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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K/A

ANNUAL REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(as amended)
For the period ended January 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. [ ]

Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

AS OF SEPTEMBER 4, 1996, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE ISSUER BASED ON THE AVERAGE BID AND ASK PRICES OF $1.50
AND $2.75, RESPECTIVELY, OF SUCH COMMON STOCK IS $6,916,161 BASED UPON AN
AVERAGE PRICE OF $2.125 MULTIPLIED BY 3,254,664 SHARES OF COMMON STOCK
OUTSTANDING ON SUCH DATE HELD BY NON-AFFILIATES.

AS OF SEPTEMBER 4, 1996, THE ISSUER HAD A TOTAL OF 4,943,000 SHARES OF COMMON
STOCK, PAR VALUE $0.0001 PER SHARE, OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE:
None.
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The Registrant hereby amends its Annual Report on Form 10-K for the
fiscal year ended January 27, 1996 in its entirety as follows:

KIDS MART, INC.
10-K/A
TABLE OF CONTENTS

Page

PART I
Item 1. Business 1

Item 2. Properties 7

Item 3. Legal Proceedings 9

Item 4. Submission of Matters to a Vote of Security-Holders 10

PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11

Item 6. Selected Financial Data 12

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12

Item 8. Financial Statements 16

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 16

PART III
Item 10. Directors and Executive Officers 17

Item 11. Executive Compensation 18

Item 12. Security Ownership of Certain Beneficial Owners and Management 19

Item 13. Certain Relationships and Related Transactions 20

Item 14. Exhibits and Reports on Form 8-K 20

SIGNATURES 21
FINANCIAL STATEMENTS F-1
EXHIBITS

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PART I
ITEM 1. BUSINESS

INTRODUCTION

INTRODUCTORY NOTE. This Annual Report on Form 10-K 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 "--Private Securities Litigation Reform Act."

THE COMPANY. Kids Mart, Inc. (together with its subsidiaries, the "Company"), a
Florida corporation, is a value oriented chain of children's specialty apparel
stores generally located in strip shopping centers. At January 27, 1996, it
operated 296 children's apparel stores in 20 states under the names Little Folks
(14 stores) and Kids Mart (282 stores). See "--Recent Developments --Store
Closure Plan" for information regarding the closure of approximately 100 of the
Company's stores during the third quarter of fiscal year 1996.

The Company (then known as Frost Hanna Acquisition Group, Inc.) was
formed in April 1993 to serve as a vehicle to effect a merger, exchange of
capital stock, asset acquisition or other similar business combination with an
operating business. In September 1993, the Company consummated an initial public
offering of its equity securities from which it derived net proceeds of
approximately $6.6 million. Approximately $5.7 million (representing
approximately 80% of proceeds from the initial public offering, inclusive of
interest earned thereon) was held in escrow, pending the consummation of the
Acquisition (as hereinafter defined) described below and was released to the
Company upon consummation of the Merger (as hereinafter defined) also described
below.

LFS Acquisition Corp. ("LFS") purchased the Little Folks and Kids Mart
business from Woolworth Corporation and Kinney Shoe Corporation (collectively
"Woolworth") in May 1995 (the "Acquisition"). On January 3, 1996, the Company
merged with LFS. See "--Organization, Acquisition and Merger."

In January 1996, the Company changed its fiscal year from a calendar
basis ending on December 31 to a 52/53 week fiscal year ending on the Saturday
nearest January 31 and changed its name to Kids Mart, Inc.

See "--Organization, Acquisition and Merger" and "Item 3. Legal
Proceedings."

RECENT DEVELOPMENTS

CONTINUING LOSSES AND CASH FLOW CONSTRAINTS. The Company has experienced
substantial losses and cash flow constraints since the Acquisition. Net losses
were $5.7 million for the eight months ended January 27, 1996, and $8.6 million
for the six months ended July 27, 1996 (unaudited). No assurance can be given
as to when, if ever, the Company will become profitable. See "--Private
Securities Litigation Reform Act."

The Company has experienced difficulties in obtaining adequate credit
support from its factors. As a result, the Company has been required to operate
on shortened payment terms from its vendors, creating significant cash flow
constraints. Through early May 1996, the Company had been able to obtain
sufficient merchandise to satisfy its requirements. However, during late May,
June, July and August 1996, the Company was 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 relies heavily on inventory
purchased during these months to generate sales during the back-to-school season
in August and September. The Company's failure to achieve adequate sales levels
in the 1996 back-to-school and holiday seasons would have a material adverse
effect on its business.

The Company's recurring losses, cash flow constraints, and anticipated
loan covenant violations (see "--Other Developments") raise substantial doubt
about its ability to continue as a going concern. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Item 14. Financial Statements." 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
interim and 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,

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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 these efforts are unsuccessful, as a last
resort, the Company may consider the possible filing of a petition for
reorganization under Chapter 11 of the Federal bankruptcy laws. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

STORE CLOSURE PLAN. In response to the Company's going concern issues,
management implemented a store closure plan (the "Store Closure Plan") during
the third quarter of fiscal year 1996 that immediately closed approximately 100
stores (the "Closed Stores") and reduced staff at its distribution center and
administrative offices. The Store Closure Plan will require, during the third
quarter of fiscal year 1996, an estimated charge to operations of approximately
$5.4 million, principally related to store rent liability, closing costs, and
separation pay. See "--Personnel." The Company has received the consent of
Foothill Capital Corporation ("Foothill"), the Company's principal lender, to
the 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 30 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.

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.

In connection with the Store Closure Plan, the Company reduced staff at
its distribution center and administrative offices, with a corresponding
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.

In addition to the Store Closure Plan, since May 1995, management has taken the
following steps to improve the Company's operations:

- implemented a coordinated merchandising plan with a discernible
style and fashion;

- increased the percentage to total inventory of higher margin
private label merchandising;

- reduced its work force;

- identified and closed unprofitable stores (37 were closed during
the eight months ended January 27, 1996, and an additional 14 were
closed by July 27, 1996);

- renegotiated certain store leases;

- instituted a markdown strategy to support the Company's inventory
turnover goals;

- targeted marketing efforts to "Preferred Customer" cardholders;

- added a limited number of unique toys and stuffed animals to most
of its stores; and

- improved customer service to create a friendly, neighborhood store
atmosphere

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INTERIM FINANCING. The Company requires immediate financing to purchase
inventory for the 1996 holiday sales season. Failure to achieve adequate sales
levels in the 1996 holiday season would have a material adverse effect on the
Company's business. Management has held discussions with financial advisors and
potential investors with respect to interim financing through short-term
subordinated debt, equity investment, or debt restructuring. The Company has
raised approximately $0.9 million through a sale/leaseback transaction and
conversion of a vendor account payable to shares of the Company's common stock,
par value $.0001 per share, (the "Common Stock"). See "--Other Developments."
However, the Company has not yet entered into any agreements with respect to
additional 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.

PERMANENT FINANCING. 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.

OTHER DEVELOPMENTS. The Company anticipates violation of certain of its loan
covenants under its credit facility with Foothill during the remainder of fiscal
year 1996. The Company is currently in negotiations with Foothill to waive or
amend these covenants. There can be no assurance that Foothill will waive or
amend the covenants or that the Company will not violate other covenants in the
future. If the Company does violate any such covenants, there can be no
assurance that Foothill will not declare the Company in default under the credit
facility and seek to exercise its remedies under the credit facility, including
foreclosure of the Company's assets. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

The Company has arranged an overdraft facility for up to $2.0 million
with Foothill during the period from June 10, 1996 to February 15, 1997. 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 equity on or before September 30, 1996, or to
have substantially completed a private placement of the Company's securities by
that date (the "Covenant").

As of September 16, 1996, the Company has raised approximately
$0.9 million of the $2.0 million needed through the transactions discussed
below.

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.

There can be no assurance that the Company will raise the additional
$1.1 million necessary to avoid a violation of the Covenant, that the Company
will not violate other covenants under its credit facility, or that if a
violation occurs, that Foothill will not declare the Company in default and
seek to exercise its remedies under the credit facility, including
foreclosure of the Company's assets.

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 "Item 1. Business --Recent Developments" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in other parts of this Form 10-K 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

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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.

BUSINESS

MERCHANDISING. The Company positions itself in the market by offering children's
fashions with a coordinated and stylish look at moderate prices. It accomplishes
this by consistently offering customers value at a reasonable price and
utilizing its position as a large retailer in the children's specialty store
apparel market.

The Company seeks store sites that are highly visible, well-signed and
provide easy customer access. The Company favors locations in strip centers with
established anchor tenants next to heavily trafficked roads and within
convenient reach of its customer base. Management prefers strip center locations
over mall locations because occupancy costs are less expensive, and these
locations match its core customer's shopping needs.

The Company's stores carry a full range of clothing and accessories
for children from infants to 11 years of age, including pants, jeans, tops,
skirts, dresses, coveralls, sweaters, shorts, socks, belts, hats, outerwear,
backpacks, sunglasses and many other items carried both on a seasonal and
year-round basis. Management has increased inventory levels for infant
merchandise because this category typically generates higher gross margins.

Currently, approximately 32% of the merchandise sold by the Company is
private label, primarily under the Way Cool, U BET and Bebe Terrifique labels.
The Company plans to gradually increase the percentage of private label
merchandise to 65% over the next three years, if warranted. This emphasis on
private label merchandise should result in better gross profit margins, better
direct sourcing from manufacturers and better control over styles, fabrics and
colors. The use of private label merchandise, however, brings with it the
associated burdens of quality control and unfavorable delivery schedules. The
Company monitors both these issues closely. The Company currently has a
product development department that is responsible for working with
manufacturers, both domestic and overseas, to design merchandise to be sold
under the Company's private labels.

The Company offers a small selection of creative toys and unique
stuffed animals. These toys are designed for newborn children to 11 year olds.
Presently the Company is generating approximately one-half of toy sales from
impulse items under $5 each, and the remainder from more expensive toys
primarily carried during the fourth quarter.

The success of the Company's merchandising strategy will be dependent
on its ability to generate sufficient cash flow to sustain operations.

See "--Recent Developments."

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MARKETING AND ADVERTISING. The Company maintains a "Preferred Card" program that
had approximately 607,000 card holders as of January 27, 1996. Of these,
approximately 498,000 holders had shopped at one or more of the Company's stores
during the past 18 months. Sales of the card, which can be purchased on a yearly
basis for $6 per card, resulted in revenue of $2.3 million for the eight months
ended January 27, 1996. Purchase of the card entitles the holder to a 10%
discount on all regular price purchases and other special privileges. The
Company maintains a data base that includes demographic and purchasing data on
these cardholders. The Company conducts periodic targeted marketing campaigns
utilizing this list.

The Company historically spent significant amounts of its advertising
dollars on national programs. Current management has reduced national
advertising in favor of local and point of purchase programs which it believes
are more effective and less costly.

The Company operates an in-house advertising and marketing department
with a staff of five. The department creates all of the Company's printed
materials, including mailers, newspaper advertisements, and in-store displays.
The Company's marketing strategy is aimed at attracting customers to the store
by stressing promotional pricing, value, and fashion. Many of the Company's
sales are at the beginning of the important selling seasons, including
Christmas, back-to-school, and spring and summer. The Company's stores feature
wall and selling-floor displays that coordinate merchandise in order to promote
multiple sales.

MARKET. The Company's largest market is California where it maintained 43% of
its stores and derived approximately 45% of its revenue during the eight months
ended January 27, 1996. Sales of apparel and accessories represented 87% and 13%
of the Company's revenue, respectively during the eight months ended January 27,
1996. After giving effect to the Store Closure Plan, the Company's largest
market remained California where 52% of its stores are located. See "--Recent
Developments."

PRODUCT SOURCING AND MANUFACTURING. The Company has no in-house manufacturing
capability. Approximately 32% of the Company's merchandise is currently
manufactured to its private label specifications by independent factories
located in the United States and throughout the world. The Company utilizes a
buying agent in Hong Kong to coordinate overseas production. Approximately 35%
of the Company's private label capacity is produced by fewer than 30
manufacturers. On September 11, 1996, the Company entered into an agreement with
one of its vendors to use its best efforts to purchase annually a minimum of $10
million of merchandise inventory, as defined, from this vendor. As part of the
agreement, the vendor has converted $0.65 million of amounts owed to it by the
Company into 433,333 shares of Common Stock. See "Recent Developments --Other
Developments."

TRADEMARKS AND PRIVATE LABELS. The Company owns the right to the following
trademarks: Bebe Terrifique, Kids Mart, Kidsmart (pending), Little Folk, Little
Folks, Little Folk Shop, Little Folk Shops, Way Cool, U Bet and others.

RESTRICTION ON IMPORTS. The Company's operations are subject to the customary
risks of doing business abroad, including fluctuations in the value of
currencies, customs duties and related fees, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, work stoppages and
political instability in certain parts of the world. However, the Company
believes that it has reduced these risks by diversifying its offshore purchases
among various countries and factories. These risks have not had a material
adverse impact upon the Company's operations to date.

Imports into the United States are also affected by the cost of
transportation, the imposition of import duties and increased competition for
greater production abroad. The countries from which the Company's products are
imported may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect the Company's operations and its ability to import products
at current or increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring. The Company's imported products are
subject to United States customs duties and, in the ordinary course of its
business, the Company may be subject to claims for duties and other charges.

WAREHOUSING AND DISTRIBUTION. The Company leases a warehouse and distribution
center, approximately 118,500 square feet, located in City of Industry,
California. Management believes that the warehouse has current capacity to serve
as many as 500 stores and is therefore sufficient for the Company's needs. The
facility also contains the Company's executive, administrative and buying
offices.

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Merchandise purchased by the Company is received at this facility and
prepared for distribution to its stores. The functions performed at the facility
include quality control inspection, ticketing, packing and shipping. The
facility's automated sorting system ensures the proper flow of merchandise from
receipt to shipment. Shipments to each store are made by trucks operated
principally by common carriers. The Company ships to stores two to five times
per week, depending on seasonal volume.

PERSONNEL. At January 27, 1996, the Company had 831 full-time equivalent
employees comprised of 148 full-time employees in the administrative offices and
distribution center, 21 full-time field supervision personnel, and 661 full-time
and 1,223 part-time employees at the stores. After giving effect to the Stores
Closure Plan and staff reductions, the Company will have approximately:
511 full-time equivalent employees comprised of 136 employees in the
administrative offices and distribution center, 11 full-time field supervision
personnel, and 364 full-time and 728 part-time employees at the stores.
See "--Recent Developments."

TRANSITIONAL SERVICES. The Company receives information systems, accounting and
administrative services from Woolworth pursuant to the terms of a transition
service agreement (the "Service Agreement"). In return, the Company pays certain
fees to Woolworth. The initial term of the Service Agreement expired on May 31,
1996. In connection with a settlement reached under a Mutual Release and
Settlement Agreement (the "Settlement Agreement"), the Service Agreement was
extended to October 26, 1996, at which time the Service Agreement can be
extended on a month-to-month basis unless terminated by either party upon a
30-day notice. See "--Organization, Acquisition and Merger" and "Item 3. Legal
Proceedings."

The Company is currently upgrading its management information systems.
These systems will offer greater functionality and flexibility than systems
currently available to the Company under the Service Agreement with Woolworth.
Implementation of these systems is a high priority of management. Management had
originally estimated that the cost of this upgrade would be up to $5.5 million,
which includes financial and merchandise system software, main system hardware,
and POS (point-of-sale) hardware and software. As a result of the Store Closure
Plan, the POS hardware requirements have been reduced, and the estimated cost of
the upgrade is approximately $4.1 million. Approximately $0.9 million of systems
upgrade costs had been incurred as of July 27, 1996. The Company has entered
into an operating lease agreement for a significant portion of this equipment
and will fund the remaining portion from internally generated sources of funds
or additional financing. The Company may not establish its own systems by the
expiration date of the Service Agreement and may incur significant expenses in
excess of the budgeted amounts in developing such systems.

IMPACT OF COMPETITION. All aspects of the children's apparel specialty retail
industry are highly competitive. The Company competes with a number and variety
of retailers, mass merchandisers and warehouse clubs, including several national
chains, some of which have greater financial and marketing resources than the
Company. The principal competitors of the Company include Baby Gap/Gap Kids,
Gymboree, Kids "R" Us, Children's Place, Little Things, Mervyns, Wal-Mart, J.C.
Penney, Ross Stores, Target, Venture and Marshall's. Competition exists
primarily in the areas of price, product selection and service. Competitive
factors could require price reductions or increases in expenditures for
marketing and customer service that could adversely affect the Company's
operating results.

SEASONALITY. 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 income are realized
during the months of August, September, 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.

ORGANIZATION, ACQUISITION AND MERGER

The Company was formed in April 1993 to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating business. In September 1993, the Company
consummated an initial public offering of its equity securities from which it
derived net proceeds of approximately $6.6 million. Approximately $5.7 million
(representing approximately 80% of proceeds from the initial public offering,
inclusive of interest earned thereon) was held in escrow, pending the
consummation of the Acquisition described below and was released to the
Company upon consummation of the Merger also described below.

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On January 3, 1996, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated May 31, 1995, FH Sub Delaware,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company merged
with and into LFS (the "Merger"). As a result of the Merger, LFS became a wholly
owned subsidiary of the Company. Thereupon, the Company issued an aggregate of
2,678,000 shares (the "Shares") of Common Stock to the owners of all the issued
and outstanding shares of capital stock of LFS. The Shares constituted
approximately 54% of the outstanding shares of Common Stock of the Company.
Additional shares of Common Stock issuable upon the exercise of certain warrants
are held by a) the underwriter of the Company's initial public offering (110,000
shares) and b) the initial LFS investors (1,094,300 shares). Assuming full
exercise of all of the outstanding warrants to purchase shares of the Company's
Common Stock, the former LFS security holders would own approximately 61.4% of
the outstanding shares of the Company's Common Stock. Since the former LFS
investors own the controlling interest of the Company's Common Stock, the Merger
has been accounted for as a "reverse acquisition" as if LFS recapitalized its
ownership interest and then acquired the Company under the purchase method of
accounting by the issuance of 2,265,000 shares of its Common Stock. These
2,265,000 shares were valued at $6.2 million which represented the estimated
fair market value of the Company's net assets acquired at the date of the
Merger. For purposes of the Merger, LFS is the "accounting acquirer" and the
Company is the "legal acquirer."

LFS was formed on May 26, 1995, for the purpose of acquiring the
Holtzman's Little Folk Shop, Inc. ("Holtzman's") business from Woolworth. On May
31, 1995, LFS acquired all of the outstanding shares of capital stock of
Holtzman's from Woolworth and certain of Holtzman's operating assets and
liabilities from Kinney Shoe Corporation, a wholly owned subsidiary of Woolworth
("Kinney"). Prior to this transaction, Holtzman's had transferred certain of its
assets and liabilities to Kinney. The preliminary purchase price of the
Acquisition was $21.0 million, which was financed with a $5.0 million promissory
note to Woolworth, $4.3 million of current liabilities to Woolworth, a borrowing
of $4.4 million under the Company's revolving credit facility, $4.3 million of
short-term bridge loans advanced by a group of private lenders, including
Woolworth, and $3.0 million of cash on hand.

Subsequent to the Acquisition, disagreements arose between LFS and
Woolworth regarding the determination of the final purchase price of Holtzman's
net assets at May 31, 1995. Such disagreements resulted in LFS filing a lawsuit
against Woolworth, and a cross-complaint filed by Woolworth against LFS.

On May 30, 1996, the Company and Woolworth reached a settlement under
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 one million shares of Series A
convertible nonvoting preferred stock to Woolworth. The adjusted purchase price
for the Acquisition was $11.1 million. See "Item 3. Legal Proceedings."

ITEM 2. PROPERTIES

At January 27, 1996, the Company operated 296 stores in 20 states,
consisting of 14 Little Folks Stores and 282 Kids Mart stores. Stores that are
located in strip shopping centers are open eleven hours each day, Monday through
Saturday, and seven hours on Sunday; stores located in enclosed malls conform to
mall hours. Store hours are longer during the Christmas holiday season and
during back-to-school programs. After giving effect to the Store Closure Plan,
the Company will operate approximately 182 stores in 18 states consisting of
approximately 11 Little Folks Stores and approximately 171 Kids Mart Stores.

The Company's stores range in size from 1,800 to 6,000 square feet,
averaging approximately 2,600 square feet and are designed to maximize selling
space.

The Company seeks store sites which are highly visible, well-signed and
provide easy customer access. The Company has favored locations in strip centers
with established anchor tenants next to heavily trafficked roads and within
convenient reach of its customer base. Management prefers strip locations over
mall locations because

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occupancy costs are less expensive, strip center leases are typically more
favorable than mall leases, and these locations match its core customer's
shopping needs.

The table below sets forth the location of the Little Folks and Kids
Mart stores by state:

CLOSED STORES
AND OTHER CLOSED STORES (a)
----------------------------------------
NUMBER OF STORES LITTLE FOLK KIDS MART ADJUSTED
STATE AT JANUARY 27, 1996 STORES STORES STORE COUNT
- ------------------------------------------------ ----------------------------------------

California 127 (2) (30) 95
Texas 31 (12) 19
Illinois 24 (18) 6
Ohio 18 (12) 6
Florida 17 (5) 12
Louisiana 12 (2) 10
Maryland 10 (1) (6) 3
Michigan 9 (4) 5
Arizona 8 (4) 4
Missouri 6 (2) 4
Virginia 6 (2) 4
Indiana 5 (3) 2
Utah 4 (1) 3
Washington 4 (3) 1
Nevada 3 (2) 1
New Mexico 3 3
Oklahoma 3 (1) 2
Oregon 3 (1) 2
Wisconsin 2 (2) --
Kentucky 1 (1) --

- ------------------------------------------------ ----------------------------------------
Total 296 (3) (111) 182
================================================ ========================================

(a) 97 stores have been closed with respect to the Store Closure Plan;
17 additional stores have been closed since January 27, 1996. Up to 10
additional stores may be closed with respect to the Store Closure
Plan pending review of such stores by management.

The following table sets forth the types and number of store leases to which the
Company is a party as of the date of this filing giving effect to the Closed
Stores and other closed stores.

No. of Leases Closed Stores & Adjusted
Type of lease at January 27, 1996 other closed stores (a) lease count
------------------------------------------------------------------------------------------------

Short-Term (12 months or less) 39 (13) 26
Month-to-Month 57 (22) 35
Long-Term 200 (79) 121
------------------------------------------------------------------------------------------------
TOTAL 296 (114) 182
================================================================================================

(a) 97 stores have been closed with respect to the Store Closure
Plan; 17 additional stores have been closed since January 27,
1996. Up to 10 additional stores may be closed with
respect to the Store Closure Plan pending review of such
stores by management.

Lease payments for the six months ended July 27, 1996 were $5.8
million, which included approximately $1.8 million for the Closed Stores. The
aggregate rent liability for the Closed Stores is approximately $13.2 million

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and the average remaining lease term is approximately 30 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 leases a warehouse and distribution center, approximately
118,500 square feet, located in City of Industry, California. Management
believes that the warehouse has current capacity to serve as many as 500 stores
and is therefore sufficient for the Company's needs. The facility also contains
the Company's executive, administrative and buying offices.

Lease payments for the eight months ended January 27, 1996 were $8.3
million, which included approximately $1.1 million of rent for 37 unprofitable
stores closed during the eight months ended January 27, 1996. Since the date of
the Acquisition, the Company has successfully renegotiated leases on 81 stores
and the distribution center, and intends to renegotiate the leases on the
remaining stores during the next 12 months. However, there is no assurance that
the Company will be successful in its effort to renegotiate the remaining leases
or that if it is successful, that the new leases will be on terms more
beneficial to the Company.

Within the context of the lease renegotiations described above, with
respect to the stores currently operating on month-to-month or short term
leases, the Company will attempt to secure longer term leases on terms favorable
to the Company, for those stores which fit the Company's performance
requirements. In the event landlords representing these centers refuse to extend
terms on these leases, the Company would experience a significant reduction in
sales volume with a resulting negative impact on earnings.

During the eight months ended January 27, 1996, the Company closed 37
unprofitable stores, nine of which had lease terms remaining when the Company
ceased store operations. The remaining lease terms on these stores varied from
less than six months to over three years. As of January 27, 1996, the total rent
liability associated with these leases was $0.5 million. Based on favorable
negotiations with the landlord at one of the stores, the Company recorded a
provision as of January 27, 1996, of $0.4 million to reflect the impact of these
closures. As of July 27, 1996, three of the nine stores' leases had been
terminated. The six remaining stores have a total rent liability of $0.2
million, which approximates the remaining accrued balance. The Company is
attempting to negotiate favorable terms with the other landlords but it is
possible that because the Company has ceased operations in these nine locations,
the individual landlords may declare the Company in default under the terms of
these leases.

See "Recent Developments."

ITEM 3. LEGAL PROCEEDINGS

On December 5, 1995, LFS 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. Woolworth sought
recovery of a minimum of $5.6 million for payroll taxes, sales and use taxes,
customs duties and other taxes, charges and expenses paid by Woolworth on behalf
of LFS. LFS filed a general denial to this cross-complaint and asserted several
affirmative defenses.

On May 30, 1996, the Company and Woolworth entered into 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 one million shares of Series A convertible
nonvoting preferred stock to Woolworth. 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.

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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 sheet as of 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 eight months ended January 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 3, 1996, the Company held a special meeting of stockholders.
At that meeting the stockholders voted on the proposals described below. The
results of the stockholder vote on each proposal is set forth after such
description.

1. To approve the Merger, including an amendment to the Articles
of Incorporation of the Company to change the Company's name
to "Little Folks Shops, Inc."

FOR: 1,342,100 shares. AGAINST: 9,900 shares. ABSTAIN: 3,200
shares.

2. To approve and adopt the Company's Restated Articles of
Incorporation.

FOR: 1,316,750 shares. AGAINST: 25,200 shares. ABSTAIN: 13,250
shares.

3. To approve and adopt the 1995 Frost Hanna Acquisition Group,
Inc. Stock Option Plan.

FOR: 1,300,016 shares. AGAINST: 42,234 shares. ABSTAIN: 12,950
shares.

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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The principal market in which the Company's Common Stock, is traded is
the over-the-counter market under the symbol KIDM. The Common Stock commenced
trading on September 7, 1993. The following table shows the reported low bid and
high bid quotations per share of Common Stock for the periods indicated. The
high and low bid prices for the periods indicated are inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. These quotations have been obtained from the OTC
Bulletin Board.

Low Bid High Bid

Year ended December 31, 1994
First quarter $7.375 $ 8.25
Second quarter 6.75 8.25
Third quarter 5.50 7.25
Fourth quarter 4.50 6.50

Year ended December 31, 1995
First quarter 3.00 5.25
Second quarter 5.00 7.00
Third quarter 4.75 7.50
Fourth quarter 3.375 6.25

Interim period (due to change in fiscal year end)
January 1, 1996 through January 27, 1996 4.375 5.125

Year ending February 3, 1997
First quarter 3.88 4.40
Second quarter 2.00 6.125
Third quarter (through September 4, 1996) 0.50 2.75

On September 4, 1996, the closing bid and ask prices of the Common
Stock were $2.00 and $2.75, respectively. On September 5, 1996, there were 87
recorded holders of Common Stock, inclusive of those brokerage firms and/or
clearing houses holding shares of Common Stock for their clientele (with each
such brokerage house and/or clearing house being considered as one holder).

The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition and such other factors as the Board
of Directors may consider. Under the Company's lending arrangements, the Company
will not be permitted to declare any dividends without the lender's prior
consent.

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ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes selected consolidated financial data as of and
for the eight months ended January 27, 1996, and should be read in conjunction
with the audited consolidated financial statements included elsewhere in this
report. The table also sets forth summarized unaudited consolidated financial
data as of and for the six months ended July 27, 1996.

January 27, July 27,
INCOME STATEMENT DATA 1996 1996
- -----------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts) (eight months ended) (six months ended)
(unaudited)

Net sales $87,698 $47,370
Gross profit $34,402 $17,708
Loss from operations $(4,212) $(7,775)
Net loss $(5,696) $(8,563)
Net loss per common share $ (1.15) $ (1.73)
Dividends per common share None None
Average shares 4,943 4,943
=====================================================================================================

BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------
(in thousands) (at fiscal year end) (six months ended)
(unaudited)

Working capital (deficiency) $ 1,010 $(7,883)
Total assets $27,609 $23,374
Borrowings under credit facility $ 8,849 $ 9,422
Redeemable common stock $ 50 $ 50
Stockholders' equity (deficiency) $ 7,087 $(1,470)
=====================================================================================================

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

PRIVATE SECURITIES LITIGATION REFORM ACT. This Annual Report on Form 10-K
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 "Item 1. Business --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 eight months ended January 27, 1996. This information
should be read in conjunction with the audited consolidated financial statements
of the Company and the notes thereto. Information presented as of and for the
six months ended July 27, 1996 is unaudited. See "Item 1. Business --Recent
Developments."

The Company reported a net loss of $5.7 million for the eight months
ended January 27, 1996. The net loss reflected $1.0 million of goodwill
impairment write-off related to the Acquisition, and a charge against cost of
sales for $1.2 million for markdown reserves. Also 37 unprofitable stores were
closed during the eight months ended January 27, 1996. Net sales for the eight
months ended January 27, 1996 were $87.7 million.

The Company has continued to experience operating losses and cash flow
constraints subsequent to January 27, 1996. Unaudited net losses were $8.6
million for the six months ended July 27, 1996, unaudited current liabilities
exceeded unaudited current assets by $7.9 million, and the Company has an
unaudited stockholders' deficiency of $1.5 million, respectively, as of July 27,
1996. The Company also anticipates violation of certain of its loan covenants
under its credit facility for the remainder of fiscal year 1996. These
conditions have raised substantial doubt about the Company's ability to continue
as a going concern for a reasonable period of time.

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administrative offices. The Store Closure Plan will require, during the third
quarter of fiscal year 1996, an estimated charge to operations of approximately
$5.4 million, principally related to store rent liability, closing costs, and
separation pay. The Company has received the consent of Foothill, the Company's
principal lender, to the Store Closure Plan.

FINANCIAL CONDITION. The Company's working capital was $1.0 million as of
January 27, 1996, and a deficiency of $(7.9) million as of July 27, 1996
(unaudited). Its current ratio and debt-to-equity ratios were 1.05 and 3.54,
respectively, at January 27, 1996, and 0.68 and (7.35), respectively, at
July 27, 1996 (unaudited).

On the Acquisition date of May 31, 1995, average store inventory at
retail was approximately $152.2 thousand. New management's 1996 plan called for
average store inventory of approximately $135.3 thousand for May. This average
store inventory surplus aggregated approximately $5.6 million in excess
inventory at the date of the Acquisition.

Woolworth also had significant merchandise inventory orders outstanding
at the Acquisition. Management canceled approximately $30 million at retail of
these orders. Despite these order cancellations, merchandise purchases during
June, July and August 1995, were approximately $62.5 million, as compared to the
1996 plan for merchandise purchases of approximately $44.2 million for the same
three months during 1996.

The excessive levels of inventory and merchandise purchases as of the
Acquisition and immediately following it resulted in high levels of aged
inventory at January 27, 1996. Aged inventory (that is, merchandise on-hand
greater than nine months) was 10.9% of total inventory at January 27, 1996. The
Company recorded purchase accounting adjustments to the beginning inventory
balance and inventory markdown reserves against the year-end inventory balance
for approximately $22.1 million, at retail, during the eight months ended
January 27, 1996.

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.

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 sheet as of 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 eight months ended January 27, 1996, based upon
management's belief that the possibility of such loss is remote.

LIQUIDITY AND CAPITAL RESOURCES. The Company's cash requirements are primarily
related to the need to purchase and pay for inventory prior to its sales, lease
payments for store rent, the costs associated with 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.

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At January 27, 1996, the Company had drawn down approximately $8.8
million at 9.75% under the credit facility and had approximately $1.1 million of
remaining availability. The Company's average interest rate on borrowings under
its credit facility was 11.37% during the eight months ended January 27, 1996.
Following the date of the Acquisition, the Company experienced substantial
losses in connection with inventory writedowns recorded prior to the Settlement
Agreement adjustments, which resulted in a violation of certain covenants under
its credit facility as of January 27, 1996. Subsequent to January 27, 1996, the
Company has experienced losses and cash flow constraints that resulted in
uncertainty regarding the Company's ability to continue as a going concern.
As a result, the Company's auditors have included an emphasis paragraph
regarding the uncertainty of the Company's ability to continue as a going
concern in their report on the Company's audited consolidated financial
statements as of and for the eight months ended January 27, 1996. The going
concern qualification was a violation of one of the credit facility covenants as
of January 27, 1996. However, the Company obtained waivers of the first covenant
violation through April 1996, and of the second violation on September 4, 1996.
The Company also anticipates potential violation of certain other covenants for
the remainder of fiscal year 1996.

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. 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 equity on or
before September 30, 1996, or to have substantially completed a private
placement of the Company's securities by that date (the "Covenant"). To date,
the Company has raised $0.9 million of the $2.0 million needed. There can be no
assurance that the Company will raise the additional $1.1 million necessary to
avoid a violation of the Covenant, that the Company will not violate other
covenants under its credit facility, or that if a violation occurs, that
Foothill will not declare the Company in default and seek to exercise its
remedies under the credit facility, including foreclosure of the Company's
assets. The Company must also achieve certain performance criteria. The
Company issued to Foothill warrants to purchase 100,000 shares of Common Stock
at $6 per share as consideration for these amendments.

As of July 27, 1996, approximately $7.9 million was outstanding at
10.25% under the credit facility. There was no credit available as of that date.
Further, the Company had borrowed $1.5 million and had $0.5 million available
under its overdraft facility.

The Company has experienced difficulties in obtaining adequate credit
support from its factors. As a result, the Company has been required to operate
on shortened payment terms from its vendors, creating significant cash flow
constraints. Through early May 1996, the Company had been able to obtain
sufficient merchandise to satisfy its requirements. However, during late
May, June, July and August 1996, the Company was 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 relies heavily on
inventory purchased during these months to generate sales during the
back-to-school season in August and September. The Company's failure to achieve
adequate sales levels in the 1996 back-to-school and holiday seasons would
have a material adverse effect on its business.

The Company's recurring losses, cash flow constraints, and anticipated
loan covenant violations (see "Item 1. Business --Other Developments")
raise substantial doubt about its ability to continue as a going concern. See
"Item 14. --Financial Statements." 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 interim and 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, 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 these efforts are unsuccessful, as a last resort, the
Company may consider the possible filing of a petition for reorganization under
Chapter 11 of the Federal bankruptcy laws.

The Company requires immediate financing to purchase inventory for the
1996 holiday sales season. Failure to achieve adequate sales levels in the
1996 holiday season would have a material adverse effect on the Company's
business. Management has held discussions with financial advisors and
potential investors with respect to interim financing through short-term
subordinated debt, equity investment, or debt restructuring. The Company has
raised approximately $0.9 million through a sale/leaseback transaction and
conversion of a vendor account payable to shares of Common Stock. See "Item 1.
Business --Other Developments." However, the Company has not yet entered into
any agreements with respect to additional interim financing, and accordingly,
there can be no assurance that the Company can obtain

14
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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.

RESULTS OF OPERATIONS. The Company reported a net loss of $5.7 million on net
sales of $87.7 million for the eight months ended January 27, 1996. The Company
operated 296 stores at January 27, 1996.

The Company reported an unaudited net loss of $8.6 million on unaudited
net sales of $47.4 million for the six months ended July 27, 1996. After giving
effect to the Store Closure Plan, the Company will operate approximately 182
stores.

Selling, general and administrative expenses were $36.1 million for the
eight months ended January 27, 1996, and included $1.4 million of charges
related to the Service Agreement. Selling, general and administrative expenses
were $24.5 million, unaudited, for the six months ended July 27, 1996.

Depreciation and amortization was $1.5 million for the eight months
ended January 27, 1996. The Company also recorded a charge for goodwill
impairment for approximately $1.0 million. Depreciation and amortization was
$1.0 million, unaudited, for the six months ended July 27, 1996.

Interest expense was $1.5 million for the eight months ended January
27, 1996. Interest expense included approximately $0.6 million of interest
payments on the Acquisition debt. Interest expense was $0.8 million, unaudited,
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
that immediately closed the Closed Stores and reduced staff at its distribution
center and administrative offices. The Store Closure Plan will require, during
the third quarter of fiscal year 1996, an estimated charge to operations of
approximately $5.4 million, principally related to store rent liability, closing
costs, and separation pay. The Company has received the consent of Foothill, the
Company's principal lender, to the Store Closure Plan. See "Item 1. Business
- --Recent Developments."

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In connection with the Store Closure Plan, the Company reduced staff at
its distribution center and administrative offices, with a corresponding
annualized reduction in payroll and benefits expense of approximately $1.4
million.

ITEM 8. FINANCIAL STATEMENTS

The consolidated balance sheet as of January 27, 1996, and consolidated
statements of operations, stockholders' equity, and cash flows for the eight
months ended January 27, 1996 are set forth in the pages indicated in Item 14.

Balance sheets for Holtzman's as of January 29, 1994 and January 28,
1995, and statements of operations, stockholders' equity, and cash flows for the
fiscal years ended January 30, 1993, January 29, 1994, and January 28, 1995, and
the four months ended May 31, 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 "Item 3.
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 Annual Report on Form 10-K for the fiscal
year ended January 27, 1996.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In connection with the Merger, Deloitte & Touche LLP ("Deloitte") was
appointed as the independent auditors of the Company replacing Arthur Andersen,
LLP ("Arthur Andersen"). During the Company's fiscal years ended December 31,
1995, and December 31, 1994, and the interim period preceding the change in
accountants, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures which disagreements, if not resolved to the satisfaction of
Arthur Andersen, would have caused Arthur Andersen to make reference to the
subject matter of the disagreements in connection with its reports. The Company
has authorized Arthur Andersen to respond fully to the inquiries of Deloitte or
any other successor accountant concerning the subject matter described above.

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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

EXECUTIVE OFFICERS AND DIRECTORS. Pursuant to the Merger Agreement the persons
identified below were appointed to the Board of Directors of the Company on
January 3, 1996, to serve until their successors are duly elected and qualified.
Set forth below is certain information concerning each person who is presently
an executive officer or director of the Company.

Name Age Position
-----------------------------------------------------------------------

Bernard Tessler 46 Chairman of the Board, President,
Chief Executive Officer

Robert S. Kelleher 47 Vice President, Chief Financial Officer,
Chief Operating Officer

Jeffrey Koffman 31 Director

Eric M. Specter 38 Director

Stephen L. Pistner 64 Director

Donald S. Rosenberg 62 Director

Bernard Tessler has been Director, Chairman, President and Chief
Executive Officer of the Company since January 3, 1996. From 1991 to 1993, Mr.
Tessler was Vice President-General Merchandise Manager (Children's Apparel,
Sporting Goods, Seasonal, "Crafts and More") of Ames Department Stores Inc.
("Ames"). Mr. Tessler was responsible for the $700 million children's division
of Ames. From 1987 to 1991, Mr. Tessler was President and Chief Executive
Officer of Children's Creative Workshop, Ltd., a publicly held consulting firm,
where he worked with diverse retailers in developing new children's and toy
store concepts. From 1983 to 1987, Mr. Tessler was Chairman of the Board and
President of Enchanted Village Stores, Inc., a publicly held company with 23
children's toy stores.

Robert Kelleher joined the Company on July 3, 1995, as Chief
Administrative Officer and Chief Financial Officer. Mr. Kelleher has been
appointed Chief Operating Officer of the Company effective April 1, 1996; he
will continue to hold the position of Chief Financial Officer. Prior to joining
the Company, Mr. Kelleher was employed from 1980 to 1995 by Contempo Casuals,
Inc., a subsidiary of the Neiman Marcus Group. Contempo Casuals was a chain of
over 240 junior women's apparel specialty stores. Since 1993, Mr. Kelleher held
the position of President and Chief Operating Officer of Contempo Casuals, Inc.;
prior to that he was Executive Vice President and Chief Financial Officer.

Jeffrey Koffman served as a financial analyst with Security Pacific
from 1987 to 1989. In 1989, Mr. Koffman became Vice President of Pilgrim
Industries and in 1990, he became the President of that company. From 1994 to
present, Mr. Koffman has served in the capacities of Executive Vice President of
Tech Aerofoam Products and Executive Vice President, and more recently,
President of Apparel America, Inc.

Eric M. Specter has been Vice President and Chief Financial Officer of
Charming Shoppes, Inc. since December 1995 and, prior to that time he served as
Vice President Corporate Controller since 1985 and has been employed by that
company since 1983. Prior to that he was an associate in the accounting firm of
Touche Ross & Company.

Stephen L. Pistner currently operates the consulting firm of Pistner
and Associates. From April 1990 to December 1992, Mr. Pistner was Chairman of
the Board and Chief Executive Officer of Ames Department Stores, Inc. From 1981
to 1985, Mr. Pistner was Chairman and Chief Executive Officer of Montgomery Ward
and Company, and later served as Chairman of McCrory Corporation.

Donald S. Rosenberg is an attorney and a partner in Rosenberg, Reisman
& Stein, Miami, Florida, where he has worked since 1956. Mr. Rosenberg is a
member of the Board of Directors of the Skylake State Bank and Chairman of its
Audit Committee. He serves as a member of the Board of Trustees, Executive
Committee, Finance

17
20
Committee and Investment Committee of Barry University, Miami, Florida and is a
member of the Board of Trustees of the Zoological Society of Florida.

Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the fiscal year ended January 27, 1996, and Form
5 and amendments thereto furnished to the Company with respect to the fiscal
year ended January 27, 1996, and certain representations made to the Company, no
person required to file such forms failed to do so on a timely basis, as
disclosed in such Forms, during the fiscal year ended January 27, 1996, or prior
years.

ITEM 11. EXECUTIVE COMPENSATION

The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the Company's most highly paid executive
officer.

- ------------------------------------------------------------------------------------------------------------------------------------
Long-term
Annual Compensation Compensation Awards Payouts
------------------- ------------ ---------------------------- ------------
Other Annual Restricted Options/SARS All Other
Name and Principal Position Year Salary Bonus Compensation Stock Awards (# of shares) LTIP Payouts Compensation
- --------------------------- ---- ------ ----- ------------ ------------ ------------- ------------ ------------

Bernard Tessler, CEO 1995 $300,000 $-- $-- $-- $-- $-- $168,375 *
Robert Kelleher, CFO/COO 1995 $245,000 $-- $-- $-- $-- $-- $ 3,600 **
- ------------------------------------------------------------------------------------------------------------------------------------

* Pursuant to an agreement with the Company (then LFS), Mr. Tessler
received short-term advances in the amount of $19,313 to cover expenses
related to his relocation to California on behalf of the Company. In
addition, Mr. Tessler received compensation in respect of the fiscal
year ended January 27, 1996, in the amount of $49,062, representing
housing allowance and car allowance, and $100,000 of compensation
related to the Acquisition.

** Car allowance.

COMPENSATION OF DIRECTORS. Directors of the Company receive no compensation for
their services as directors; however, they will be entitled to receive stock
options under the Company's Stock Option Plan and may receive monetary
compensation in the future.

EMPLOYMENT ARRANGEMENTS. The Company (then LFS) entered into an employment
agreement, dated as of May 31, 1995, with Bernard Tessler, pursuant to which the
Company has agreed to employ Mr. Tessler as President and Chief Executive
Officer for a term which commenced on May 31, 1995, and will continue through
May 31, 1999, unless sooner terminated in accordance with its terms. Thereafter,
Mr. Tessler's employment with the Company would continue until terminated by the
Company upon not less than one year's notice. For compensation for his services,
Mr. Tessler will receive, among other things, an annual salary of $300,000 and
any bonus to which he will be entitled under the Company's Management Incentive
Plan (see below). If Mr. Tessler's employment with the Company is terminated
without cause by the Company or by Mr. Tessler for good reason, Mr. Tessler will
be entitled, among other things, to a termination payment equal to the greater
of (i) the balance due under the remainder of the term of the employment
agreement or (ii) one year's compensation. Mr. Tessler is also entitled to a
$5,000 per month housing allowance. Mr. Tessler is prohibited from competing
with the Company for a period of one year following termination.

MANAGEMENT INCENTIVE PLAN. The Company is in the process of instituting a
performance based incentive award program. While specific details of the plan
have not been finalized, achievement of profitability targets will be a primary
factor in determining bonus compensation. It is contemplated that a substantial
number of employees will participate in this plan.

1995 STOCK OPTION PLAN. The stockholders of the Company approved the adoption of
the 1995 Stock Option Plan at a meeting on January 3, 1996. No grants were made
pursuant to such plan in the year ended December 31, 1995. Members of the Board
of Directors who are not employees of the Company, are automatically entitled to
receive options to purchase 2,000 shares for each year they serve on the Board.

18
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of September 5, 1996,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the owner of more than 5% of its outstanding shares of Common
Stock, (ii) each director and (iii) all executive officers and directors as a
group:

Amount and Nature of
Name of Beneficial Owner (1) Beneficial Ownership (2) Percent of Common Stock
- -------------------------------------------------------------------------------------

CSHC, Inc. (3) 783,040 15.8%
450 Winks Lane
Philadelphia, PA 19020

Donald S. Rosenberg (4) 22,500 0.5%
1 S.E. 3rd Avenue
Suite 2600
Miami, FL 33131

Bernard Tessler 773,025 15.6%
801 Sentous Avenue
City of Industry, CA 91748

Jeffrey Koffman (5) 109,771 2.2%
150 E. 52nd Street
New York, NY 10022

Robert S. Kelleher (6) * *
Eric M. Specter (6) * *
Stephen L. Pistner (6) * *
801 Sentous Avenue
City of Industry, CA 91748

All executive officers and
directors as a group (6 persons) 1,688,336 34.2%

- --------------
(1) Unless otherwise noted, all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them. No persons named in the table are acting as
nominees for any persons or are otherwise under the control of any
person or group of persons.

(2) Excludes Common Stock issuable upon exercise of outstanding warrants.
If such warrants were exercised, the percentage of ownership of all
outstanding Common Stock would be as follows: CSHC, Inc., 12.7%, Donald
S. Rosenberg, 0.4%, Bernard Tessler, 16.7%, Jeffrey Koffman, 2.6%, and
all executive officers and directors as a group, 32.4%.

(3) CSHC, Inc. is controlled by Charming Shoppes, Inc. of which Mr. Eric M.
Specter, a director of the Company, is a Vice President and Chief
Financial Officer. Mr. Specter disclaims beneficial ownership of these
shares.

(4) Members of Mr. Rosenberg's immediate family own 218,000 additional
shares of Common Stock. Mr. Rosenberg, a director of the Company,
disclaims beneficial ownership of such shares.

(5) Members of the Koffman family or entities controlled by the Koffman
family own an additional aggregate 582,331 shares of Common Stock. Mr.
Jeffrey Koffman, a director of the Company, disclaims beneficial
interest in these shares.

(6) Messrs. Pistner and Specter, directors of the Company, and Mr.
Kelleher, an executive officer of the Company do not beneficially own
shares of Common Stock.

19
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Between December 1993 and January 1996, the Company maintained its
executive offices in approximately 1,100 square feet of office space located at
7700 West Camino Real, Suite 222, Boca Raton, Florida 33431. The Company leased
this space from an unaffiliated third party for approximately $1,260 per month.
In January 1994, an affiliate of the Company ("FHM") agreed to sublease from the
Company approximately one half of such office space for approximately $630 per
month. Upon consummation of the Merger, the Company assigned to FHM, and FHM
assumed, the Company's obligations under the lease.

Mr. Jeffrey Koffman, a director of the Company, acted as a consultant
to the Company for which he was paid $4,166 per month from June 1, 1995 until
May 31, 1996. Rosenberg, Reisman & Stein, a law firm of which Donald S.
Rosenberg, a director of the Company, is a partner, has represented the Company
in certain legal matters for which he was paid $54,829 from May 31, 1995, to
December 31, 1995. From December 31, 1995, to January 27, 1996, Rosenberg,
Reisman & Stein has been paid $2,053. Rosenberg, Reisman & Stein may continue to
provide legal services to the Company in the future.

The Company purchases merchandise from apparel manufacturers owned by
members of the Koffman family. These purchases amounted to $36,882 for the eight
months ended January 27, 1996.

ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) Financial Statements

Report of Management F-1
Independent Auditors' Report F-2
Consolidated Balance Sheet F-4
Consolidated Statement of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8

The registrant is not required to file supplemental
schedules to its consolidated financial statements.

(b) Exhibits
(c) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated January
8, 1996, relating to the Merger, a change in certifying
accountants and the change in the Company's fiscal year end.

The Company filed a current report on Form 8-K dated May 31,
1996, relating to the settlement of its litigation against
Woolworth Corporation and Kinney Shoe Corporation.

The Company filed a current report on Form 8-K dated September
6, 1996, relating to the 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.

20
23
SIGNATURES

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

KIDS MART, INC.

By /s/ BERNARD TESSLER
-----------------------
Bernard Tessler,
Chief Executive Officer

Date: September 16, 1996

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:

Signature Title Date
- --------------------------------------- ---------------------------------------- ------------------

/s/ BERNARD TESSLER Chairman, Chief Executive Officer, September 16, 1996
- --------------------------------------- and Director
Bernard Tessler

/s/ ROBERT S. KELLEHER Vice President, Chief Operating Officer, September 16, 1996
- --------------------------------------- and Chief Financial Officer
Robert S. Kelleher

/s/ JEFFREY KOFFMAN Director September 16, 1996
- ---------------------------------------
Jeffrey Koffman

/s/ STEPHEN L. PISTNER Director September 16, 1996
- ---------------------------------------
Stephen L. Pistner

/s/ ERIC M. SPECTER Director September 16, 1996
- ---------------------------------------
Eric M. Specter

/s/ DONALD S. ROSENBERG Director September 16, 1996
- ---------------------------------------
Donald S. Rosenberg

21
24
INDEX TO EXHIBITS

Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- ----

2.1 Agreement and Plan of Merger and Reorganization dated
May 31 1995, by and between the Company and LFS
Acquisition Corp. (incorporated by reference to Exhibit
A-1 to the Company's Proxy Statement dated December 14,
1995).

3.1 Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2, File No.
33-63736-A, filed with the Securities and Exchange
Commission on July 2, 1993).

3.2 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit C-1 to
the Company's Proxy Statement dated December 14, 1995).

3.3 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form SB-2, File No. 33-63736-A, filed with the
Securities and Exchange Commission on July 2, 1993).

9 Stockholders' Agreement, dated May 30, 1995, among LFS
Acquisition Corp., Bernard Tessler, Sentani Trading
Ltd., Jeffrey Koffman, Allison Koffman, Jack Koffman,
Janice Payson, Barbara Koffman, Tech Aerofoam, Inc.,
David Koffman, Ruthanne Koffman, Whitehorn, Inc.,
Financo, Inc. and Marvin Traub (incorporated by
reference to Exhibit 9 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31,
1995).

10.1 1995 Stock Option Plan of the Company (incorporated by
reference to Exhibit B-1 to the Company's Proxy
Statement dated December 14, 1995).

10.2 Employment Agreement between LFS Acquisition Corp. and
Bernard Tessler dated May 31, 1995, (incorporated by
reference to Exhibit 10.2 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1995).

10.3 Transitional Services Agreement between LFS Acquisition
Corp. and Woolworth Corporation dated as of May 31,
1995 (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995).

10.4 Settlement Agreement between LFS Acquisition Corp. and
Woolworth Corporation and Kinney Shoe Corporation dated
as of May 30, 1996.

10.5 Loan and Security Agreement by and between LFS
Acquisition Corp. and Foothill Capital Corporation
dated as of May 31, 1995, and amendments thereto.

10.6 Sale/leaseback agreement between Kids Mart, Inc. and
Computer Sales International, Inc. dated as of July 24,
1996.

10.7 Agreement between Kids Mart, Inc. and Be Bop Clothing, Inc.
dated September 11, 1996.

10.8 Exchange Agreement and Investment representation Agreement
between Kids Mart, Inc. and Be Bop Clothing, Inc. dated
September 11, 1996.

27 Financial Data Schedule

22
25

REPORT OF MANAGEMENT

The management of the Company is responsible for the preparation, integrity,
and objectivity of the data included in this report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles. The consolidated financial statements are audited by
independent auditors, through the application of generally accepted auditing
standards.

The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded against loss, that the
financial records reflect fairly the transactions of the Company, and that
established policies and procedures are followed. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
accounting controls must be related to the benefits derived.

The Audit Committee, composed of two members of the Company's Board of
Directors who are not employees of the Company, meet with representatives of
management and the independent auditors to monitor the functioning of the
accounting and control systems, and to review the results of auditing
activities. The Audit Committee also recommends independent auditors for
appointment by the Board. The independent auditors have full and free access
to the Audit Committee.

/s/ BERNARD TESSLER /s/ ROBERT S. KELLEHER
- ------------------------ ---------------------------
Bernard Tessler Robert S. Kelleher
Chairman, President and Vice President,
Chief Executive Officer Chief Operating Officer and
Chief Financial Officer

F-1
26

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Kids Mart, Inc.:

We have audited the accompanying consolidated balance sheet of Kids Mart, Inc.
(the "Company") and subsidiaries as of January 27, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the eight months ended January 27, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

As discussed in Note 2 of the notes to the consolidated financial statements,
on January 3, 1996, the Company consummated a transaction to acquire
substantially all the assets and assume all the liabilities of LFS Acquisition
Corp. ("LFS"). After the acquisition, the original stockholders of LFS hold
approximately 54% of the voting power of the Company stock. The acquisition has
been accounted for as a reverse acquisition of the Company by LFS.

As discussed in Note 3 of the notes to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be disposed of," as of January 27, 1996.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at January 27, 1996, and the results of their operations and their cash flows
for the eight months ended January 27, 1996 in conformity with generally
accepted accounting principles.

F-2
27

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company's recurring losses raise
substantial doubts about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
Consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Los Angeles, California
June 17, 1996 (July 24, 1996, September 11, 1996, and September 13, 1996 as to
paragraph one, two, and three, respectively, of Note 15)

F-3
28

KIDS MART, INC.

CONSOLIDATED BALANCE SHEET
JANUARY 27, 1996
(In thousands, except share and par value amounts)

ASSETS (NOTE 8)

CURRENT ASSETS:
Cash $ 502
Receivable from Woolworth Corporation (Note 2) 1,670
Merchandise inventories (Note 4) 17,144
Prepaid expenses and other current assets 1,888
-------
Total current assets 21,204

Property and equipment, net (Note 5) 6,106
Deferred financing costs, net of accumulated amortization of $85 299
-------
Total $27,609
=======

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Borrowings under credit facility (Note 8) $ 8,849
Accounts payable 5,562
Accrued expenses and other current liabilities (Note 7) 4,546
Deferred revenue 1,237
-------
Total current liabilities 20,194
-------
Deferred rent 278
-------
Redeemable common stock (Note 9) 50
-------
Commitments and contingencies (Notes 8, 12, 14 and 15)

STOCKHOLDERS' EQUITY (Notes 10, 14, and 15):
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
Accumulated deficit (5,696)
-------
Total stockholders' equity 7,087
-------
Total $27,609
=======

See accompanying notes to consolidated financial statements.

F-4
29

KIDS MART, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands, except per share amounts)

Net sales $87,698
Cost of sales 53,296
-------
Gross profit 34,402

Selling, general and administrative expenses (Note 13) 36,128
Goodwill impairment (Note 2) 979
Depreciation and amortization 1,507
-------
Loss from operations (4,212)
Interest expense (Notes 6, 8 and 13) 1,484
-------
NET LOSS $(5,696)
=======
PER SHARE DATA:
Average shares outstanding 4,943
=======
Net loss per common share $(1.15)
=======
Dividends per common share None
=======

See accompanying notes to consolidated financial statements.

F-5
30

KIDS MART, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands, except for number of shares)

CLASS A CLASS B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ----------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT

BALANCE, MAY 31, 1995 1,400,626 $ 14 81.7 $ - 854,560 $ 9

Issuance of Series B preferred stock 320,000 3

Redemption of Series A preferred stock (81.7)

Exercise of Warrants C (Note 10) 102,814 1

Acquisition of Frost Hanna Acquisition
Group, Inc. (Note 2) 3,439,560 (15) (1,174,560) (12)

Issuance of Series A nonvoting Convertible
Preferred Stock (Notes 2 and 10)

Net loss
--------- ---- ----- ---- ---------- ----
BALANCE, JANUARY 27, 1996 4,943,000 $ - - $ - - $ -
========= ==== ===== ==== ========== ====

SERIES A
PREFERRED STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL

BALANCE, MAY 31, 1995 $ 2,977 $ 3,000

Issuance of Series B preferred stock 817 820

Redemption of Series A preferred stock (820) (820)

Exercise of Warrants C (Note 10) 616 617

Acquisition of Frost Hanna Acquisition
Group, Inc. (Note 2) 5,693 5,666

Issuance of Series A nonvoting Convertible
Preferred Stock (Notes 2 and 10) 1,000,000 $ - 3,500 3,500

Net loss $(5,696) (5,696)
--------- ---- ------- ------- -------
BALANCE, JANUARY 27, 1996 1,000,000 $ - $12,783 $(5,696) $ 7,087
========= ==== ======= ======= =======

See accompanying notes to consolidated financial statements.

F-6
31

KIDS MART, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
EIGHT MONTHS ENDED JANUARY 27, 1996
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $(5,696)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment 979
Depreciation and amortization 1,592

Changes in operating assets and liabilities, net of effect of acquisition of Frost Hanna
Acquisition Group, Inc.:
Receivable from Woolworth Corporation 4,130
Merchandise inventories (3,907)
Prepaid expenses and other current assets (1,211)
Accounts payable (859)
Accrued expenses and other current liabilities 2,154
Deferred revenue (536)
Deferred rent 278
-------
Net cash used in operating activities (3,076)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,166)
Net cash acquired in acquisition of Frost Hanna Acquisition Group, Inc. 6,199
-------

Net cash provided by investing activities 5,033
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility 2,740
Net proceeds from issuance of Class B preferred stock 820
Redemption of Class A preferred stock (820)
Transaction fees incurred in acquisition of Frost Hanna Acquisition Group, Inc. (562)
Increase in deferred financing costs (60)
Exercise of Warrant C (Note 10) 617
Repayment of bridge loans (4,250)
-------
Net cash used in financing activities (1,515)
-------
NET INCREASE IN CASH 442

CASH, BEGINNING OF PERIOD 60
-------
CASH, END OF PERIOD $ 502
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,405
Income taxes paid $ -

See accompanying notes to consolidated financial statements.

F-7
32

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

1. BASIS OF PRESENTATION

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 eight
months ended January 27, 1996, Kids Mart, Inc. incurred net losses of
$5,696. Additionally, subsequent to January 27, 1996, Kids Mart, Inc.
continued to experience operating losses and anticipates violation
with certain other covenants during the remainder of fiscal 1996
(see Note 8). These factors among others may indicate that Kids
Mart, Inc. will be unable to continue as a going concern for a
reasonable period of time.

In response to these conditions, Kids Mart, Inc. has taken steps to
reduce expenses and increase liquidity. Kids Mart, Inc. 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 January 27, 1996, Kids Mart, Inc.
closed 17 stores, reduced its work force, renegotiated certain of its
store leases, entered into a sale/leaseback transaction (see Note 15),
entered into an agreement with a vendor to convert amounts payable to
this vendor to common stock (see Note 15), implemented a store closure
plan (the "Store Closure Plan") whereby it identified approximately
100 stores for closure (see Note 15), is renegotiating its loan
covenants with its lender (see Note 8), and is exploring various
interim and permanent financing opportunities with two 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 Kids Mart, Inc. be unable to continue as a going
concern. Kids Mart, Inc.'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 payments 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 Kids Mart, Inc. can meet its obligations and sustain operations
(see Note 15).

2. ORGANIZATION OF THE BUSINESS

On January 3, 1996, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated May 31, 1995, FH Sub
Delaware, Inc., a Delaware corporation and wholly owned subsidiary of
Frost Hanna Acquisition Group, Inc., a Florida corporation in the
development stage, ("FH") merged with and into LFS Acquisition Corp.
("LFS") (the "Merger"). As a result of the Merger, LFS became a
wholly owned subsidiary of FH. In exchange, FH issued an aggregate of
2,678,000 shares (the "Shares") of its common stock to the owners of
all the issued and outstanding shares of capital stock of LFS. The
Shares constituted approximately 54% of the outstanding shares of
common stock of FH without giving effect to the issuance of 1,204,300
shares of FH's common stock issuable upon the exercise of certain
warrants held by a) the underwriter of FH's initial public offering
(110,000 shares) and b) the initial LFS investors (1,094,300 shares)
(see Note 10). Assuming full exercise of all of the outstanding
warrants to purchase shares of FH's common stock, the former LFS
security holders would own approximately 61.4% of the outstanding
shares of FH's common stock. Since the former LFS investors would own
the controlling interest of FH's common stock, the Merger has been
accounted for as a "reverse acquisition" as if LFS recapitalized its
ownership interest and then acquired FH under the purchase method of
accounting by the issuance of 2,265,000 shares of its common stock
(the "FH Shares"). The FH Shares were valued at $6,199 which
represented the estimated fair market value of FH's net assets
acquired at the date of the Merger. Under such a transaction, LFS is
the "accounting acquirer" and FH is the "legal acquirer". Because LFS
is the "accounting acquirer", the consolidated financial statements
presented are those of LFS, not FH.

F-8
33

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

FH was formed on April 2, 1993 to seek to effect a merger, exchange of
capital stock, asset acquisition or similar business combination with
an acquired business and completed a public offering of 1,265,000
shares of its common stock in September 1993. Through January 3,
1996, FH was in the development stage. The operating results
reflected in the accompanying consolidated financial statements do not
include FH's operating activities prior to January 3, 1996, the date
of the Merger, as the amounts are not significant.

Concurrent with the Merger, FH changed its fiscal year from the year
ending December 31 to the 52/53-week period ending on the Saturday
nearest January 31 and changed its name to Little Folks Shops, Inc.
On January 23, 1996, the name was changed to Kids Mart, Inc. (the
"Company").

LFS, a Delaware corporation, (hereafter, also referred to as the
Company), was formed on May 26, 1995 for the purpose of acquiring the
Holtzman's Little Folk Shop, Inc. ("Holtzman's") business from
Woolworth Corporation ("Woolworth"). On May 31, 1995 the Company
acquired all the outstanding shares of capital stock of Holtzman's
from Woolworth and certain of Holtzman's operating assets and
liabilities from Kinney Shoe Corporation, a wholly owned subsidiary of
Woolworth ("Kinney") (the "Acquisition"). Prior to this transaction,
Holtzman's had transferred certain of its assets and liabilities to
Kinney. The preliminary purchase price of the Acquisition was $22,820
($20,970 to Woolworth plus $1,850 in transaction fees) and included
$11,670 in cash (of which $1,670 was placed into an escrow account)
and $9,300 in current and long-term debt. This purchase price,
excluding transaction fees, increased from an originally agreed upon
estimated purchase price of $16,670 due to opening balance sheet
adjustments of approximately $4,300 (principally inventory, other
assets and accrued liabilities). The purchase price was subject to
adjustment based on the final book value of Holtzman's at May 31,
1995, as defined.

Subsequent to the Acquisition, disagreements arose between the Company
and Woolworth regarding the determination of the final purchase price
of Holtzman's net assets at May 31, 1995. Such disagreements resulted
in the filing of a complaint by the Company against Woolworth and
Kinney with Woolworth filing a counter complaint. On May 30, 1996,
the Company and Woolworth and Kinney reached a settlement under a
Mutual Release and Settlement Agreement (the "Settlement Agreement")
whereby Woolworth agreed to 1) release the cash of $1,670 held in
escrow to the Company, 2) cancel the $9,300 of debt incurred in
connection with the Acquisition and also cancel approximately $4,415
of other amounts paid by Woolworth on behalf of the Company during the
eight months ended January 27, 1996. In exchange, the Company issued
1,000,000 shares of its Series A convertible nonvoting preferred stock
to Woolworth (see Note 10). These shares were valued at $3,500, which
represented their fair market value at the date of issuance.

F-9
34

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

The Company has accounted for the Acquisition under the purchase
method of accounting and, accordingly, recorded the assets and
liabilities acquired at their fair values. The excess purchase price
over net assets acquired is computed as follows:

Purchase price:
Cash paid by the Company, net of canceled advances of $4,415 $ 5,585
Issuance of 1,000,000 shares of Series A convertible preferred stock 3,500
Fees incurred in connection with the Acquisition 2,039
-------
Total 11,124
-------
Fair value of net assets acquired:
Current assets 13,610
Property and equipment 6,413
Liabilities (9,912)
-------
Total 10,111
-------
Excess of purchase price over net assets acquired $ 1,013
=======

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General - The Company, a retailer of infant and children apparel and
toys, operates 296 stores in 20 states.

Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions and balances
have been eliminated.

Fiscal Year - The Company's fiscal year is the 52/53-week period
ending on the Saturday nearest January 31.

Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Merchandise Inventories - Merchandise inventories consist principally
of finished goods purchased from domestic and foreign vendors.
Inventories are carried at the lower of cost (determined by the retail
inventory method), or market. Certain costs of buying, warehousing
and distribution are included in inventory.

Property and Equipment - Property and equipment are stated at cost and
are depreciated using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are
amortized over the shorter of their useful lives or the related lease
terms. Useful lives range from three to ten years.

Deferred Financing Costs - Deferred financing costs are amortized
using the straight-line method over the terms of the related debt
agreement.

F-10
35

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

Excess of Purchase Price Over Net Assets Acquired - Excess purchase
price over net assets acquired is amortized over its estimated useful
life of 20 years. Amortization expense during the eight months ended
January 27, 1996, amounted to $34 (see Impairment of Long-Lived
Assets, below).

Deferred Revenue - The Company offers for sale a preferred customer
card which entitles the holder to a one-year 10% discount from the
retail price of its regularly priced merchandise. The proceeds from
card sales, net of related direct costs, are amortized into income
over a 12-month period.

Deferred Rent - Leases with free rent periods and/or scheduled
specific rent increases are recognized on a straight-line basis over
the lease term.

Income Taxes - Deferred income taxes reflect the tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, based on the income tax rates expected to be in
effect when the temporary differences are expected to reverse.

Net Loss per Common Share - Net loss per common share is based on the
weighted average number of common shares and common stock equivalents
outstanding. Common stock equivalents represent shares issuable upon
assumed exercise of warrants and conversion of preferred stock, which
would have a dilutive effect when there are earnings.

Impairment of Long-Lived Assets - In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which the Company is required to adopt effective with the fiscal year
beginning January 28, 1996. SFAS No. 121 standardizes the accounting
practices for the recognition and measurement of impairment losses on
certain long-lived assets. The Company elected early adoption of SFAS
No. 121 and, accordingly, wrote off the value of the excess purchase
price over net assets acquired amounting to $979 at January 27, 1996,
based on the projections of future cash flow.

Accounting for Stock-Based Compensation - The Company currently
accounts for its stock-based compensation plans using the provision of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). In 1995, the FASB issued SFAS
No. 123 "Accounting for Stock-Based Compensation". Under the
provisions of SFAS No. 123, companies can elect to account for
stock-based compensation plans using a fair-value based method or
continue using the intrinsic value method prescribed in APB No. 25.
SFAS No. 123 requires that companies electing to continue using APB
No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been
applied. The Company will include the necessary disclosures in its
1996 consolidated financial statements. As the Company anticipates
continuing to account for stock-based compensation using the intrinsic
value method, SFAS No. 123 will not have an impact on the Company's
consolidated financial statements.

Fair Value of Financial Instruments - The carrying value of financial
assets and liabilities approximates fair value due to the short
maturity of these items. The carrying amount of debt issued pursuant
to the Company's credit facility approximates fair value because the
interest rate changes with market interest rates.

F-11
36

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

4. MERCHANDISE INVENTORIES

At January 27, 1996, the Company recorded a $1,164 markdown reserve in
connection with the reduction of merchandise retail prices subsequent
to January 27, 1996. In the opinion of management, this charge was
necessary to clear various categories of aged inventories and provide
space for fresh and more competitive merchandise.

5. PROPERTY AND EQUIPMENT

Property and equipment at January 27, 1996 consist of the following:

Furniture, fixtures and equipment $5,212
Leasehold improvements 2,367
------
Total 7,579
Less accumulated depreciation and amortization 1,473
------
Property and equipment, net $6,106
======

6. BRIDGE LOANS

In connection with the Acquisition (see Note 2), the Company obtained
an aggregate of $4,250 of 10% bridge loans from a group of private
lenders, as well as Woolworth. The bridge loans were repaid on
January 3, 1996. In consideration for providing the bridge loans,
each of the lenders, with the exception of Woolworth, was granted one
warrant to purchase a share of common stock of the Company for a
purchase price of $6.00 per share for each $5.00 of bridge loans made
(see Note 10).

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the
following at January 27, 1996:

Accrued payroll and related expenses $1,114
Accrued advertising expenses 810
Accrued sales taxes 603
Other accrued expenses 2,019
------
Total $4,546
======

8. CREDIT FACILITY

The Company has a credit facility with a financial institution under
which $20,000 is available for working capital advances and $10,000 is
available for the issuance of letters of credit. Aggregate borrowings
are limited to the lesser of $20,000 or specified percentages of
eligible merchandise inventories, as defined. At January 27, 1996,
the Company had outstanding revolving advances of $8,849 and letters
of credit of $4,893. Additional borrowings available under the
facility amounted to $1,148 at January 27, 1996.

F-12
37

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

Advances under the credit facility, which bear interest at a reference
rate plus 2% (9.75% at January 27, 1996), are collateralized by
substantially all the assets of the Company. The credit facility
shall continue in effect until May 31, 1998, at which time it can
automatically be renewed for successive one-year periods thereafter,
unless sooner terminated pursuant to the terms of the agreement. On
April 15, 1996 and June 10, 1996, the credit facility was amended to
modify certain of its covenants, extend its term to May 31, 1999 and
grant the Company $2,000 of additional borrowings available from June
10, 1996 to February 15, 1997. In exchange, warrants to purchase
100,000 shares of the Company's common stock were issued to the
financial institution on June 14, 1996 (see "Financial Institution
Warrants" at Note 10). Loan covenants in connection with the credit
facility include the maintenance of certain financial ratios and other
restrictions, including the Company's successful completion of a
private placement of the Company's securities by September 30, 1996,
or successfully raising at least $2,000 in subordinated debt or
common stock equity by that date. At January 27, 1996, the Company
was in violation of one of these covenants, and anticipates
violation with certain other covenants during the remainder of fiscal
1996, and accordingly, has reclassified the amounts due under the
credit facility as of January 27, 1996 to a current liability. The
Company is currently in negotiations with the financial institution
to waive or amend these covenants.

9. REDEEMABLE COMMON STOCK

In connection with the Merger Agreement (see Note 2), certain public
stockholders of FH representing 9,900 shares of the Company's common
stock, voted against the Merger. Accordingly, as required per an
agreement with these stockholders to redeem their common stock shares
held, the Company reclassified the redemption value of 9,900 shares,
which voted against the Merger, to "redeemable common stock" in the
accompanying consolidated balance sheet. However, to the Company's
knowledge, none of these stockholders took the steps needed to
exercise the redemption rights and, therefore the Company may not have
any obligation to redeem these shares

10. STOCKHOLDERS' EQUITY

PREFERRED STOCK - The Company has authorized the issuance of
100,000,000 shares of $.0001 par value preferred stock, including
1,000,000 shares of $.0001 par value Series A Convertible Preferred
Stock (the "Convertible Preferred Stock"). In connection with the
Settlement Agreement, the Company issued all shares of the Convertible
Preferred Stock to Woolworth (see Note 2). The Convertible Preferred
Stock have a liquidation preference of $10.00 per share and are
redeemable, at the Company's option, at a redemption price of $10.00
per share. Each share is convertible into one share of common stock
subject to adjustment for dilution. The Convertible Preferred Stock
are nonvoting. However, their holders can vote, as a single class, to
approve certain modifications to among other things, the Articles of
Incorporation.

Upon the declaration of dividends to common stockholders, the Company
is required to declare dividends on the Convertible Preferred Stock in
an amount equal to the per share amount distributable with respect to
the number of shares of common stock into which such shares of
Convertible Preferred Stock is convertible on the common stockholder
dividend declaration date.

WARRANTS - The Company has the following warrants outstanding at
January 27, 1996 related to the issuance of common stock:

Underwriter's Warrant - In connection with FH's initial public
offering in September 1993, FH sold to the managing
underwriter for $.1, warrants to purchase 110,000 shares of
common stock at $6.60 per share.

F-13
38

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

The right to exercise these warrants is for the four-year
period commencing on September 2, 1994. These warrants are not
redeemable.

Warrant A - Represents the aggregate right to purchase 494,300
shares of common stock (including the right to purchase 35,590
shares as exercised under Warrant C) at $6.00 per share. The
right to exercise these warrants is for the five-year period
that begins at the earlier of a) the first fiscal year
reflecting net income of at least $.75 per share (undiluted) or
b) December 31, 2004.

Warrant B - Represents the aggregate right to purchase 600,000
shares of common stock at $6.00 per share. These warrants
expire on May 31, 2000.

Financial Institution Warrant - In connection with the
amendment of the credit facility (see Note 8), the Company
issued to the financial institution warrants to purchase
100,000 shares of common stock at $6.00 per share. These
warrants expire on June 14, 2001.

Prior to the merger, LFS had certain warrants outstanding (Warrant C)
which represented the right to purchase for $1.00 at a time
immediately preceding the consummation of the Merger (i) 102,814
shares of common stock of the Company, and (ii) such Warrant A
securities representing the right to purchase 35,590 (see Warrant A
above) shares of common stock. In connection with the exercise of
Warrant C on January 2, 1996, the Company issued 102,814 shares of LFS
common stock and recorded compensation expense of $617 representing
the difference between the market price of $6.00 per share and the
exercise price of $1.00 for Warrant.

11. INCOME TAXES

At January 27, 1996, deferred tax assets and liabilities were
comprised of the following:

CURRENT NONCURRENT TOTAL

Deferred tax assets:
Net operating loss carryforwards $ 1,640 $ 1,640
Deferred revenue $ 495 495
Inventory capitalization 400 400
Other 393 393
------ ------- -------
Total 1,288 1,640 2,928

Deferred tax liability
Accelerated deductions (641) (641)
------ ------- -------
Net deferred tax assets 647 1,640 2,287
Less: valuation allowance (647) (1,640) (2,287)
------ ------- -------
Net amount recorded $ - $ - $ -
====== ======= =======

The Company has recorded a valuation allowance to reduce the net
deferred income asset to zero.

The Company has federal net operating loss carryforwards available for
income tax purposes of approximately $4,103 that expire in 2010.

F-14
39

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

12. COMMITMENTS AND CONTINGENCIES

The Company has been notified that certain stores in California have
materials containing asbestos. The asbestos material is generally in
trace quantities, and no remediation is expected to be required on the
understanding that such material is property secured.

The Company is a party to various other legal proceedings incidental
to its business. In the opinion of management, the ultimate
resolution of these matters would not have a material effect on the
Company's consolidated financial statements.

The Company has an employment agreement with its President that
expires on May 31, 1999 and requires a yearly salary of $300.

The Company has noncancelable operating leases, primarily for retail
stores, that expire at various dates through 2004. These leases
generally contain renewal options for periods ranging from one to
three years and require the Company to pay costs such as real estate
taxes, maintenance and/or additional rents based on a percentage of
sales. Net rental expense for all operating leases during the eight
months ended January 27, 1996 was $8,330.

Future minimum lease payments under operating leases at January 27,
1996 are as follows:

YEAR ENDING
JANUARY

1997 $ 9,185
1998 7,548
1999 6,448
2000 5,153
2001 3,759
Thereafter 3,375
-------
Total $35,468
=======

On June 17, 1996, the Company entered into an operating lease
agreement for a point-of-sale system. Under the provisions of this
lease agreement, the Company is required to make monthly payments
commencing with the first store installation and increasing to $62.3
based upon 282 stores. Monthly payments will be reduced in the event
of store closures. The term of the agreement is five years.

13. TRANSACTIONS WITH WOOLWORTH

The Company receives information systems, accounting and administrative
services from Woolworth pursuant to the terms of a transition service
agreement (the "Service Agreement"). In return, the Company pays
certain fees to Woolworth. These fees amounted to approximately $1,440
during the eight months ended January 27, 1996. The initial term of the
Service Agreement expired on May 31, 1996. In connection with the
Settlement Agreement (see Note 2), the Service Agreement was extended to
September 28, 1996, at which time, the Service Agreement can continue on
a month-to-month basis unless terminated by either party upon a 30-day
notice. Interest expense paid to Woolworth in connection with debt
incurred with the Acquisition (see Note 2) and the bridge loans (see
Note 6) amounted to $372 during the eight months ended January 27, 1996.

F-15
40

KIDS MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EIGHT MONTHS ENDED JANUARY 27, 1996
(Dollar amounts in thousands, except per share amounts)

14. STOCK OPTION PLAN

On January 3, 1996, the stockholders of the Company approved the 1995
Stock Option Plan (the "Plan"). Under the Plan, 600,000 shares of
common stock have been reserved for issuance to eligible employees,
directors, consultants and advisors, subject to certain limitations,
as defined in the Plan. Incentive stock options may be granted at
prices not less than 100% (110% for individuals controlling more than
10% of the Company's total combined capital stock) at the date of the
grant, and expire within 10 years from the date of the grant (5 years
for individuals controlling more than 10% of the Company's total
combined capital stock). Nonstatutory stock options may be granted at
prices not less than 100% of the fair market value at the date of the
grant and expire within 10 years of the date the grant. The Plan
provides for an automatic grant of nonstatutory stock options to
acquire 2,000 shares of the Company's common stock to non-employee
directors (other than designees of Woolworth) each year on the day
following the Company's annual meeting of stockholders. No options
were granted during the eight months ended January 27, 1996.

15. 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 $10 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.

On September 13, 1996, the Company's Board of Directors approved the
Store Closure Plan under which the Company will immediately reduce
its workforce at its distribution center and administrative offices
and close approximately 100 stores. The Company estimates that its
lease termination costs, property and equipment write-off and other
closing costs in connection with the Store Closure Plan
will be approximately $5,366, which will be recorded as a charge to
operations the third quarter ending October 26, 1996.

* * * * * *

F-16