Agreement, the carrying out of the provisions hereof and
the consummation of the transactions contemplated hereby.
9.10. Equitable Relief. Each party acknowledges that, in the event
of any breach of this Agreement by a party, the other party would be
irreparably and immediately harmed and could not be made whole by monetary
damages. It is accordingly agreed that such other party, in addition to any
other remedy to which it may be entitled, shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
compel specific performance of this Agreement.
9.11. Joint Drafting. The parties have jointly drafted this
Agreement, and this Agreement shall not be interpreted against or in favor of
any of the parties on the basis that any of the parties participated in the
drafting of this Agreement.
30
<PAGE> 34
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers duly authorized hereunto, all as of the
date first written above.
KIDS MART, INC.
By: /s/ BERNARD TESSLER
-------------------------------
Name: Bernard Tessler
Title: President
WOOLWORTH CORPORATION
By: /s/ JOHN H. CANNON
-------------------------------
Name: John H. Cannon
Title: Vice President & Treasurer
<PAGE> 35
[KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP LETTERHEAD]
May 23, 1996
BY HAND
- -------
Peter Neckles, Esq.
Skadden, Arps, Slate,
Meager & Flom
919 Third Avenue
New York, NY 10022
Re: Kids Mart, Inc.
---------------
Dear Peter:
In connection with the "closing" of the "Mutual Release and Settlement
Agreement" (the "Settlement Agreement") among Kids Mart, Inc., LFS Acquisition
Corp. and Jack Koffman, on the one hand (collectively "Kids Mart"), and
Woolworth Corporation and Kinney Shoe Corporation, on the other hand
("Woolworth"), Kids Mart hereby acknowledges that the releases running to them
and set forth in paragraph "9" of the Settlement Agreement will not become
effective until such time as Kids Mart, Inc. causes to be delivered to you, on
behalf of Woolworth, (i) the stock certificate representing the issuance to
Woolworth of the preferred stock contemplated under paragraph "3" of the
Settlement Agreement and (ii) the releases of Richard B. Frost, Mark J. Hanna,
Donald H. Baxter, Marshall E. Rosenberg and Bernard E. Tessler, contemplated
under paragraph "7" of the Settlement Agreement.
When the subject preferred stock certificate and releases are delivered,
the aforesaid releases running to and for the benefit of Kids Mart shall
automatically become effective.
<PAGE> 36
Peter Neckles, Esq. 2 May 23, 1996
Please provide me with an acknowledged copy of this letter of
understanding to my file.
Sincerely,
/s/ MITCHEL H. PERKIEL
----------------------
Mitchel H. Perkiel
MHP/alz
Acknowledged and agreed to
as of the date hereof
SKADDEN ARPS SLATE MEAGHER & FLOM
Attorneys for Woolworth Corporation
By: /s/ PETER NECKLES
-----------------------
Peter Neckles, Esq.
<PAGE> 37
[KAYE, SCHOLER, FIERMAN, HAYS & HANDLER LETTERHEAD]
May 24, 1996
BY HAND AND BY TELECOPY
- -----------------------
Peter Neckles, Esq.
Skadden, Arps, Slate,
Meagher & Flom
919 Third Avenue
New York, NY 10022
Re: Kids Mart, Inc.
---------------
Dear Peter:
This letter supplements my letter to you of yesterday concerning the
timing of the effectiveness of Woolworth Corporation's releases.
In connection with the "closing" of the "Mutual Release and Settlement
Agreement" (the "Settlement Agreement") among Kids Mart, Inc., LFS Acquisition
Corp. and Jack Koffman, on the one hand (collectively "Kids Mart"), and
Woolworth Corporation and Kinney Shoe Corporation, on the other hand
("Woolworth"), Kids Mart hereby acknowledges that the releases running to them
and set forth in paragraph "9" of the Settlement Agreement will not become
effective until such time as Kids Mart, Inc. causes to be delivered to you, on
behalf of Woolworth, the opinion of Rosenberg, Reisman & Stein contemplated
under paragraph "1.2" of the Stock Acquisition Agreement.
When the subject opinion, preferred stock certificate and releases are
delivered, the aforesaid releases running to and for the benefit of Kids Mart
shall automatically become effective.
<PAGE> 38
Peter Neckles, Esq. May 24, 1996
2
Please provide me with an acknowledged copy of this letter of
understanding to my file.
Sincerely,
/s/ MITCHEL H. PERKIEL
-----------------------------------
Mitchel H. Perkiel
MHP/alz
Acknowledged and agreed to
as of the date hereof
SKADDEN ARPS SLATE MEAGHER & FLOM
Attorneys for Woolworth Corporation
By: /s/ PETER NECKLES
--------------------------
Peter Neckles, Esq.
<PAGE> 39
[FLORIDA DEPARTMENT OF STATE LETTERHEAD]
May 24, 1996
CSC Networks
1201 Hays Street
Tallahassee, FL 32301-2607
Re: Document Number P93000024509
The Articles of Amendment to the Articles of Incorporation for KIDS MART, INC.,
a Florida corporation, were filed on May 24, 1996.
The certification requested is enclosed.
Should you have any question regarding this matter, please telephone (904)
487-6050, the Amendment Filing Section.
Annette Hogan
Corporate Specialist
Division of Corporations Letter Number: 996A00026200
Account number: 072100000032 Account charged: 245.00
<PAGE> 40
[LOGO]
[STATE OF FLORIDA DEPARTMENT OF STATE]
I certify the attached is a true and correct copy of the Articles of Amendment,
filed on May 24, 1996, to Articles of Incorporation for KIDS MART, INC., a
Florida corporation, as shown by the records of this office.
The document number of this corporation is P93000024509.
Given under my hand and the
Great Seal of the State of Florida,
at Tallahassee, the Capital, this the
Twenty-fourth day of May, 1996
[SEAL] /s/ SANDRA B. MORTHAM
---------------------
Sandra B. Mortham
Secretary of State
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND STATEMENT OF OPERATIONS ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-3-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> APR-27-1996
<CASH> 1,335
<SECURITIES> 0
<RECEIVABLES> 1,670
<ALLOWANCES> 0
<INVENTORY> 15,868
<CURRENT-ASSETS> 20,442
<PP&E> 8,572
<DEPRECIATION> 1,987
<TOTAL-ASSETS> 27,314
<CURRENT-LIABILITIES> 22,527
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,384
<TOTAL-LIABILITY-AND-EQUITY> 27,314
<SALES> 26,403
<TOTAL-REVENUES> 26,403
<CGS> 15,942
<TOTAL-COSTS> 15,942
<OTHER-EXPENSES> 12,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> (2,703)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,703)
<DISCONTINUED> 0
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<CHANGES> 0
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<EPS-PRIMARY> (0.55)
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