<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM S-8
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
___________________
ZANY BRAINY, INC.
(Exact name of company as specified in its charter)
Pennsylvania 23-2663337
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2520 Renaissance Boulevard
King of Prussia, Pennsylvania 19406
(Address of principal executive offices) (Zip Code)
1993 Stock Incentive Plan
Amended and Restated 1998 Equity Compensation Plan
Rosa Aukburg Stock Option Agreement
Nick Egelanian Non-Qualified Stock Option Agreement
(Full title of the plans)
Keith C. Spurgeon
Chief Executive Officer
Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, Pennsylvania 19406
(Name and address of agent for service)
(610) 278-7800
(Telephone number, including area code, of agent for service)
___________________
Copy of all communications to:
Alan Singer
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103-2921
(215) 963-5000
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
Title of securities Amount to be Proposed maximum Proposed maximum Amount of
to be registered registered (1) offering price aggregate registration fee
per share offering price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 2,063,600 (4) $9.75 (2) $20,120,100 (2)
par value ---------------------------------------------------------------------------------- $ 10,761
3,361,607 (4) $5.53 (3) $18,589,687 (3)
===============================================================================================================================
</TABLE>
(1) Includes 2,400,207 shares issuable pursuant to the 1993 Stock Incentive
Plan, 3,000,000 shares issuable pursuant to the Amended and Restated 1998
Equity Compensation Plan, 5,000 shares issuable pursuant to the Rosa
Aukburg Stock Option Agreement dated May 15, 1992 and 20,000 shares
issuable pursuant to the Nick Egelanian Non-Qualified Stock Option
Agreement dated August 7, 1995.
(2) Estimated pursuant to Paragraphs (c) and (h) of Rule 457 under the
Securities Act, solely for the purpose of calculating the registration fee,
based upon the average of the high and low sales prices of shares of the
Company's Common Stock on July 13, 1999, as reported on the Nasdaq National
Market.
(3) Calculated pursuant to paragraph (h)(1) of Rule 457, based on the actual
per share exercise prices of stock options awarded.
(4) Pursuant to Rule 416 under the Securities Act of 1933, as amended
(the"Securities Act"), this Registration Statement also covers such
additional shares as may hereinafter be offered or issued to prevent
dilution resulting from stock splits, stock dividends, recapitalizations or
certain other capital adjustments.
===============================================================================
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENTS
Item 3. Incorporation of Documents by Reference.
---------------------------------------
The following documents filed with the U.S. Securities and Exchange
Commission (the "Commission") by Zany Brainy, Inc. (the "Registrant") are
incorporated by reference in this Form S-8 Registration Statement (the
"Registration Statement") and made a part hereof:
1. The Registrant's prospectus dated June 2, 1999 filed pursuant to
Rule 424(b) as part of the Registrant's registration statement on Form S-1
(Registration No. 333-74719); and
2. The description of the Registrant's Common Stock, par value $.01
per share, set forth in the Registrant's registration statement on Form 8-A
filed with the Commission on May 24, 1999 to register such securities under the
Securities Exchange Act of 1934 (the "Exchange Act").
All documents and reports filed by the Registrant pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Registration Statement and prior to the filing of a post-effective amendment
which indicates that all securities offered hereby have been sold or which
deregisters all securities then remaining unsold shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such documents or reports. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Registration Statement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified shall not be deemed to
constitute a part of the Registration Statement except as so modified and any
statement so superseded shall not be deemed to constitute a part of this
Registration Statement.
Independent Public Accountants
- ------------------------------
The consolidated financial statements of the Registrant as of January
31, 1998 and January 30, 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended January 30, 1999, incorporated by reference in this
Registration Statement from the Registrant's registration Statement on Form S-1
(Registration No. 333-74719), together with all amendments thereto, have been
audited by Arthur Andersen LLP, independent certified public accountants,
as indicated in their report with respect thereto, and are incorporated herein
in reliance upon the authority of said firm as experts in giving said report.
Future financial statements of the Company and the reports thereon of Arthur
Andersen LLP also will be incorporated by reference in this registration
statement in reliance upon the authority of that firm as experts in giving those
reports to the extent said firm has audited those financial statements and
consented to the use of their reports thereon.
Item 4. Description of Securities.
-------------------------
Not Applicable
II-1
<PAGE>
Item 5. Interests of Named Experts and Counsel.
--------------------------------------
Not Applicable
Item 6. Indemnification of Directors and Officers.
-----------------------------------------
Section 1741 of the Pennsylvania Business Corporation Law, as amended
(the "BCL"), provides the Registrant with the power to indemnify any officer or
director acting in his or her capacity as a representative of the Registrant who
was, is or is threatened to be made a party to any action or proceeding for
expenses, judgments, penalties, fines and amounts paid in settlement in
connection with such action or proceeding. The indemnity provisions apply
whether the action was instituted by a third party or arose by or in the right
of the Registrant. Generally, the only limitation on the Registrant's ability to
indemnify its officers and directors is if the act violates a criminal statute
or if the act or failure to act is finally determined by a court to have
constituted wilful misconduct or recklessness.
The Registrant's Amended and Restated Bylaws (the "Bylaws") provide a
right to indemnification to the full extent permitted by law for expenses,
attorney's fees, damages, punitive damages, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by any director or
officer whether or not the indemnified liability arises or arose from any
threatened, pending or completed proceeding by or in the right of the Registrant
by reason of the fact that such director or officer is or was serving as a
director, officer or employee of the Registrant or, at the Registrant's request,
as a director, officer, partner, fiduciary or trustee of another corporation,
partnership, joint venture, trust employee benefit plan or other enterprise,
unless the act or failure to act giving rise to the claim for indemnification is
finally determined by a court to have constituted willful misconduct or
recklessness. The Registrant's Bylaws provide for the advancement of expenses to
an indemnified party upon receipt of an undertaking by the party to repay those
amounts if it is finally determined that the indemnified party is not entitled
to indemnification.
The Registrant's Bylaws authorize the Registrant to take steps to
ensure that all persons entitled to the indemnification are properly
indemnified, including, if the Board of Directors of the Registrant so
determines, purchasing and maintaining insurance.
Item 7. Exemption from Registration Claimed.
-----------------------------------
Not Applicable
II-2
<PAGE>
Item 8. Exhibits.
--------
Exhibit Numbers Exhibit
--------------------------------------------------------------
5 Opinion of Morgan, Lewis & Bockius LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morgan, Lewis & Bockius LLP
(included as part of Exhibit 5)
24 Power of Attorney (included as part of the
signature page)
99.1 1993 Stock Incentive Plan, as amended
99.2 Amended and Restated 1998 Equity Compensation Plan
99.3 Rosa Aukburg Stock Option Agreement
99.4 Nick Egelanian Non-Qualified Stock Option
Agreement
II-3
<PAGE>
Item 9. Undertakings.
------------
(a) The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that subparagraphs (a)(1)(i) and (a)(1)(ii) of
this section do not apply if the information required to be included
in a post-effective amendment by those subparagraphs is contained in
periodic reports filed with or furnished to the Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has
II-4
<PAGE>
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in King of Prussia, Pennsylvania on this 15th day of July, 1999.
ZANY BRAINY, INC.
By: /s/ Keith C. Spurgeon
----------------------
Name: Keith C. Spurgeon
Title: Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by or on behalf of the following persons in the
capacities and on the dates indicated.
Each person, in so signing, also makes, constitutes and appoints Keith C.
Spurgeon and Robert A. Helpert, and each such officer acting singly, his true
and lawful attorney-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments to
this Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto, and to do and perform each and every
act and thing necessary to effectuate the same.
Name Title Date
- ---- ----- ----
/s/ Keith C. Spurgeon Chairman of the Board and July 15, 1999
- ------------------------
Keith C. Spurgeon Chief Executive Officer
/s/ Robert A. Helpert Chief Financial Officer July 15, 1999
- ------------------------ (principal financial and
Robert A. Helpert accounting officer)
/s/ C. Donald Dorsey
- ------------------------
C. Donald Dorsey Director July 15, 1999
/s/ Robert A. Fox
- ------------------------
Robert A. Fox Director July 15, 1999
/s/ Gerald R. Gallagher
- ------------------------
Gerald R. Gallagher Director July 15, 1999
/s/ Henry Nasella
- ------------------------
Henry Nasella Director July 15, 1999
/s/ Yves B. Sisteron
- ------------------------
Yves B. Sisteron Director July 15, 1999
II-6
<PAGE>
/s/ David V. Wachs
- ------------------
David V. Wachs Director July 15, 1999
II-7
<PAGE>
INDEX TO EXHIBITS
Exhibit Numbers Exhibit
- ------------------------------------------------------------------------------
5 Opinion of Morgan, Lewis & Bockius LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (included as part of
Exhibit 5)
24 Power of Attorney (included as part of the signature page)
99.1 1993 Stock Incentive Plan, as amended
99.2 Amended and Restated 1998 Equity Compensation Plan
99.3 Rosa Aukburg Stock Option Agreement
99.4 Nick Egelanian Non-Qualified Stock Option Agreement
<PAGE>
EXHIBIT 5
July 15, 1999
Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, Pennsylvania 19406
Ladies and Gentlemen:
We have acted as counsel to Zany Brainy, Inc., a Pennsylvania corporation (the
"Registrant"), in connection with the preparation of a registration statement on
Form S-8 (the "Registration Statement") to be filed pursuant to the Securities
Act of 1933, as amended (the "Act") and relating to 5,425,207 shares (the
"Shares") of the Registrant's Common Stock, par value $.01 per share (the
"Common Stock"). The Shares covered by this Registration Statement may be issued
pursuant to the Registrant's 1993 Stock Incentive Plan, as amended, the
Registrant's Amended and Restated 1998 Equity Compensation Plan, the Rosa
Aukburg Stock Option Agreement and the Nick Egelanian Non-Qualified Stock Option
Agreement (together, the "Benefit Arrangements").
We have examined the Registration Statement and such corporate records, statutes
and other documents as we have deemed relevant in rendering this opinion. As to
matters of fact, we have relied on representations of officers of the
Registrant. In our examination, we have assumed the genuineness of documents
submitted to us as originals and the conformity with originals of documents
submitted to us as copies thereof.
Based on the foregoing, it is our opinion that Shares originally issued by the
Registrant to eligible participants through the Benefit Arrangements will be,
when issued and delivered as contemplated by the Benefit Arrangements, validly
issued, fully paid and nonassessable.
The opinion set forth above is limited to the laws of the Commonwealth of
Pennsylvania.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Act or the rules or regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
We consent to the incorporation by reference in this registration statement on
Form S-8 pertaining to the Zany Brainy, Inc. 1993 Stock Incentive Plan, the
Amended and Restated 1998 Equity Compensation Plan, the Rosa Aukburg Stock
Option Agreement and the Nick Egelanian Non-Qualified Stock Option Agreement of
our report dated March 5, 1999 appearing in the prospectus dated June 2, 1999
included in the registration statement on Form S-1 (Registration No. 333-74719)
of Zany Brainy, Inc. filed with the Securities and Exchange Commission and to
all references to our Firm included in this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
July 15, 1999
<PAGE>
EXHIBIT 99.1
As Amended March 17, 1999 and October 19, 1993
ZANY BRAINY, INC.
----------------
1993 STOCK INCENTIVE PLAN
-------------------------
1. Definitions. As used herein, the following terms have the
-----------
meanings hereinafter set forth:
(a) "Affiliate" shall mean a corporation which is a parent corporation
---------
or a subsidiary corporation with respect to the Company within the meaning of
section 424(e) or 424(f) of the Code.
(b) "Award" shall mean a transfer of Common Stock subject to
-----
conditions of forfeiture (or the right to purchase Common Stock subject to
conditions of forfeiture) made pursuant to sections 3 and 10 of the Plan.
(c) "Award Agreement" shall mean the agreement between the Company and
---------------
a Grantee with respect to an Award made pursuant to the Plan.
(d) "Board" shall mean the Board of Directors of the Company or of an
-----
Affiliate; "Company's Board" shall mean the Board of Directors of Zany Brainy,
---------------
Inc.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended,
----
and the same as may be further amended from time to time.
(f) "Committee" shall mean the Company's Board, subject to the right
---------
of the Company's Board to designate some other committee to make recommendations
to it for the grant of Options and Awards and/or to assume other designated
responsibilities in the administration of the Plan.
(g) "Common Stock" shall mean the Company's common stock, par
------------
value $0.01 per share.
(h) "Company" shall mean Zany Brainy, Inc., a Pennsylvania
-------
business corporation.
(i) "Grantee" shall mean a person to whom an Award has been
-------
granted pursuant to the Plan.
<PAGE>
(j) "Incentive Stock Option" or "ISO" shall mean an Option granted
---------------------- ---
pursuant to the Plan which is intended to constitute an incentive stock option
within the meaning of section 422 of the Code.
(k) "Option" shall mean the right to purchase Common Stock
------
granted pursuant to sections 3 and 7 of the Plan.
(l) "Option Agreement" shall mean the agreement between the Company
----------------
and the Optionee under which the Optionee may purchase Common Stock pursuant to
the Plan.
(m) "Optionee" shall mean a person to whom an Option has been
--------
granted pursuant to the Plan.
(n) "Plan" shall mean Zany Brainy, Inc. 1993 Stock Incentive Plan, as
----
set forth herein, and the same as may be amended from time to time.
(o) "Stock Appreciation Right" or "SAR" shall mean the right granted
------------------------ ---
pursuant to the Plan in connection with an Option to surrender the Option and
receive in exchange therefor an amount equal to the excess of the fair market
value of the Common Stock subject to the Option so surrendered over the exercise
price of the Option.
2. Purpose. The Plan is intended as an additional incentive to key
-------
employees and non-employee members of the Board to enter into or remain in the
employ of the Company or any Affiliate or to serve on the Board and to devote
themselves to the Company's success and to reward past service of such persons
by providing them with an opportunity to acquire or increase a proprietary
interest in the Company through receipt of Awards and/or Options.
3. Administration. The Plan shall be administered by the Company's
--------------
Board or the Committee if a Committee is appointed. The powers and duties of
the Committee set forth in this Plan shall be exercised by the Company's Board
in the absence of a Committee.
The Committee shall from time to time at its discretion grant Options
and Awards pursuant to the terms of the Plan. Subject to section 4, the
Committee shall have plenary authority to determine the persons to whom and the
times at which Options or Awards shall be granted, the number of shares of
Common Stock to be covered thereby and the price and other terms and conditions
thereof, including in the case of an Option a specification with respect to
whether or not the option is intended to be an ISO and/or to include an SAR. In
making such determinations the Committee may take into account the nature of the
person's services and responsibilities, the person's present and potential
contribution to the Company's success and
-2-
<PAGE>
such other factors as it may deem relevant. The interpretation and construction
by the Committee of any provision of the Plan or of any Option or Award granted
under it shall be final, binding and conclusive.
4. Eligibility.
-----------
(a) All key employees of the Company or an Affiliate and all members
of the Board shall be eligible to receive Options or Awards hereunder. The
Committee, in its sole discretion, shall determine whether an individual
qualifies as a key employee.
5. Shares. The aggregate maximum number of shares for which options
------
or Awards may be issued under the Plan is 300,000 shares of the Company's Common
Stock, $.0l par value, adjusted as provided in section 11. Shares shall be
issued from authorized and unissued Common Stock or Common Stock held in or
hereafter acquired for the treasury of the Company. If any outstanding Option
granted under the Plan expires, lapses or is terminated for any reason or if any
shares which are subject to an Award are forfeited for any reason, the Shares
allocable thereto may again be the subject of an Option or Award granted
pursuant to the Plan.
6. Effective Date and Term of the Plan.
-----------------------------------
(a) Effective Date. The Plan shall be effective immediately.
--------------
(b) Term. This Plan shall terminate on May 9, 2003 and no Option
----
or Award shall be granted hereunder after such date.
7. Terms and Conditions of Options. Options granted pursuant to the
-------------------------------
Plan shall be evidenced by written Option Agreements in such form as the
Committee shall from time to time approve, which Option Agreements shall comply
with and be subject to the following terms and conditions and such other terms
and conditions which the Committee shall from time to time require which are not
inconsistent with the terms of the Plan.
(a) Number of Shares. Each Option Agreement shall state the
----------------
number of shares to which it pertains.
(b) Exercise Price. Each Option Agreement shall state the exercise
--------------
price at which shares covered by the Option may be purchased. In the case of an
ISO, the exercise price shall be at least 100% of the fair market value of the
Common Stock on the date the ISO is granted; provided, however, if an ISO is
granted to an Optionee who then owns, directly or by attribution under section
424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliate,
-3-
<PAGE>
then the exercise price shall be at least 110% of the fair market value of the
shares on the date the Option is granted. If the Common Stock is traded in a
public market, then the fair market value per share shall be the mean between
the closing "bid" and "asked" prices thereof or the mean between the highest and
lowest quoted selling prices thereof, as applicable, as the Committee
determines, on the day the Option is granted as reported in customary financial
reporting services. If the Common Stock is not traded in a public market, fair
market value shall be determined in good faith by the Committee.
(c) Medium of Payment. An Optionee shall pay for shares (i) in cash,
-----------------
(ii) by certified check payable to the order of the Company, or (iii) by such
other mode of payment as the Committee may approve. Furthermore, the Committee
may provide in an Option Agreement that payment may be made all or in part in
shares of the Common Stock held by the Optionee. If payment is made in whole or
in part in shares of the Common Stock, then the Optionee shall deliver to the
Company certificates registered in the name of such Optionee representing shares
of Common Stock owned by such optionee, free of all liens, claims and
encumbrances of every kind, accompanied by stock powers duly endorsed in blank
by the Optionee. For purposes of determining the amount of payment, shares of
Common Stock tendered as payment by the Optionee shall be valued at fair market
value (as determined under subsection 7(b)) on the date of exercise (as
determined under section 9). Notwithstanding the foregoing, the Committee, in
its sole discretion, may refuse to accept shares of Common Stock in payment of
the exercise price. In that event, any certificates representing shares of
Common Stock which were delivered to the Company shall be returned to the
Optionee with notice of the refusal of the Committee to accept such shares in
payment of the exercise price. The Committee may impose from time to time such
limitations and prohibitions on the use of shares of the Common Stock to
exercise an Option as it deems appropriate.
(d) Termination of Options. No Option shall be exercisable after
----------------------
the first to occur of the following:
(i) Expiration of the term specified in the Option Agreement,
which shall not exceed (A) five years from the date of grant with respect to an
ISO if the Optionee on the date of grant owns, directly or by attribution under
section 424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or of an Affiliate
or (B) ten yea rs in all other cases;
(ii) Termination of the optionee's employment or service as a
director with the Company and its Affiliates, subject to such additional periods
not to exceed one year as the Committee shall determine, which periods may vary
with the reason for termination including, without limitation, the Optionee's
death, disability or retirement;
-4-
<PAGE>
(iii) The date set by the Committee to be an accelerated expiration
date in the event of dissolution or liquidation of the Company or consummation
of any acquisition or business combination transaction in which the Company is
not the surviving or acquiring entity or in which the Company becomes an 80% or
more owned subsidiary of another person or company, in which case the Committee
may take whatever other action with respect to the Option, including
acceleration of any exercise provisions, it deems necessary or desirable; or
(iv) A finding by the Committee, after full consideration of the facts
presented on behalf of both the Company and the Optionee, that the Optionee has
breached his employment or service contract with the Company or an Affiliate, or
has been engaged in any sort of disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft, commission of a
felony or proven dishonesty in the course of his employment or service or has
disclosed trade secrets or confidential information of the Company or an
Affiliate. In such event, in addition to immediate termination of the Option,
the Optionee, upon a determination by the Committee, shall automatically forfeit
all shares for which the Company has not yet delivered the share certificates
upon refund by the Company of the exercise price.
(e) Transferability of Grants.
-------------------------
(i) Nontransferability of Grants. Except as provided below, only the
----------------------------
Grantee may exercise rights under an Option during the Grantee's lifetime. A
Grantee may not transfer those rights except by will or by the laws of descent
and distribution or, with respect to Grants other than Incentive Stock Options,
if permitted in any specific case by the Committee, pursuant to a domestic
relations order (as defined under the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the regulations thereunder). When a
Grantee dies, the personal representative or other person entitled to succeed to
the rights of the Grantee ("Successor Grantee") may exercise such rights. A
Successor Grantee must furnish proof satisfactory to the Company of his or her
right to receive the Option under the Grantee's will or under the applicable
laws of descent and distribution.
(ii) Transfer of Nonqualified Stock Options. Notwithstanding the
--------------------------------------
foregoing, the Committee may provide, in an Option Agreement, that a Grantee may
transfer nonqualified stock options to family members, according to such terms
as the Committee may determine; provided that the Option is not transferred to
the family member for value. For purposes of the Plan, "family member" includes
any child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, including adoptive
relationships, any person sharing the employee's household (other than a tenant
or employee), a trust in which these persons have more than fifty percent of the
beneficial interest, a foundation
-5-
<PAGE>
in which these persons (or the employee) control the management of assets, and
any other entity in which these persons (or the employee) own more than fifty
percent of the voting interests. The following transactions are not deemed to be
transfers for value for purposes of the Plan:
(i) a transfer under a domestic relations order in
settlement of marital property rights; and
(ii) a transfer to an entity in which more than fifty
percent of the voting interests are owned by family members (or the employee) in
exchange for an interest in that entity.
(f) Other Provisions. The Option Agreements shall contain such other
----------------
provisions including, without limitation, additional restrictions upon the
exercise of the Option or additional limitations upon the term of the Option, as
the Committee shall deem advisable.
(g) Amendment. The Committee shall have the right to amend Option
---------
Agreements issued to an Optionee subject to his consent, except that the consent
of the Optionee shall not be required for any amendment made under subsection
7(d)(iii).
8. Stock Appreciation Rights (SARs).
--------------------------------
(a) In General. Subject to the terms and conditions of the Plan, the
----------
Committee may, in its sole and absolute discretion, grant to an Optionee rights
to surrender to the Company, in whole or in part, an option, and to receive in
exchange therefor payment by the Company of an amount equal to the excess of the
fair market value of the shares of Common Stock subject to such Option, or
portion thereof, so surrendered (determined in the manner described in
subsection 7(b) as of the date the SARs are exercised) over the exercise price
to acquire such shares. Such payment may be made, as determined by the
Committee in accordance with subsection 8(c) below and set forth in the Option
Agreement, either in shares of Common Stock or in cash or in any combination
thereof.
(b) Grant. Each SAR shall relate to a specific Option granted under
-----
the Plan and shall be granted to the Optionee concurrently with the grant of
such Option by inclusion of appropriate provisions in the Option Agreement
pertaining thereto. The number of SARs granted to an Optionee shall not exceed
the number of shares of Common Stock which such Optionee is entitled to purchase
pursuant to the related Option. The number of SARs held by an Optionee shall be
reduced by (i) the number of SARs exercised under the provisions of the Option
Agreement pertaining to the related Option, and (ii) the number of shares of
Common Stock purchased pursuant to the exercise of the related Option.
-6-
<PAGE>
(c) Payment. The Committee shall have sole discretion to determine
-------
whether, and shall set forth in the Option Agreement pertaining to the related
Option the circumstances under which, payment in respect of SARs granted to any
Optionee shall be made in shares of Common Stock, or in cash, or in a
combination thereof. If payment is made in Common Stock, the number of shares
of Common Stock which shall be issued pursuant to the exercise of SARs shall be
determined by dividing (i) the total number of SARs being exercised, multiplied
by the amount by which the fair market value (as determined under subsection
7(b)) of a share of Common Stock on the exercise date exceeds the exercise price
for shares covered by the related Option, by (ii) the fair market value of a
share of Common Stock on the exercise date of the SARs. No fractional share of
Common Stock shall be issued on exercise of an SAR; cash may be paid by the
Company to the individual exercising an SAR in lieu of any such fractional
share. If payment on exercise of an SAR is to be made in cash, the individual
exercising the SAR shall receive in respect of each share to which such exercise
relates an amount of money equal to the difference between the fair market value
of a share of Common Stock on the exercise date and the exercise price for
shares covered by the related Option.
(d) Limitations. SARs shall be exercisable at such times and under
-----------
such terms and conditions as the Committee, in its sole and absolute discretion,
shall determine and set forth in the Option Agreements pertaining to the related
Options; provided, however, that an SAR may be exercised only at such times and
by such individuals as the related Option under the Plan and the Option
Agreement may be exercised.
9. Exercise. No Option or SAR associated therewith shall be deemed
--------
to have been exercised prior to the receipt by the Company of written notice of
such exercise and, in the case of an Option exercise, of payment in full of the
exercise price for the shares to be purchased. The date on which the Company
receives such notice, together with payment of the exercise price and all
information or acknowledgments required herein, shall be the exercise date of
the Option or SAR. Each such notice shall specify the number of shares to which
the exercise pertains and, in the case of an Option, shall (unless the shares
are covered by a then current registration statement or a Notification under
Regulation A under the Securities Act of 1933, as amended (the "Act")), contain
the Optionee's acknowledgment in form and substance satisfactory to the Company
that (a) such shares are being purchased for investment and not for distribution
or resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (b) the Optionee has been advised and understands that
(i) the shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer and (ii) the Company is under no obligation to register
the shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (c) such shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (d) an appropriate legend
-7-
<PAGE>
referring to the foregoing restrictions on transfer may be endorsed on the
certificates. Notwithstanding the above, should the Company be advised by
counsel that issuance of shares should be delayed pending (A) registration under
federal or state securities laws or (B) the receipt of an opinion that an
appropriate exemption therefrom is available, the Company may defer exercise of
any Option granted hereunder until either such event in (A) or (B) has occurred.
10. Terms and Conditions of Awards. Awards granted pursuant to the
------------------------------
Plan shall be evidenced by written Award Agreements in such form as the
Committee shall from time to time approve, which Award Agreements shall comply
with and be subject to the following terms and conditions and such other terms
and conditions which the Committee shall from time to time require which are not
inconsistent with the terms of the Plan.
(a) Number of Shares. Each Award Agreement shall state the
----------------
number of shares of Common Stock to which it pertains.
(b) Purchase Price. Each Award Agreement shall specify the purchase
--------------
price, if any, which applies to the Award. If the Board specifies a purchase
price, the Grantee shall be required to make payment on or before the date
specified in the Award Agreement. A Grantee shall pay for shares (i) in cash,
(ii) by certified check payable to the order of the Company, or (iii) by such
other mode of payment as the Committee may approve.
(c) Transfer. In the case of an Award which provides for a transfer
--------
of shares without any payment by the Grantee, the transfer shall take place on
the date specified in the Award Agreement. In the case of an Award which
provides for a payment, the transfer shall take place on the date the initial
payment is delivered to the Company, unless the Committee or the Award Agreement
otherwise specifies. Stock certificates evidencing shares transferred pursuant
to an Award shall be issued in the sole name of the Grantee. Notwithstanding
the foregoing, as a precondition to a transfer, the Company may require an
acknowledgment by the Grantee as required under section 9.
(d) Forfeiture Conditions. The Committee shall specify in an Award
---------------------
Agreement any conditions under which the Grantee of that Award shall be required
to convey to the Company the shares covered by the Award. Upon the occurrence
of any such specified condition, the Grantee shall forthwith surrender and
deliver to the Company the certificates evidencing such shares as well as
completely executed instruments of conveyance. The Committee, in its
discretion, may provide that certificates for shares transferred pursuant to an
Award be held in escrow by the Company or an appropriate officer of the Company
until such time as each and every forfeiture condition has lapsed and that the
Grantee be required, as a condition of the transfer, to deliver to such escrow
agent stock powers covering the transferred shares duly endorsed by the Grantee.
Stock certificates evidencing shares subject to forfeiture
-8-
<PAGE>
shall bear a legend to the effect that the Common Stock evidenced thereby is
subject to repurchase or conveyance to the Company in accordance with an Award
made under the Plan and that the shares may not be sold or otherwise
transferred.
(e) Lapse of Conditions. Upon termination or lapse of each and every
-------------------
forfeiture condition, the Company shall cause certificates without the legend
referring to the Company's repurchase right (but with any other legends that may
be appropriate) evidencing the shares covered by the Award to be issued to the
Grantee upon the Grantee's surrender of the legended certificates held by him to
the Company.
(f) Rights as Shareholder. Upon payment of the purchase price, if
---------------------
any, for shares covered by an Award and compliance with the acknowledgment
requirement of subsection 10(c), the Grantee shall have all of the rights of a
shareholder with respect to the shares of Common Stock covered thereby,
including the right to vote the shares and receive all dividends and other
distributions paid or made with respect thereto, except to the extent otherwise
provided by the Committee or in the Award Agreement.
11. Adjustments on Changes in Capitalization. The aggregate number
----------------------------------------
of shares and class of shares as to which Options or Awards may be granted
hereunder, the number of shares covered by each outstanding Option and the
exercise price thereof, and the number of shares subject to forfeiture with
respect to each Award shall be appropriately adjusted in the event of a stock
dividend, stock split, recapitalization or other change in the number or class
of issued and outstanding equity securities of the Company resulting from a
subdivision or consolidation of the Common Stock and/or other outstanding equity
security or a recapitalization or other capital adjustment (not including the
issuance of Common Stock on the conversion of other securities of the Company
which are convertible into Common Stock) affecting the Common Stock which is
effected without receipt of consideration by the Company. In the event of any
adjustment relating to shares covered by an Award and still subject to
forfeiture, the foregoing provisions and the provisions of subsection 10(d)
shall apply to the certificates issued in connection with the adjustment. The
Committee shall have authority to determine the adjustments to be made under
this section and any such determination by the Committee shall be final, binding
and conclusive; provided, however, that no adjustment shall be made which will
cause an ISO to lose its status as such without the consent of the Optionee.
12. Amendment of the Plan. The Company's Board may amend the Plan
---------------------
from time to time in such manner as it may deem advisable. Nevertheless, the
Company's Board may not, without obtaining approval by vote of a majority of the
outstanding voting stock of the Company, within twelve months before or after
such action, change the class of individuals eligible to receive an ISO, extend
the expiration date of the Plan or increase the maximum number of shares as to
which Options or Awards may be granted, except as provided in section
-9-
<PAGE>
11 hereof. No amendment to the Plan shall adversely affect any outstanding
Option or Award, however, without the consent of its holder.
13. Continued Employment. The grant of an Option or Award pursuant
--------------------
to the Plan shall not be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company or any Affiliate to
retain an Optionee or Grantee in the employ of the Company or an Affiliate or as
a member of the Board or in any other capacity.
14. Withholding of Taxes. Whenever the Company proposes or is
--------------------
required to deliver or transfer shares or cash in connection with the exercise
of an Option, SAR or Award, the Company shall have the right to (a) require the
intended transferee to remit or otherwise make available to the Company an
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such shares, or (b) take whatever action it deems necessary to
protect its interests with respect to tax liabilities, including, without
limitation, withholding a portion of any shares or cash otherwise deliverable
pursuant to the Plan. The Company's obligation to make any delivery or transfer
of shares under the Plan shall be conditioned on the Optionee's or Grantee's
compliance with any withholding requirement to the satisfaction of the Company.
-10-
<PAGE>
EXHIBIT 99.2
ZANY BRAINY, INC.
AMENDED AND RESTATED
1998 EQUITY COMPENSATION PLAN
-----------------------------
The purpose of the Zany Brainy, Inc. Amended and Restated 1998 Equity
Compensation Plan (the "Plan") is to provide (i) designated employees of Zany
Brainy, Inc. (the "Company") and its subsidiaries, (ii) certain consultants and
advisors who perform services for the Company or its subsidiaries and (iii) non-
employee members of the Board of Directors of the Company (the "Board") with the
opportunity to receive grants of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock and performance units. The
Company believes that the Plan will encourage the participants to contribute
materially to the growth of the Company, thereby benefitting the Company's
shareholders, and will align the economic interests of the participants with
those of the shareholders.
1. Administration
--------------
(a) Committee. The Plan shall be administered and interpreted by the Board
---------
or by a committee appointed by the Board (the "Committee"). After an initial
public offering of the Company's stock as described in Section 21(b) (a "Public
Offering"), the Plan shall be administered by a Committee, which may consist of
two or more persons who are "outside directors" as defined under Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code"), and related
Treasury regulations and "non-employee directors" as defined under Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
However, the Board may ratify or approve any grants as it deems appropriate. If
the Board administers the Plan, references in the Plan to the "Committee" shall
be deemed to refer to the Board.
(b) Committee Authority. The Committee shall have the sole authority to
-------------------
(i) determine the individuals to whom grants shall be made under the Plan, (ii)
determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability, (iv) amend
the terms of any previously issued grant, and (v) deal with any other matters
arising under the Plan.
(c) Committee Determinations. The Committee shall have full power and
------------------------
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and for the conduct of its business as it deems necessary
or advisable, in its sole discretion. The Committee's interpretations of the
Plan and all determinations made by the Committee pursuant to the powers
<PAGE>
vested in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any awards granted hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the objectives of the Plan and
need not be uniform as to similarly situated individuals.
2. Grants
------
Awards under the Plan may consist of grants of incentive stock options as
described in Section 5 ("Incentive Stock Options"), nonqualified stock options
as described in Section 5 ("Nonqualified Stock Options") (Incentive Stock
Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 6 ("Restricted Stock"),
stock appreciation rights as described in Section 7 ("SARs"), and performance
units as described in Section 8 ("Performance Units") (hereinafter collectively
referred to as "Grants"). All Grants shall be subject to the terms and
conditions set forth herein and to such other terms and conditions consistent
with this Plan as the Committee deems appropriate and as are specified in
writing by the Committee to the individual in a grant instrument or an amendment
to the grant instrument (the "Grant Instrument"). The Committee shall approve
the form and provisions of each Grant Instrument. Grants under a particular
Section of the Plan need not be uniform as among the grantees.
3. Shares Subject to the Plan
--------------------------
(a) Shares Authorized. Subject to the adjustment specified in Section 3(c)
-----------------
below, the aggregate number of shares of common stock of the Company ("Company
Stock") that may be issued or transferred under the Plan is 3,000,000 shares.
The shares may be authorized but unissued shares of Company Stock or reacquired
shares of Company Stock, including shares purchased by the Company on the open
market for purposes of the Plan. If and to the extent Options or SARs granted
under the Plan terminate, expire, or are canceled, forfeited, exchanged or
surrendered without having been exercised, or if any shares of Restricted Stock
or Performance Units are forfeited, the shares subject to such Grants shall
again be available for purposes of the Plan. In addition, if shares of Company
Stock are used to pay the Exercise Price of an Option, only the net number of
shares received by the Grantee (as defined in Section 4(b)) pursuant to such
exercise shall be considered to have been issued or transferred under the Plan
with respect to such Option, and the remaining number of shares subject to such
Option shall again be available for purposes of the Plan.
(b) Individual Limit. After a Public Offering, no individual may be
----------------
granted Options or other Grants under the Plan during any calendar year that, in
the aggregate, may be settled by delivery of more than 500,000 shares of Company
Stock, subject to adjustment as provided in Section 3(c). In addition, with
respect to Grants the value of which is based on the Fair Market Value of
Company Stock and that may be settled in cash (in whole or in part), after a
Public Offering no individual may be paid during any calendar year cash amounts
relating to such Grants that exceed the greater of the Fair Market Value (as
defined in Section 5(b)(iii)) of the
-2-
<PAGE>
number of shares of Company Stock set forth in the preceding sentence either at
the date of grant or at the date of settlement. This provision sets forth two
separate limitations, so that Grants that may be settled solely by delivery of
Company Stock will not operate to reduce the amount or value of cash-only
Grants, and vice versa; nevertheless, Grants that may be settled in Company
Stock or cash must not exceed either limitation.
With respect to Grants, the value of which is not based on Fair Market
Value of Company Stock, after a Public Offering no individual may receive during
any calendar year cash or shares of Company Stock with a Fair Market Value at
date of settlement that, in the aggregate, exceeds $2,000,000.
(c) Adjustments. If there is any change in the number or kind of shares of
-----------
Company Stock outstanding (i) by reason of a stock dividend, spinoff,
recapitalization, stock split, or combination or exchange of shares, (ii) by
reason of a merger, reorganization or consolidation in which the Company is the
surviving corporation, (iii) by reason of a reclassification or change in par
value, or (iv) by reason of any other extraordinary or unusual event affecting
the outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spinoff or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Grants, the maximum number of shares of Company Stock that
any individual participating in the Plan may be granted in any year, the number
of shares covered by outstanding Grants, the kind of shares issued under the
Plan, and the price per share or the applicable market value of such Grants may
be appropriately adjusted by the Committee to reflect any increase or decrease
in the number of, or change in the kind or value of, issued shares of Company
Stock to preclude, to the extent practicable, the enlargement or dilution of
rights and benefits under such Grants; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated. Any adjustments
determined by the Committee shall be final, binding and conclusive. If and to
the extent that any such change in the number or kind of shares of Company Stock
outstanding is effected solely by application of a mathematical formula (e.g., a
---
2-for-1 stock split), the adjustment described in this Section 3(c) shall be
made and shall occur automatically by application of such formula, without
further action by the Committee.
4. Eligibility for Participation
-----------------------------
(a) Eligible Persons. All employees of the Company and its subsidiaries
----------------
("Employees"), including Employees who are officers or members of the Board, and
members of the Board who are not Employees ("Non-Employee Directors") shall be
eligible to participate in the Plan. Consultants and advisors who perform
services to the Company or any of its subsidiaries ("Key Advisors") shall be
eligible to participate in the Plan if the Key Advisors render bona fide
services and such services are not in connection with the offer or sale of
securities in a capital-raising transaction.
-3-
<PAGE>
(b) Selection of Grantees. The Committee shall select the Employees, Non-
---------------------
Employee Directors and Key Advisors to receive Grants and shall determine the
number of shares of Company Stock, the number of SARs or the number of
Performance Units subject to a particular Grant, and/or shall establish such
other terms and conditions applicable to such Grant, in such manner as the
Committee determines. Employees, Non-Employee Directors and Key Advisors and
who receive Grants under this Plan shall hereinafter be referred to as
"Grantees".
5. Granting of Options
-------------------
(a) Number of Shares. The Committee shall determine the number of shares
----------------
of Company Stock that will be subject to each Grant of Options to Employees,
Non-Employee Directors and Key Advisors.
(b) Type of Option and Price
------------------------
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Code or Nonqualified Stock Options that are not intended so to
qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options, all in accordance with the terms and conditions set forth herein.
Incentive Stock Options may be granted only to Employees. Nonqualified Stock
Options may be granted to Employees, Non-Employee Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal to,
greater than, or less than the Fair Market Value of a share of Company Stock on
the date the Option is granted; provided, however, that (x) the Exercise Price
of an Incentive Stock Option shall be equal to, or greater than, the Fair Market
Value of a share of Company Stock on the date the Incentive Stock Option is
granted and (y) an Incentive Stock Option may not be granted to an Employee who,
at the time of grant, owns stock possessing more than 10% percent of the total
combined voting power of all classes of stock of the Company or any parent or
subsidiary of the Company, unless the Exercise Price per share is not less than
110% of the Fair Market Value of Company Stock on the date of grant.
(iii) If the Company Stock is publicly traded, then the Fair Market
Value per share shall be determined as follows: (x) if the principal trading
market for the Company Stock is a national securities exchange or the Nasdaq
National Market, the last reported sale price thereof on the relevant date or
(if there were no trades on that date) the latest preceding date upon which a
sale was reported, or (y) if the Company Stock is not principally traded on such
exchange or market, the mean between the last reported "bid" and "asked" prices
of Company Stock on the relevant date, as reported on Nasdaq or, if not so
reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines. If the Company Stock is not publicly traded or, if
publicly
-4-
<PAGE>
traded, is not subject to reported transactions or "bid" or "asked" quotations
as set forth above, the Fair Market Value per share shall be as determined by
the Committee.
(c) Option Term. The Committee shall determine the term of each Option.
-----------
The term of any Option shall not exceed ten years from the date of grant.
However, an Incentive Stock Option that is granted to an Employee who, at the
time of grant, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company, or any parent or subsidiary of the
Company, may not have a term that exceeds five years from the date of grant.
(d) Exercisability of Options. Options shall become exercisable in
-------------------------
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee and specified in the Grant Instrument. The
Committee may accelerate the exercisability of any or all outstanding Options at
any time for any reason.
(e) Termination of Employment, Disability or Death
----------------------------------------------
(i) Except as provided below, an Option may only be exercised while
the Grantee is employed by, or providing service to, the Company as an Employee,
Key Advisor or member of the Board. In the event that a Grantee ceases to be
employed by, or provide service to, the Company for any reason other than a
"disability," death, or termination for "cause," any Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within 90 days after
the date on which the Grantee ceases to be employed by, or provide service to,
the Company (or within such other period of time as may be specified by the
Committee), but in any event no later than the date of expiration of the Option
term. Except as otherwise provided by the Committee, any of the Grantee's
Options that are not otherwise exercisable as of the date on which the Grantee
ceases to be employed by, or provide service to, the Company shall terminate as
of such date.
(ii) In the event the Grantee ceases to be employed by, or provide
service to, the Company on account of a termination for "cause" by the Company,
any Option held by the Grantee shall terminate as of the date the Grantee ceases
to be employed by, or provide service to, the Company. In addition,
notwithstanding any other provisions of this Section 5, if the Committee
determines that the Grantee has engaged in conduct that constitutes "cause" at
any time while the Grantee is employed by, or providing service to, the Company
or after the Grantee's termination of employment or service, any Option held by
the Grantee shall immediately terminate.
(iii) In the event the Grantee ceases to be employed by, or provide
service to, the Company because the Grantee is "disabled," any Option which is
otherwise exercisable by the Grantee shall terminate unless exercised within one
year after the date on which the Grantee ceases to be employed by, or provide
service to, the Company (or within such other period of time as may be specified
by the Committee), but in any event no later than the date of expiration
-5-
<PAGE>
of the Option term. Except as otherwise provided by the Committee, any of the
Grantee's Options which are not otherwise exercisable as of the date on which
the Grantee ceases to be employed by, or provide service to, the Company shall
terminate as of such date.
(iv) If the Grantee dies while employed by, or providing service to,
the Company or within 90 days after the date on which the Grantee ceases to be
employed or provide service on account of a termination specified in Section
5(e)(i) above (or within such other period of time as may be specified by the
Committee), any Option that is otherwise exercisable by the Grantee shall
terminate unless exercised within one year after the date on which the Grantee
ceases to be employed by, or provide service to, the Company (or within such
other period of time as may be specified by the Committee), but in any event no
later than the date of expiration of the Option term. Except as otherwise
provided by the Committee, any of the Grantee's Options that are not otherwise
exercisable as of the date on which the Grantee ceases to be employed by, or
provide service to, the Company shall terminate as of such date.
(v) For purposes of this Section 5(e) and Sections 6, 7, 8 and 9:
(A) The term "Company" shall mean the Company and its parent
and subsidiary corporations.
(B) "Employed by, or provide service to, the Company" shall
mean employment or service as an Employee, Key Advisor or member of the
Board (so that, for purposes of exercising Options and SARs and satisfying
conditions with respect to Restricted Stock and Performance Units, a
Grantee shall not be considered to have terminated employment or service
until the Grantee ceases to be an Employee, Key Advisor and member of the
Board), unless the Committee determines otherwise.
(C) "Disability" shall mean a Grantee's becoming disabled
within the meaning of Section 22(e)(3) of the Code.
(D) "Cause" as used herein shall mean the failure of the
Grantee to perform or observe any of the terms or provisions of this
Agreement or to fully comply with any of the lawful directives of the Board
of Directors of the Company, dishonesty, conviction of a crime involving
moral turpitude, substance abuse, misappropriation of funds, or
disparagement of the Company, its products, management or employees. In the
event a Grantee's employment or service is terminated for cause, in
addition to the immediate termination of all Grants, the Grantee shall
automatically forfeit all shares underlying any exercised portion of an
Option for which the Company has not yet delivered the share certificates,
upon refund by the Company of the Exercise Price paid by the Grantee for
such shares. Notwithstanding anything herein to the contrary, upon any
purported exercise of an Option, the Company may withhold delivery of share
certificates pending resolution of an inquiry that could lead to a finding
resulting in a forfeiture.
-6-
<PAGE>
(f) Exercise of Options. A Grantee may exercise an Option that has become
-------------------
exercisable, in whole or in part, by delivering a notice of exercise to the
Company with payment of the Exercise Price. The Grantee shall pay the Exercise
Price for an Option as specified by the Committee (x) in cash, (y) with the
approval of the Committee, by delivering shares of Company Stock owned by the
Grantee (including Company Stock acquired in connection with the exercise of an
Option, subject to such restrictions as the Committee deems appropriate) and
having a Fair Market Value on the date of exercise equal to the Exercise Price
or (z) by such other method as the Committee may approve, including attestation
(on a form prescribed by the Committee) to ownership of shares of Company Stock
having a Fair Market Value on the date of exercise equal to the Exercise Price,
or after a Public Offering payment through a broker in accordance with
procedures permitted by Regulation T of the Federal Reserve Board. In addition,
the Committee may authorize loans by the Company to Grantees in connection with
the exercise of an Option, upon such terms and conditions that the Committee, in
its sole discretion, deems appropriate. Shares of Company Stock used to exercise
an Option shall have been held by the Grantee for the requisite period of time
to avoid adverse accounting consequences to the Company with respect to the
Option. The Grantee shall pay the Exercise Price and the amount of any
withholding tax due (pursuant to Section 11) at the time of exercise. Shares of
Company Stock shall not be issued upon exercise of an Option until the Exercise
Price is fully paid and any required withholding is made. In the event that
shares of Company Stock are used to exercise an Option, the terms of such Option
may provide for a Grant of additional Options, or the Committee may grant
additional Options, to purchase, at Fair Market Value as of the date of exercise
of the Option or the date of grant of such additional Options, whichever is
later, or at such other Exercise Price as the Committee may establish, for a
term equal to the unexpired term of the exercised Option, a number of shares of
Company Stock equal to the sum of the number of whole shares used to exercise
the Option and the number of whole shares, if any, withheld in payment of any
taxes.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option shall
---------------------------------
provide that, if the aggregate Fair Market Value of Company Stock on the date of
the grant with respect to which Incentive Stock Options are exercisable for the
first time by a Grantee during any calendar year, under the Plan or any other
stock option plan of the Company or a parent or subsidiary, exceeds $100,000,
then the option, as to the excess, shall be treated as a Nonqualified Stock
Option. An Incentive Stock Option shall not be granted to any person who is not
an Employee of the Company or a parent or subsidiary (within the meaning of
Section 424(f) of the Code).
(h) Dividend Equivalents. The Committee may grant dividend equivalents in
--------------------
connection with Options granted under the Plan. Such amounts may be paid
currently or accrued as contingent cash obligations and may be payable in cash
or shares of Company Stock, upon such terms as the Committee may establish,
including after a Public Offering the achievement of specific performance goals.
-7-
<PAGE>
6. Restricted Stock Grants
-----------------------
The Committee may issue or transfer shares of Company Stock to an Employee,
Non-Employee Director or Key Advisor under a Grant of Restricted Stock, upon
such terms as the Committee deems appropriate. The following provisions are
applicable to Restricted Stock:
(a) General Requirements. Shares of Company Stock issued or transferred
--------------------
pursuant to Restricted Stock Grants may be issued or transferred for
consideration or for no consideration, as determined by the Committee. The
Committee may establish conditions under which restrictions on shares of
Restricted Stock shall lapse over a period of time or according to such other
criteria as the Committee deems appropriate, including without limitation, after
a Public Offering, restrictions based upon the achievement of specific
performance goals. The period of time during which the Restricted Stock will
remain subject to restrictions will be designated in the Grant Instrument as the
"Restriction Period."
(b) Number of Shares. The Committee shall determine the number of shares
----------------
of Company Stock to be issued or transferred pursuant to a Restricted Stock
Grant and the restrictions applicable to such shares.
(c) Requirement of Employment or Service. If the Grantee ceases to be
------------------------------------
employed by, or provide service to, the Company (as defined in Section 5(e))
during a period designated in the Grant Instrument as the Restriction Period, or
if other specified conditions are not met, the Restricted Stock Grant shall
terminate as to all shares covered by the Grant as to which the restrictions
have not lapsed as of the close of business on the Grantee's last day of
employment or service, and those shares of Company Stock must be immediately
returned to the Company. The Committee may, however, provide for complete or
partial exceptions to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During the
--------------------------------------------------------
Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Restricted Stock except to a Successor
Grantee under Section 12(a). Each certificate for a share of Restricted Stock
shall contain a legend giving appropriate notice of the restrictions in the
Grant. The Grantee shall be entitled to have the legend removed from the stock
certificate covering the shares subject to restrictions when all restrictions on
such shares have lapsed. The Committee may determine that the Company will not
issue certificates for shares of Restricted Stock until all restrictions on such
shares have lapsed, or that the Company will retain possession of certificates
for shares of Restricted Stock until all restrictions on such shares have
lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Committee
--------------------------------------
determines otherwise, during the Restriction Period, the Grantee shall have the
right to vote shares of Restricted Stock and to receive any dividends or other
distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee, including after a Public Offering the achievement
of specific performance goals.
-8-
<PAGE>
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
---------------------
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Committee. The Committee may
determine, as to any or all Restricted Stock Grants, that the restrictions shall
lapse without regard to any Restriction Period.
7. Stock Appreciation Rights
-------------------------
(a) General Requirements. The Committee may grant SARs to an Employee,
--------------------
Non-Employee Director or Key Advisor separately or in tandem with any Option
(for all or a portion of the applicable Option). Tandem SARs may be granted
either at the time the Option is granted or at any time thereafter while the
Option remains outstanding; provided, however, that, in the case of an Incentive
Stock Option, SARs may be granted only at the time of the Grant of the Incentive
Stock Option. The Committee shall establish the base amount of the SAR at the
time the SAR is granted. Unless the Committee determines otherwise, the base
amount of each SAR shall be equal to the per share Exercise Price of the related
Option or, if there is no related Option, the Fair Market Value of a share of
Company Stock as of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs granted
-----------
to a Grantee that shall be exercisable during a specified period shall not
exceed the number of shares of Company Stock that the Grantee may purchase upon
the exercise of the related Option during such period. Upon the exercise of an
Option, the SARs relating to the Company Stock covered by such Option shall
terminate. Upon the exercise of SARs, the related Option shall terminate to the
extent of an equal number of shares of Company Stock.
(c) Exercisability. An SAR shall be exercisable during the period
--------------
specified by the Committee in the Grant Instrument and shall be subject to such
vesting and other restrictions as may be specified in the Grant Instrument. The
Committee may accelerate the exercisability of any or all outstanding SARs at
any time for any reason. SARs may only be exercised while the Grantee is
employed by, or providing service to, the Company or during the applicable
period after termination of employment or service as described in Section 5(e).
A tandem SAR shall be exercisable only during the period when the Option to
which it is related is also exercisable.
(d) Value of SARs. When a Grantee exercises SARs, the Grantee shall
-------------
receive in settlement of such SARs an amount equal to the value of the stock
appreciation for the number of SARs exercised, payable in cash, Company Stock or
a combination thereof. The stock appreciation for an SAR is the amount by which
the Fair Market Value of the underlying Company Stock on the date of exercise of
the SAR exceeds the base amount of the SAR as described in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
---------------
appreciation in an SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion as the Committee deems
appropriate. For purposes of calculating the number of shares of Company Stock
to be received, shares of Company Stock shall be valued at their Fair
-9-
<PAGE>
Market Value on the date of exercise of the SAR. If shares of Company Stock are
to be received upon exercise of an SAR, cash shall be delivered in lieu of any
fractional share.
8. Performance Units
-----------------
(a) General Requirements. The Committee may grant performance units
--------------------
("Performance Units") to an Employee or Key Advisor. Each Performance Unit
shall represent the right of the Grantee to receive an amount based on the value
of the Performance Unit, if performance goals established by the Committee are
met. A Performance Unit shall be based on the Fair Market Value of a share of
Company Stock or on such other measurement base as the Committee deems
appropriate. The Committee shall determine the number of Performance Units to
be granted and the requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance Units are
----------------------------------------
granted, the Committee shall establish the performance period during which
performance shall be measured (the "Performance Period"), performance goals
applicable to the Units ("Performance Goals") and such other conditions of the
Grant as the Committee deems appropriate. Performance Goals may relate to the
financial performance of the Company or its operating units, the performance of
Company Stock, individual performance, or such other criteria as the Committee
deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
-----------------------------------------
Performance Period, the Committee shall determine to what extent the Performance
Goals and other conditions of the Performance Units are met, the value of the
Performance Units (if applicable), and the amount, if any, to be paid with
respect to the Performance Units. Payments with respect to Performance Units
shall be made in cash, in Company Stock, or in a combination of the two, as
determined by the Committee.
(d) Requirement of Employment or Service. If the Grantee ceases to be
------------------------------------
employed by, or provide service to, the Company (as defined in Section 5(e))
during a Performance Period, or if other conditions established by the Committee
are not met, the Grantee's Performance Units shall be forfeited. The Committee
may, however, provide for complete or partial exceptions to this requirement as
it deems appropriate.
9. Qualified Performance-Based Compensation
----------------------------------------
(a) Designation as Qualified Performance-Based Compensation. After a
-------------------------------------------------------
Public Offering, the Committee may determine that Performance Units, Restricted
Stock, dividends on Restricted Stock, or dividend equivalents on Options granted
to an Employee shall be considered "qualified performance-based compensation"
under Section 162(m) of the Code. The provisions of this Section 9 shall apply
to such Grants that are to be considered "qualified performance-based
compensation" under Section 162(m) of the Code.
-10-
<PAGE>
(b) Performance Goals. When Grants that are to be considered "qualified
-----------------
performance-based compensation" are granted, the Committee shall establish in
writing (i) the objective performance goals that must be met in order for
restrictions on the Restricted Stock to lapse, amounts to be paid under the
Performance Units, dividends to be paid on Restricted Stock, or dividend
equivalents to be paid on Options, (ii) the Performance Period during which the
performance goals must be met, (iii) the threshold, target and maximum amounts,
as applicable, that may be paid if the performance goals are met, and (iv) any
other conditions that the Committee deems appropriate and consistent with the
Plan and Section 162(m) of the Code. The performance goals may relate to the
Employee's business unit or the performance of the Company and its subsidiaries
as a whole, or any combination of the foregoing. The Committee shall use
objectively determinable performance goals based on one or more of the following
criteria: stock price, earnings per share, net earnings, operating earnings,
return on assets, shareholder return, return on equity, growth in assets, unit
volume, sales, market share or strategic business criteria consisting of one or
more objectives based on meeting specified revenue goals, market penetration
goals, geographic business expansion goals, cost targets or goals relating to
acquisitions or divestitures.
(c) Establishment of Goals. The Committee shall establish the performance
----------------------
goals in writing either before the beginning of the Performance Period or during
a period ending no later than the earlier of (i) 90 days after the beginning of
the Performance Period or (ii) the date on which 25% of the Performance Period
has been completed, or such other date as may be required or permitted under
applicable regulations under Section 162(m) of the Code. The performance goals
shall satisfy the requirements for "qualified performance-based compensation,"
including the requirement that the achievement of the goals be substantially
uncertain at the time they are established and that the goals be established in
such a way that a third party with knowledge of the relevant facts could
determine whether and to what extent the performance goals have been met. The
Committee shall not have discretion to increase the amount of compensation, but
may in its discretion reduce the amount of compensation, that is payable upon
achievement of the designated performance goals.
(d) Announcement of Grants. The Committee shall certify and announce the
----------------------
results for each Performance Period to all Grantees immediately following the
announcement of the Company's financial results for the Performance Period. If
and to the extent that the Committee does not certify that the performance goals
have been met, the Grants subject to the performance goals for the Performance
Period shall be forfeited.
(e) Death, Disability or Change of Control. The Committee may provide
--------------------------------------
that Performance Units, dividends on Restricted Stock, or dividend equivalents
on Options shall be payable, or restrictions on Restricted Stock shall lapse, in
whole or in part, in the event of the Grantee's death or disability (as defined
in Section 5(e) above) during the Performance Period, and the provisions of
Section 14 shall apply in the event of a Change of Control.
-11-
<PAGE>
10. Deferrals
---------
The Committee may permit or require a Grantee to defer receipt of the
payment of cash or the delivery of shares that would otherwise be due to such
Grantee by virtue of the exercise of any Option or SAR, the lapse or waiver of
restrictions applicable to Restricted Stock, or the satisfaction of any
requirements or objectives with respect to Performance Units. If any such
deferral election is permitted or required, the Committee shall, in its sole
discretion, establish rules and procedures for such deferrals.
11. Withholding of Taxes
--------------------
(a) Required Withholding. All Grants under the Plan shall be subject to
--------------------
applicable federal (including FICA), state and local tax withholding
requirements. The Company shall have the right to deduct from all Grants paid
in cash, or from other wages paid to the Grantee, any federal, state or local
taxes required by law to be withheld with respect to such Grants. In the case
of Options and other Grants paid in Company Stock, the Company may require the
Grantee or other person receiving such shares to pay to the Company the amount
of any such taxes that the Company is required to withhold with respect to such
Grants, or the Company may deduct from other wages paid by the Company the
amount of any withholding taxes due with respect to such Grants.
(b) Election to Withhold Shares. If the Committee so permits, a Grantee
---------------------------
may elect to satisfy the Company's income tax withholding obligation with
respect to an Option, SAR, Restricted Stock or Performance Units paid in Company
Stock by having shares withheld up to an amount that does not exceed the
Grantee's minimum applicable withholding tax rate for federal (including FICA),
state and local tax liabilities. The election must be in a form and manner
prescribed by the Committee and shall be subject to the prior approval of the
Committee, which approval may be given in connection with approval of a Grant
that expressly permits such an election.
12. Transferability of Grants
-------------------------
(a) Nontransferability of Grants. Except as provided below, only the
----------------------------
Grantee may exercise rights under a Grant during the Grantee's lifetime. A
Grantee may not transfer those rights except by will or by the laws of descent
and distribution or, with respect to Grants other than Incentive Stock Options,
if permitted in any specific case by the Committee, pursuant to a domestic
relations order (as defined under the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the regulations thereunder). When a
Grantee dies, the personal representative or other person entitled to succeed to
the rights of the Grantee ("Successor Grantee") may exercise such rights. A
Successor Grantee must furnish proof satisfactory to the Company of his or her
right to receive the Grant under the Grantee's will or under the applicable laws
of descent and distribution.
-12-
<PAGE>
(b) Transfer of Nonqualified Stock Options and Restricted Stock Grants.
------------------------------------------------------------------
Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument,
that a Grantee may transfer Nonqualified Stock Options or Restricted Stock
Grants to family members, according to such terms as the Committee may
determine; provided that the Option or Restricted Stock Grant is not transferred
to the family member for value. For purposes of the Plan, "family member"
includes any child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including
adoptive relationships, any person sharing the employee's household (other than
a tenant or employee), a trust in which these persons have more than fifty
percent of the beneficial interest, a foundation in which these persons (or the
employee) control the management of assets, and any other entity in which these
persons (or the employee) own more than fifty percent of the voting interests.
The following transactions are not deemed to be transfers for value for purposes
of the Plan:
(i) a transfer under a domestic relations order in settlement of
marital property rights; and
(ii) a transfer to an entity in which more than fifty percent of the
voting interests are owned by family members (or the employee) in exchange for
an interest in that entity.
13. Change of Control of the Company
--------------------------------
As used herein, a "Change of Control" shall be deemed to have occurred in
the event of both of the following:
(a) Any of (i) the direct or indirect sale or exchange by the shareholders
of the Company of the stock of the Company, in a single or series of related
transactions, after which sale or exchange the shareholders of the Company
immediately prior to such transactions do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock of the Company;
(ii) a merger in which the Company is a party after which merger the
shareholders of the Company do not retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the surviving company
or (iii) the sale, exchange, or transfer of all or substantially all of the
Company's assets (other than a sale, exchange, or transfer to one or more
corporations where the shareholders of the Company before such sale, exchange,
or transfer retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the corporation(s) to which the
assets were transferred); and
(b) A change in either the composition or size of the Board of Directors
of the Company after which change a majority of members of the Board of
Directors immediately preceding such change are no longer members of the Board
of Directors.
As used herein, "Voting Stock" shall include both the common stock and the
preferred stock of the Company, determined on a fully converted basis.
-13-
<PAGE>
14. Consequences of a Change of Control
-----------------------------------
(a) Notice and Acceleration. Upon a Change of Control, unless the
-----------------------
Committee determines otherwise, (i) the Company shall provide each Grantee with
outstanding Grants written notice of such Change of Control, (ii) 50% of all
unvested Options and SARs shall automatically accelerate and become fully
exercisable, (iii) the restrictions and conditions on all outstanding Restricted
Stock shall immediately lapse and (iv) Grantees holding Performance Units shall
receive a payment in settlement of such Performance Units, in an amount
determined by the Committee, based on the Grantee's target payment for the
Performance Period and the portion of the Performance Period that precedes the
Change of Control.
(b) Assumption of Grants. Upon a Change of Control where the Company is
--------------------
not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding Options
and SARs that are not exercised shall be assumed by, or replaced with comparable
options or rights by, the surviving corporation.
(c) Other Alternatives. Notwithstanding the foregoing, subject to
------------------
subsection (d) below, in the event of a Change of Control, the Committee may
take one or both of the following actions: the Committee may (i) require that
Grantees surrender their outstanding Options and SARs in exchange for a payment
by the Company, in cash or Company Stock as determined by the Committee, in an
amount equal to the amount by which the then Fair Market Value of the shares of
Company Stock subject to the Grantee's unexercised Options and SARs exceeds the
Exercise Price of the Options or the base amount of the SARs, as applicable, or
(ii) after giving Grantees an opportunity to exercise their outstanding Options
and SARs, terminate any or all unexercised Options and SARs at such time as the
Committee deems appropriate. Such surrender or termination shall take place as
of the date of the Change of Control or such other date as the Committee may
specify.
(d) Committee. The Committee making the determinations under this Section
---------
14 following a Change of Control must comprise the same members as those on the
Committee immediately before the Change of Control. If the Committee members do
not meet this requirement, the automatic provisions of Subsections (a) and (b)
shall apply, and the Committee shall not have discretion to vary them.
(e) Limitations. Notwithstanding anything in the Plan to the contrary, in
-----------
the event of a Change of Control, the Committee shall not have the right to take
any actions described in the Plan (including without limitation actions
described in Subsection (c) above) that would make the Change of Control
ineligible for pooling of interests accounting treatment or that would make the
Change of Control ineligible for desired tax treatment if, in the absence of
such right, the Change of Control would qualify for such treatment and the
Company intends to use such treatment with respect to the Change of Control.
-14-
<PAGE>
15. Requirements for Issuance or Transfer of Shares
-----------------------------------------------
(a) Shareholder's Agreement. The Committee may require that a Grantee
-----------------------
execute a shareholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Company Stock issued or distributed prior to a
Public Offering pursuant to this Plan.
(b) Limitations on Issuance or Transfer of Shares. No Company Stock shall
---------------------------------------------
be issued or transferred in connection with any Grant hereunder unless and until
all legal requirements applicable to the issuance or transfer of such Company
Stock have been complied with to the satisfaction of the Committee. The
Committee shall have the right to condition any Grant made to any Grantee
hereunder on such Grantee's undertaking in writing to comply with such
restrictions on his or her subsequent disposition of such shares of Company
Stock as the Committee shall deem necessary or advisable as a result of any
applicable law, regulation or official interpretation thereof, and certificates
representing such shares may be legended to reflect any such restrictions.
Certificates representing shares of Company Stock issued or transferred under
the Plan will be subject to such stop-transfer orders and other restrictions as
may be required by applicable laws, regulations and interpretations, including
any requirement that a legend be placed thereon.
16. Amendment and Termination of the Plan
-------------------------------------
(a) Amendment. The Board may amend or terminate the Plan at any time;
---------
provided, however, that the Board shall not amend the Plan without shareholder
approval if such approval is required in order to meet the requirements for
Incentive Stock Options under Section 422 of the Code or, after a Public
Offering, such approval is required in order to exempt compensation under the
Plan from the deduction limit under Section 162(m) of the Code.
(b) Shareholder Approval for "Qualified Performance-Based Compensation."
------------------------------------------------------------------
If Grants are "qualified performance-based compensation" under Section 10 above,
the Plan must be reapproved by the shareholders no later than the first
shareholders meeting that occurs in the fifth year following the year in which
the shareholders previously approved the provisions of Section 10, if required
by Section 162(m) of the Code or the regulations thereunder.
(c) Termination of Plan. The Plan shall terminate on the day immediately
-------------------
preceding the tenth anniversary of its effective date, unless the Plan is
terminated earlier by the Board or is extended by the Board with the approval of
the shareholders.
(d) Termination and Amendment of Outstanding Grants. A termination or
-----------------------------------------------
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 22(b). The termination of the Plan shall not
impair the power and authority of the Committee with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
-15-
<PAGE>
terminated or amended under Section 22(b) or may be amended by agreement of the
Company and the Grantee consistent with the Plan.
(e) Governing Document. The Plan shall be the controlling document. No
------------------
other statements, representations, explanatory materials or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company and its successors and assigns.
17. Funding of the Plan
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
18. Rights of Participants
----------------------
Nothing in this Plan shall entitle any Employee, Key Advisor, Non-Employee
Director or other person to any claim or right to be granted a Grant under this
Plan. Neither this Plan nor any action taken hereunder shall be construed as
giving any individual any rights to be retained by or in the employ of the
Company or any other employment rights.
19. No Fractional Shares
--------------------
No fractional shares of Company Stock shall be issued or delivered pursuant
to the Plan or any Grant. The Committee shall determine whether cash, other
awards or other property shall be issued or paid in lieu of such fractional
shares or whether such fractional shares or any rights thereto shall be
forfeited or otherwise eliminated.
20. Headings
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
21. Effective Date of the Plan
--------------------------
(a) Effective Date. Subject to approval by the Company's shareholders,
--------------
the Plan shall be effective as of July 22, 1998.
(b) Public Offering. The provisions of the Plan that refer to a Public
---------------
Offering, or that refer to, or are applicable to persons subject to, Section 16
of the Exchange Act or Section 162(m) of the Code, shall be effective, if at
all, upon the initial registration of the Company
-16-
<PAGE>
Stock under Section 12(g) of the Exchange Act, and shall remain effective
thereafter for so long as such stock is so registered.
22. Miscellaneous
-------------
(a) Grants in Connection with Corporate Transactions and Otherwise.
--------------------------------------------------------------
Nothing contained in this Plan shall be construed to (i) limit the right of the
Committee to make Grants under this Plan in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including Grants to employees thereof
who become Employees of the Company, or for other proper corporate purposes, or
(ii) limit the right of the Company to grant stock options or make other awards
outside of this Plan. Without limiting the foregoing, the Committee may make a
Grant to an employee of another corporation who becomes an Employee by reason of
a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company or any of its subsidiaries
in substitution for a stock option or restricted stock grant made by such
corporation. The terms and conditions of the substitute grants may vary from
the terms and conditions required by the Plan and from those of the substituted
stock incentives. The Committee shall prescribe the provisions of the
substitute grants.
(b) Compliance with Law. The Plan, the exercise of Options and SARs and
-------------------
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to persons
subject to Section 16 of the Exchange Act, after a Public Offering it is the
intent of the Company that the Plan and all transactions under the Plan comply
with all applicable provisions of Rule 16b-3 or its successors under the
Exchange Act. In addition, it is the intent of the Company that the Plan and
applicable Grants under the Plan comply with the applicable provisions of
Section 162(m) of the Code, after a Public Offering, and Section 422 of the
Code. To the extent that any legal requirement of Section 16 of the Exchange
Act or Section 162(m) or 422 of the Code as set forth in the Plan ceases to be
required under Section 16 of the Exchange Act or Section 162(m) or 422 of the
Code, that Plan provision shall cease to apply. The Committee may revoke any
Grant if it is contrary to law or modify a Grant to bring it into compliance
with any valid and mandatory government regulation. The Committee may also
adopt rules regarding the withholding of taxes on payments to Grantees. The
Committee may, in its sole discretion, agree to limit its authority under this
Section.
(c) Governing Law. The validity, construction, interpretation and effect
-------------
of the Plan and Grant Instruments issued under the Plan shall exclusively be
governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
-17-
<PAGE>
EXHIBIT 99.3
As amended July 29, 1996
and May 3, 1999
STOCK OPTION AGREEMENT
Option No. 1
No. of Shares Subject to Option: 30,000
This AGREEMENT, dated May 15, 1992, is made between CHILDREN'S CONCEPT,
INC. (the "Company") and ROSA L. AUKBURG (the "Optionee"),
W I T N E S S E T H :
1. Grant of Option. Pursuant to resolution of the Board of Directors of the
---------------
Company dated May 14, 1992, the Company hereby grants to the Optionee, subject
to the terms and conditions herein set forth, the right and option to purchase
from the Company, all or any part of an aggregate of 30,000 shares of common
stock ($.01 par value) of the Company ("Stock") at the purchase price of $0.67
per share (the "Exercise Price"), such option to be exercisable and exercised as
hereinafter provided. This option shall not be treated as an incentive stock
option as defined in Section 422A(b) of the Internal Revenue Code of 1986, as
amended.
2. Terms and Conditions. It is understood and agreed that the option
--------------------
evidenced hereby is subject to the following terms and conditions:
(a) Expiration Date. The option shall expire ten (10) years after the
---------------
date indicated above;
(b) Vesting of Option. The option granted hereunder shall vest (the
-----------------
"Vested Shares") in accordance with the following schedule:
On or After Number of
This Date Shares
--------- ------
May 15, 1992 15,000
May 15, 1993 7,500
May 15, 1994 7,500
(c) Exercise of Option. Subject to the other terms of this Agreement
------------------
regarding the exercisability of the option, this option may be exercised on or
after the date shares
<PAGE>
have vested and upon termination of the Company's "S" corporation status (the "S
exception"), but in no event shall the S exception remain in effect beyond three
(3) years from the date hereof.
Any exercise shall be accompanied by a written notice to the
Company specifying the number of shares as to which the option is being
exercised. Notation of any partial exercise shall be made by the Company on
Schedule 1 hereto;
(d) Payment of Purchase Price Upon Exercise. At the time of any
---------------------------------------
exercise, the purchase price of the shares as to which this option shall be
exercised shall be paid to the Company in cash.
(e) Exercise Upon Death or Termination of Employment. In the event of
------------------------------------------------
death of Optionee while an employee of the Company or any subsidiary of the
Company, this option may be exercised , to the extent that Optionee was entitled
to do so on the date of her death, by the person or persons to whom Optionee's
rights under this option pass by will or applicable law, or if no such person
has such right, by her executors or administrators, at any time, or from time to
time, but no later than ten (10) years from the date hereof or three (3) months
after Optionee's death, whichever date is earlier; provided, however, if the
option cannot be exercised because of the S exception, the right to exercise
this option shall terminate one (1) month after the expiration of the S
exception.
(f) Exercise Upon Termination of Employment. If Optionee's employment
---------------------------------------
shall terminate for any reasons other than death, all right to exercise this
option shall terminate on May 14, 2002; provided, however, if Optionee cannot
exercise the option because of the S exception, Optionee's right to exercise the
option shall terminate one (1) month after the expiration of the S exception.
(g) Non-Transferability. This option shall not be transferable other
-------------------
than by will or by the laws of the descent and distribution. During the lifetime
of Optionee, this option shall be exercisable only by her;
(h) Adjustments. In the event of any change in the Stock of the
-----------
Company by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, or any
rights offering to purchase Stock or securities of any type (including
convertible debt, options or warrants) convertible into, or entitling the holder
thereof to purchase Stock (the "Stock Change"), the number and kind of shares
subject to this option shall be appropriately adjusted consisted with the Stock
Change so the Optionee shall have the option to purchase the same percentage of
Stock after the Stock Change as Optionee had the option to purchase immediately
prior to the Stock Change;
(i) No Rights as Stockholder. Optionee shall have no right as a
------------------------
stockholder with respect to any shares of Stock subject to this option prior to
the date of issuance to her of a certificate or certificates for such shares;
<PAGE>
(j) No Right to Continued Employment. This option shall not confer
--------------------------------
upon Optionee any right with respect to continuance of employment by the Company
or any subsidiary, nor shall it interfere in any way with the right of her
employer to terminate her employment under the terms of the Employment
Agreement;
(k) Compliance with Laws and Regulations. This option and the
------------------------------------
obligation of the Company to sell and deliver shares hereunder, shall be subject
to all applicable federal and state laws, rules and regulations and to such
approvals by any government or regulatory agency as may be required. The Company
shall not be required to issue or deliver any certificates for shares of Stock
prior to:
(i) the listing of such shares on any stock exchange on which the
Stock may then be listed, and
(ii) the completion of any registration or qualification of such
shares under any federal or state law, or any rule or regulation of any
government body which the Company shall reasonably determine to be necessary or
advisable. Moreover, this option may not be exercised if its exercise, or the
receipt of shares of Stock pursuant thereto, would be contrary to applicable
law.
3. Investment Representation. The Board of Directors of the Company may
-------------------------
require Optionee to furnish to the Company, prior to the issuance of any shares
upon the exercise of all or any part of the option, an agreement (in such form
as the Board of Directors may specify) in which Optionee represents that the
shares acquired by her upon exercise are being acquired for investment and not
for resale or with a view of distribution thereof.
4. Notices. Any notice hereunder to the Company shall be addressed to it at
-------
its office at the following address:
Children's Concept, Inc.
257 E. Lancaster Avenue
Suite 202
Wynnewood, Pennsylvania 19096
Attention: David Schlessinger
and any notice hereunder to Optionee shall be addressed to her at:
Ms. Rosa Aukburg
433 Levering Mill Road
Bala Cynwyd, Pennsylvania 19004
subject to the right of either party to designate at any time hereafter in
writing some other address.
<PAGE>
5. Amendment. The Board of Directors of the Company shall have the right to
---------
amend this Agreement subject to the Optionee's consent if such amendment is not
favorable to the Optionee.
6. Withholding of Taxes. Whenever the Company proposes or is required to
--------------------
deliver or transfer shares in connection with the exercise of an option, the
Company shall have the right to:
(a) require the recipient to remit or otherwise make available to the
Company an amount sufficient to satisfy any federal, state and/or local
withholding tax requirements prior to the delivery or transfer of any
certificate or certificates for such shares; or
(b) take whatever other action it deems necessary to protect its
interest with respect to tax liabilities. The Company's obligation to make any
delivery or transfer of shares shall be conditioned on the Optionee's
compliance, to the Company's satisfaction, with any withholding requirement.
7. Counterparts. This Agreement has been executed in two counterparts each
------------
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, _________________, has caused this Agreement to be
executed by an appropriate officer and Optionee has executed this Agreement,
both as of the day and year first above written.
/s/ Rosa Aukburg
--------------------------------
ROSA AUKBURG
CHILDREN'S CONCEPT, INC.
By: /s/ David Schlessinger
-----------------------------
David Schlessinger, President
<PAGE>
SCHEDULE 1
Date of Exercise Number of Shares Aggregate Exercise Price
- ---------------- ---------------- ------------------------
June 2, 1999 25,000 $16,750.00
<PAGE>
EXHIBIT 99.4
Children's Concept, Inc.
Non-Qualified Stock Option
THIS STOCK OPTION ("Option") is granted this 7th day of August, 1995, by
Children's Concept, Inc., a Pennsylvania corporation (the "Company"), to Nick A.
Egelanian (the "Optionee").
W I T N E S S E T H
- - - - - - - - - -
1. Grant. The Company hereby grants to the Optionee an Option to purchase
-----
on the terms and conditions hereinafter set forth all or any part of an
aggregate of 20,000 shares of the Company's Common Stock, par value $.01 per
share (the "Option Shares"), at the purchase price of $3.33 per share (the
"Option Price"). This Option is not intended to be an "incentive stock option"
within the meaning of section 422A(b) of the Internal Revenue Code of 1986 (the
"Code"). This Option is not granted pursuant to the Children's Concept, Inc.
1993 Stock Incentive Plan (the "Plan").
2. Term and Exercisability.
-----------------------
(a) General Rule. The Option granted hereunder shall vest (the "Vested
------------
Options") in three cumulative installments, with each installment vesting on the
vesting date in the chart below for the number of Option Shares set forth across
from such vesting date.
Vesting Date Option Shares
------------ -------------
July 15, 1995 10,000
January 31, 1996 5,000
July 31, 1996; provided that the 5,000
vesting date shall be January 31, 1996
if the Master Brokerage Agreement
between Company and Optionee, effective
July 15, 1995 ("MBA"), is not renewed
Subject to the other terms of this Option regarding exercisability of this
Option, this Option may be exercised on or after the date shares have vested.
<PAGE>
The Option granted hereunder shall terminate with respect to each installment at
5:00 p.m. local Philadelphia, Pennsylvania time on November 29, 2003 (the
"Expiration Date"), unless sooner terminated under Section 2(b) or (c) below.
Any installment may be exercised in whole or in part, except that this Option
may in no event be exercised with respect to fractional shares.
(b) Certain Transactions. If (i) the Company is dissolved or liquidated or
--------------------
(ii) an acquisition or business combination transaction occurs in which the
Company (A) is not the surviving or acquiring entity or (B) becomes an 80% or
more subsidiary of another person or company, then the Option shall terminate on
any date specified by the Company's Board of Directors ("Board"). If this
Section 2(b) shall become applicable, the Board shall have the right to advance
the Expiration Date of this Option without the consent of the Optionee, as it
deems necessary or desirable. The Board may accelerate the exercisability of any
installments that are not yet exercisable before the accelerated Expiration
Date, but the Board shall have no obligation to do so.
(c) Breach of Restrictive Covenants or Termination of MBA for Cause.
---------------------------------------------------------------
Notwithstanding anything herein to the contrary, if the Company makes a finding
that the Optionee (i) has breached the MBA, the Non-Competition Agreement
entered in connection with the MBA, or any successor to either such agreement,
or has engaged in any sort of disloyalty to the Company or an Affiliate,
including, without limitation, fraud, embezzlement, theft, commission of a
felony or proven dishonesty or (ii) has disclosed trade secrets or confidential
information of the Company or an Affiliate, the Option shall terminate on the
date of such finding. In addition to immediate termination of the Option, the
Optionee shall forfeit all Option Shares for any exercised portion of the Option
for which the Company has not yet delivered the share certificates to the
Optionee upon refund by the Company of the Option Price paid by the Optionee.
Notwithstanding anything herein to the contrary, upon any purported exercise of
this Option, the Company may withhold delivery of share certificates pending the
resolution of an inquiry that could lead to a finding resulting in a forfeiture.
3. Transfers. This Option is not transferable by the Optionee otherwise
---------
than by will or pursuant to the laws of descent and distribution in the event of
the Optionee's death, in which event the Option may be exercised by the heirs or
legal representatives of the Optionee. The Option may be exercised during the
lifetime of the Optionee only by the Optionee or his legal representative in the
event of his incompetence. Any attempt at assignment, transfer, pledge or
disposition of the Option contrary to the provisions hereof or the levy of any
execution, attachment or similar process upon the Option shall be null and void
and without effect. Any exercise of the Option by a person other than the
Optionee shall be accompanied by appropriate proofs of the right of such person
to exercise the Option.
-2-
<PAGE>
4. Method of Exercise and Payment. When exercisable under Section 2, the
------------------------------
Option may be exercised by written notice, pursuant to Section 8, to the
Company's Treasurer specifying the number of Option Shares to be purchased and,
unless the Option Shares are covered by a then current registration statement
under the Securities Act of 1933 (the "Act") and current registrations under all
applicable state securities laws, containing the Optionee's acknowledgment, in
form and substance satisfactory to the Company, that the Optionee (a) is
purchasing such Option Shares for investment and not for distribution or resale
(other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (b) has been advised and understands that (i) the Option
Shares have not been registered under the Act and are "restricted securities"
within the meaning of Rule 144 under the Act and are subject to restrictions on
transfer, and (ii) the Company is under no obligation to register the Option
Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (c) has been advised and
understands that such Option Shares may not be transferred without compliance
with all applicable federal and state securities laws, and (d) has been advised
that an appropriate legend referring to the foregoing restrictions on transfer
may be endorsed on the certificates. The notice shall be accompanied by payment
of the aggregate Option Price of the Option Shares being purchased (a) in cash,
(b) by certified check payable to the order of the Company, or (c) by a
combination of the foregoing. Such exercise shall be effective upon the actual
receipt by the Company's Treasurer of written notice of exercise and payment.
In addition, except as provided below, the Optionee may make payment in
whole or in part in shares of the Company's Common Stock held by the Optionee.
For purposes of determining the amount of payment, such shares shall be valued
at their fair market value on the date of exercise as determined by the Board.
If payment is made in whole or in part in shares of the Company's Common Stock,
then the Optionee shall deliver to the Company certificates registered in the
name of the Optionee representing shares of the Company's Common Stock legally
and beneficially owned by the Optionee, free of all liens, claims and
encumbrances of every kind, accompanied by stock powers duly endorsed in blank
by the record holder of the shares represented by such certificates.
Notwithstanding the foregoing, the Board, in its sole discretion, may refuse to
accept shares of the Company's Common Stock in payment of the Option Price. In
that event, any certificates representing shares of the Company's Common Stock
which were delivered to the Company shall be returned to the Optionee with
notice of the refusal of the Board to accept such shares in payment of the
Option Price. Furthermore, the Board may impose from time to time such
limitations and prohibitions on the use of shares of the Company's Common Stock
for payment upon exercise of the Option as it deems appropriate in its sole
discretion.
5. Adjustments or Changes in Capitalization. In the event that, prior to
----------------------------------------
the delivery by the Company of all of the Option Shares in respect of which the
Option is granted,
-3-
<PAGE>
there shall be a stock dividend, stock split, recapitalization or other change
in the number or class of issued and outstanding equity securities of the
Company resulting from a subdivision or consolidation of the Company's Common
Stock and/or other outstanding equity security or a recapitalization or other
capital adjustment affecting the Company's Common Stock or an equity security of
the Company which is effected without receipt of consideration by the Company,
the remaining number of Option Shares (or class of shares) subject to the Option
and the Option Price therefor shall be adjusted in a manner determined by the
Board so that the adjusted number of Option Shares (or class of shares) and the
adjusted Option Price shall be the substantial equivalent of the remaining
number of Option Shares subject to the Option and the Option Price thereof prior
to such change. For purposes of this Section 5, no adjustment shall be made as a
result of the issuance of the Company's Common Stock upon the conversion of
other securities of the Company which are convertible into Common Stock.
6. Legal Requirements and Purchase for Investment. Unless the Option Shares
----------------------------------------------
have been registered under the Act, the Optionee's right to exercise this Option
may be conditioned upon the Optionee's delivery of his written representation to
the Company that the Option Shares are being acquired by him for his own
investment and not with a view to resale or distribution. Notwithstanding
anything contained herein to the contrary, if (a) the listing, registration or
qualification of the Option Shares upon any securities exchange or under any
federal or state law, or (b) the consent or approval of any governmental
regulatory body is necessary as a condition of or in connection with the
purchase of Option Shares, the Company may defer exercise of this Option unless
and until such listing, registration, qualification, consent or approval shall
have been effected or obtained. If registration is considered unnecessary by the
Company or its counsel, the Company may permit exercise and cause a legend to be
placed on the Option Shares being issued calling attention to the fact that they
have been acquired for investment and have not been registered.
7. Interpretation and Application. All questions of interpretation and
------------------------------
application of this Option shall be determined by the Board. Such determinations
shall be final, binding and conclusive.
8. Notices. Any notice to be given to the Company shall be addressed to the
-------
Treasurer of the Company at its principal executive office, and any notice to be
given to the Optionee shall be addressed to the Optionee at the address then
appearing on the records of the Company, or at such other addresses as either
party hereafter may designate in writing to the other. Any such notice shall be
deemed to have been duly given when delivered (personally, by courier service,
such as Federal Express, or by other messenger) or when deposited in the United
States mail, addressed as aforesaid, registered or certified mail, and with
proper postage and registration or certification fees prepaid.
-4-
<PAGE>
9. No Continued Service. Neither the grant of this Option nor anything
--------------------
herein contained shall be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company or an Affiliate to
retain the Optionee in the service of the Company or an Affiliate or to affect
in any way the right of the Company or any Affiliate to terminate the Optionee's
service, responsibilities, duties, or authority to represent the Company or any
Affiliate at any time for any reason whatsoever.
10. Withholding of Taxes. Whenever the Company proposes or is required to
--------------------
deliver or transfer Option Shares in connection with the exercise of this
Option, the Company shall have the right to (a) require the Optionee to remit to
the Company an amount sufficient to satisfy any federal, state and/or local
withholding tax requirements prior to the delivery or transfer of any
certificate or certificates for such Option Shares or (b) take whatever action
it deems necessary to protect its interests with respect to tax liabilities,
including, without limitation, withholding a portion of the Option Shares
otherwise deliverable pursuant to exercise of the Option.
11. Governing Law. This Agreement shall be governed by and interpreted
-------------
under the laws of the Commonwealth of Pennsylvania without giving effect to any
conflict of laws provisions.
IN WITNESS WHEREOF, the Company has granted this Option on the day and year
first above written.
Attest: CHILDREN'S CONCEPT, INC.
/s/ Robert A. Helpert /s/ David Schlessinger
- -------------------------- --------------------------
Robert A. Helpert David Schlessinger,
Secretary President
(Corporate Seal)
Witness: ACCEPTED BY:
/s/ Susan Ellen Shine /s/ Nick A. Egelanian
- -------------------------- --------------------------
Susan Ellen Shine Name: Nick A. Egelanian
-5-
