<PAGE>
As filed with the Securities and Exchange Commission on May 3, 1999
Registration No. 333-74719
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
ZANY BRAINY, INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 5945 23-2663337
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
----------------
308 East Lancaster Avenue
Wynnewood, PA 19096
(610) 896-1500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Keith C. Spurgeon
Chief Executive Officer
308 East Lancaster Avenue
Wynnewood, PA 19096
(610) 896-1500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
ALAN SINGER THOMAS C. SADLER
Morgan, Lewis & Bockius LLP Latham & Watkins
1701 Market Street 633 West 5th Street, Suite 4000
Philadelphia, PA 19103-2921 Los Angeles, CA 90071
(215) 963-5000 (213) 485-1234
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--May 3, 1999
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Prospectus
, 1999
Logo
Zany Brainy, Inc.
Shares of Common Stock
- --------------------------------------------------------------------------------
Zany Brainy: The Offering:
.We are a leading .We are offering
specialty retailer of 3,750,000 of the
high quality toys, shares and existing
games, books and shareholders are
multimedia products offering of
for children. the shares.
.Zany Brainy, Inc. .The underwriters
308 East Lancaster Avenue have an option to
Wynnewood, PA 19096 purchase an
(610) 896-1500 additional
shares from Zany
Proposed Symbol and Brainy.
Market:
.ZANY/Nasdaq National .This is our initial
Market public offering,
and no public
market currently
exists for our
shares.
.We plan to use the
proceeds from this
offering to repay
bank debt, open our
new distribution center
and additional stores,
implement new enterprise
software, develop an
Internet strategy and
for other working
capital and general
corporate purposes.
We will not receive
any proceeds from
the shares sold by
the selling
shareholders.
.Closing: , 1999
---------------------------------------------------
<TABLE>
Per Share Total
------------------------------------------------------------
<S> <C> <C>
Public offering price: $10.00 - $12.00 $
Underwriting fees:
Proceeds to Zany Brainy:
Proceeds to the selling shareholders:
</TABLE>
---------------------------------------------------
This investment involves risks. See "Risk Factors" beginning on page 5.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
BT Alex. Brown
William Blair & Company
U.S. Bancorp Piper Jaffray
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>
[Depicted on the front cover page is a jumping child]
[Depicted on the inside front cover page are photographs of Zany Brainy stores,
customers and a picture of a young girl painting with the following text: "Zany
Brainy on a Mission To provide a unique retail environment where Inter-Activity
reigns... where connections flourish. Between parents and children. Kids and
toys. Staff and families. Store and community. Friends and peers. And most
importantly, between the ZANYNESS of play and the BRAINYNESS of learning.
Through the experience of Inter-Activity, we spark the imagination and nurture
the sense of accomplishment so vital to every child reaching for the
possibilities to come."]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................... 1
Risk Factors......................................................... 5
Forward-Looking Statements........................................... 14
Use of Proceeds...................................................... 15
Dividend Policy...................................................... 15
Capitalization....................................................... 16
Dilution............................................................. 17
Selected Consolidated Historical
Financial and Operating Data........................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Our Business.......................................................... 27
Management............................................................ 36
Certain Transactions.................................................. 41
Principal and Selling Shareholders.................................... 43
Description of Capital Stock.......................................... 46
Shares Eligible for Future Sale....................................... 49
Underwriting.......................................................... 50
Experts............................................................... 53
Legal Matters......................................................... 53
Additional Information................................................ 53
Index to Our Financial Statements..................................... F-1
</TABLE>
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus should create an
implication that the information contained in this prospectus or the affairs of
Zany Brainy have not changed since the date of this prospectus.
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<PAGE>
PROSPECTUS SUMMARY
The following summarizes information in other sections of our prospectus,
including our consolidated financial statements and the notes to these
statements. You should read the entire prospectus carefully. Generally,
references to "Zany Brainy," "we," "us" and "our" mean Zany Brainy, Inc. and
our subsidiaries. Our fiscal year ends on the Saturday nearest to January 31
and is named for the calendar year ending closest to that date. For example,
our fiscal year ended January 30, 1999 is called "1998."
Zany Brainy
Zany Brainy is a leading and rapidly growing specialty retailer of high
quality toys, games, books and multimedia products for kids. We are a different
kind of toy store with a unique product mission and a passionate commitment to
our customers. We believe that learning should be fun. Our products entertain,
educate and spark the imaginations of children up to 12 years of age. Zany
Brainy combines this distinctive merchandise offering with superior customer
service and daily in-store events to create an interactive, "kid-friendly" and
exciting shopping experience for children and adults. We opened our first store
in Pennsylvania in 1991 and, as of April 30, 1999, we operated 82 stores in 23
states. We opened 23 new stores last year and plan to add approximately 25
stores in 1999, seven of which we have already opened, and approximately 25
stores in 2000. Our sales grew 36.6% in 1998 to $168.5 million and we
experienced comparable store sales growth of 9.1% in 1997 and 9.9% in 1998.
Our Unique Product Mission
We carefully select products that encourage children's educational,
emotional or physical development. Zany Brainy does not sell products that are
inconsistent with our mission, such as toys that may reinforce gender
stereotypes or encourage violence. In addition, we generally do not offer TV-
promoted, mass marketed items. Our extensive selection of over 15,000 stock
keeping units includes:
. Toys, games and puzzles
. Infant development toys
. Books, audio cassettes and videotapes
. Arts and crafts
. Computer software and electronic learning aids
. Building toys and trains
. Plush and dolls
. Sport-theme toys
Many manufacturers of the specialty products we offer currently do not sell
their products through discounters or mass market retailers. Excluding books
and multimedia, we believe that generally less than 30% of the stock keeping
units that we carry are available at Toys "R" Us.
Our Inviting and Interactive Stores
Our prototype 10,600 square foot stores are bright, colorful and inviting
and present our product offering in 11 major categories. Large banners with
unique graphics identify each of these categories
1
<PAGE>
to help customers find specific items quickly. Our stores are fully-carpeted
and have low shelving to encourage children to see, touch and play with our
products. Children can read books in our reading area, try software products
and play with electronic learning aids at one of our interactive demonstration
stations or watch movies in our Zany Showtime Theater. Our stores also feature
free fun every day, offering scheduled events such as creative arts and crafts
activities, character and author appearances and mini-concerts by well-known
children's performers. We believe these elements make our stores an attractive
destination for children and adults.
Our Knowledgeable and Highly-Trained Associates
Our highly-trained sales associates provide knowledgeable and enthusiastic
service that we believe helps us maintain the confidence, loyalty and trust of
our customers. Zany Brainy seeks employees that have a passion for addressing
the needs of our customers, enjoy working with children and appreciate how kids
learn through play. Accordingly, we actively recruit educators, child care
providers and back-to-work parents as sales associates. We train our sales
associates to proactively advise customers on product features, benefits and
age-appropriateness. In addition, we staff our stores with book, multimedia and
other specialists who have an in-depth knowledge of their product categories.
Principal Executive Offices:
Zany Brainy, Inc.
308 East Lancaster Avenue
Wynnewood, PA 19096
Phone: 610-896-1500
Incorporation:
We were incorporated in 1991 in Pennsylvania under the name Children's
Concept, Inc. and, in March 1999, we changed our name to Zany Brainy, Inc.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by:
Zany Brainy................ 3,750,000 shares
Selling shareholders....... shares
----------------------
Total.................... shares
Common stock to be
outstanding
after this offering......... 20,383,894 shares
Use of proceeds.............. We plan to use the proceeds from this offering
to repay bank debt, open a new distribution center
and additional stores, implement new enterprise
software, develop an Internet strategy and for
other working capital and general corporate
purposes. We will not receive any proceeds from
the shares sold by the selling shareholders.
Proposed Nasdaq National
Market symbol............... ZANY
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding at March 15, 1999, excluding:
. 2,953,429 shares of common stock issuable upon the exercise of options
and warrants outstanding as of March 15, 1999 at a weighted average
exercise price of $3.89 per share; and
. 942,826 shares reserved for future grants under our 1993 stock incentive
plan and our 1998 equity compensation plan.
Generally, the information in this prospectus:
. assumes there is no exercise of the underwriters' over-allotment option;
and
. gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock.
3
<PAGE>
Summary Consolidated Financial Data
You should read the data set forth below together with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this prospectus. Our fiscal year consists of 52 or 53 weeks, ends on the
Saturday nearest January 31 and is named for the calendar year ending closest
to that date. All fiscal years presented include 52 weeks of operations, except
1995, which includes 53 weeks. When reading this summary, you should be aware
that:
. Gross profit represents net sales less cost of goods sold, which
includes buying, distribution and store occupancy costs.
. A store becomes comparable in the 14th full month of store operations.
. Sales per square foot and average sales per store are based on stores
opened for the entire period.
. Pro forma, as adjusted balance sheet data represents actual data, as
adjusted, to give effect to (1) the conversion of all preferred stock
into 11,250,273 shares of common stock and (2) the sale of 3,750,000
shares of common stock offered by us at an assumed initial public
offering price of $11.00 less underwriting discounts and commissions,
estimated offering expenses and the application of the estimated net
proceeds.
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------------
1994 1995 1996 1997 1998
(in thousands, except per share,
number of stores and sales per square
Statement of Operations Data: foot data)
<S> <C> <C> <C> <C> <C>
Net sales................... $23,471 $54,372 $92,563 $123,345 $168,471
Gross profit................ 6,446 13,400 23,358 33,893 50,318
Selling, general and
administrative expenses.... 13,310 21,110 28,732 33,581 46,376
Operating income (loss)..... (6,864) (7,710) (5,374) 312 3,942
Net income (loss)........... (6,658) (7,828) (6,023) (153) 8,999(a)
Net income (loss) per common
share:
Basic...................... $ (1.35) $ (1.55) $ (1.19) $ (0.03) $ 1.67(a)
Diluted (b)................ (1.35) (1.55) (1.19) (0.03) 0.51(a)
Weighted average shares
outstanding:
Basic...................... 4,930 5,065 5,068 5,085 5,373
Diluted (b)................ 4,930 5,065 5,068 5,085 17,776
Store Data:
Number of stores at end of
fiscal year................ 16 31 43 52 75
Total square feet at end of
fiscal year................ 189 387 538 630 868
Comparable store sales
increase................... 17.3% 0.3% 4.3% 9.1% 9.9%
Sales per square foot....... $ 245 $ 202 $ 183 $ 203 $ 227
Average sales per store..... 2,502 2,382 2,286 2,523 2,746
Operating Data:
Gross profit margin......... 27.5% 24.6% 25.2% 27.5% 29.9%
Operating margin (loss)..... (29.2) (14.2) (5.8) 0.3 2.3
Capital expenditures........ $ 5,432 $ 7,377 $ 6,276 $ 6,420 $ 7,309
Depreciation and
amortization............... 730 2,115 3,713 5,017 6,859
</TABLE>
<TABLE>
<CAPTION>
As of January 30,
1999
-------------------
Pro Forma,
Actual As Adjusted
(dollars in
thousands)
<S> <C> <C>
Balance Sheet Data:
Inventories............. $43,252 $43,252
Working capital......... 25,542 62,555
Total assets............ 82,141 119,153
Short-term borrowings... 0 0
Capitalized lease
obligations, including
current portion........ 4,542 4,542
Total shareholders'
equity................. 48,291 85,304
</TABLE>
- --------
(a) Net income for 1998 includes a net income tax benefit of $6,187 due to the
$7,166 benefit recorded for our net operating loss carryforward, partially
offset by income tax expense of $979.
(b) Stock options, warrants and preferred stock convertible into common stock
were excluded from the calculation of diluted net loss per common share
for 1994 through 1997 as they were anti-dilutive due to the losses in each
of those years.
4
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of our common stock.
Risks Relating to Our Business:
We have a history of net losses
Since our inception in 1991, we have reported net losses for each year
except for 1998, when we reported net income for the first time. Our net
losses were $6.0 million in 1996 and $153,000 in 1997. Our net income was $9.0
million in 1998 and included net income tax benefit of $6.2 million due to the
$7.2 million benefit recorded for our net operating loss carryforward,
partially offset by income tax expense of $1.0 million. We may incur
additional net losses in the future, which could cause our stock price to
decline.
We have limited experience with the performance of our prototype stores, and
these stores may not perform up to our expectations
Our current prototype store is 10,600 square feet. Most of the stores we
opened in 1997 and 1998, as well as most of the 25 stores to be opened in
1999, are based on this prototype store, which is smaller than many of our
older stores. Our actual experience with these newer stores is generally
limited to one full year or less. Not all of our new stores have performed up
to our expectations. If our new stores fail to generate income at a level that
meets our expectations, the price of our stock could decline.
Our business is highly seasonal, and our annual results are highly dependent
on the success of our Christmas selling season
Seasonal shopping patterns affect our business. A significant portion of
our sales occur in the fourth quarter, coinciding with the Christmas holiday
shopping season. Therefore, our results of operations for the entire year
depend largely on our fourth quarter results. Factors that could negatively
affect us during the fourth quarter include:
. the availability of and customer demand for particular products;
. adverse weather conditions;
. unfavorable economic conditions;
. inability to hire adequate temporary personnel;
. inability to maintain appropriate inventory levels; and
. a late Thanksgiving, which reduces the number of days between
Thanksgiving and Christmas.
We have never been profitable in any fiscal quarter other than the fourth
quarter
Since inception, we have never been profitable in any quarter other than
the fourth quarter of any fiscal year. We expect to continue to incur losses
in every quarter other than the fourth quarter.
5
<PAGE>
If we do not successfully implement our store expansion program, our
financial growth and profitability will be adversely affected
Our success depends in large part on our ability to open and profitably
operate new stores in both existing and new geographic markets. We plan to open
approximately 25 stores during 1999, seven of which we have already opened, and
approximately 25 stores in 2000. We may not be able to achieve our planned
expansion. We plan to open approximately 14 stores in 1999 in markets where we
do not currently have a presence, four of which we have already opened. The
opening of stores in new geographic markets could present competitive and
operational challenges different from those we currently face or previously
faced in entering our existing geographic markets. For example, we may incur
higher costs related to advertising, administration and distribution as we
enter these new markets. Because our continued growth is dependent, in part, on
our ability to increase sales in our existing stores, our overall profitability
will suffer if the opening of new stores in existing markets draws business
from our existing stores. We generally prefer to open new stores in the first
three quarters of the year. Our failure to open stores on schedule may have
particularly adverse effects because of our dependence on the Christmas holiday
shopping season.
Our success in opening and profitably operating new stores will depend on a
number of factors, including our ability to:
. identify suitable sites;
. negotiate acceptable leases at attractive rents;
. access adequate capital to fund store expansion;
. construct and open stores on schedule;
. obtain acceptance in markets in which we currently have limited or no
presence; and
. locate, hire, train and retain competent managers.
On average, the net cost of opening a new store in 1996, 1997 and 1998 was
approximately $826,000, $842,000 and $750,000, respectively.
We may not have sufficient management, operational, distribution, financial
and information systems resources to accommodate our planned growth. Our
expansion strategy also presents some cultural risks, including our ability to
maintain our product mission, customer service commitment and quality control
as we become larger in size. In addition, if our new stores do not perform as
expected, we may curtail our store expansion, which would adversely affect our
financial growth and profitability.
Our comparable store sales will fluctuate
Changes in our comparable store sales results could affect the price of our
common stock. A number of factors have historically affected, and will continue
to affect, our comparable store sales results, including:
. competition;
. our new store openings;
. general regional and national economic conditions;
. consumer trends and preferences;
6
<PAGE>
. changes in our co-tenants;
. new product introductions and changes in our product mix;
. timing and effectiveness of promotional events; and
. weather.
Comparable store sales may not increase at the rates achieved in 1997 and
1998.
We may not develop an internet shopping site that is profitable
We intend to implement an internet shopping site in time for the 1999
Christmas holiday shopping season. Zany Brainy currently anticipates that its
internet shopping site will be developed through a joint venture arrangement
that may require significant financial and other resources. Any joint venture
would likely reduce Zany Brainy's equity ownership of, and decrease its ability
to control, the Internet business. Most internet retail businesses are
currently not profitable. In addition, selling our products on the Internet
could divert customers from our stores and depress existing store sales. We
cannot assure that we will generate revenues or profits from our internet
business or that we will implement an internet shopping site this year.
The relocation of our distribution center and corporate headquarters could
disrupt our operations
In 1999, we intend to close our distribution center in Delaware and relocate
to a larger facility in New Jersey. Approximately 80% of our products are
distributed through our Delaware facility. This transition to a new
distribution center could disrupt the receipt and distribution of our
merchandise, particularly if there are any unforseen delays or interruptions in
the transition process. Any disruption in distribution could materially
adversely affect our business operations. In addition, if we are unable to
generate increased sales and profit sufficient to absorb increased overhead and
other costs associated with our relocation, we would likely experience lower
operating profit margins.
We also plan to relocate our corporate headquarters to a larger facility in
Pennsylvania. Any delay in relocating our headquarters or disruption to our
operations as a result of the move could have a negative impact on our
business.
We may need additional financing, the terms of which could adversely affect
our business and shareholders
We currently expect that our available cash resources, including the net
proceeds from this offering and funds available under our credit facility, will
be sufficient to meet our working capital requirements for at least the next
twelve months. However, we may need additional financing to support more rapid
growth than currently anticipated or to respond to competitive pressures or
unanticipated events. Additional financing, if needed, may not be available on
satisfactory terms or at all. Any additional equity financing may cause
dilution to existing investors. Any debt financing may result in additional
restrictions on our spending or ability to pay dividends.
Restrictive loan covenants may limit our ability to take various corporate
actions
Our credit facility contains covenants which require us to satisfy ongoing
financial requirements and which limit our ability to borrow additional money,
pay dividends, divest assets and make
7
<PAGE>
additional corporate investments. If we are unable to meet any of our debt
service obligations or to comply with these covenants, our lenders can
accelerate our debt. If that were to occur and we are unable to obtain
alternative financing, our business may be materially adversely affected.
If we are unable to execute our private label program, our profit margins
could decline
We have been expanding our selection of private label products. In 1998,
approximately 3.0% of sales were attributable to our private label products. If
consumers do not perceive our private label products to be of high quality, our
efforts to increase private label sales may not succeed. Moreover, if we are
unable to execute our private label program, our profit margins could decline.
Year 2000 issues may disrupt our operations
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 issue could result in
system failures or miscalculations causing disruptions of operations,
including, among others, a temporary inability to receive shipments, process
financial information or credit card transactions, deliver products or engage
in similar normal business activities.
We have recently upgraded our enterprise software system, Systems For
Retailers (SFR). SFR is a product from Creative Data Systems (CDS), which has
recently discontinued operations. Using consultants who are former employees of
CDS, we have upgraded to version 7.0, which is Year 2000 compliant. However,
because CDS is no longer in business, we may be particularly vulnerable if the
new version of SFR does not operate properly on January 1, 2000. In late 1998,
we agreed to purchase new enterprise software from JDA Software, which is
intended to replace SFR. Although the JDA software has been certified as Year
2000 compliant, and will entail vendor support, we decided to defer
implementation until after the Christmas selling season. If the SFR system
fails to operate on January 1, 2000 and we are unable to implement the JDA
software on a timely basis, our business operations could be disrupted.
We are also engaged in efforts to upgrade certain in-store systems which are
not Year 2000 compliant. If our various store systems cease to operate on
January 1, 2000, we believe that we would be able to perform necessary
functions through manual intervention. However, the use of the manual
intervention would significantly disrupt store operations.
We have initiated formal communications with our significant vendors to
determine our vulnerability if these third parties fail to remedy their own
Year 2000 problems. We believe that Year 2000 issues faced by our key vendors,
credit card processors and telecommunication providers, if not effectively
remediated, could adversely affect our business. Moreover, while we would seek
to migrate to other third parties if service providers with whom we currently
have a relationship are not Year 2000 compliant, we may not be able to identify
suitable third party substitutes on a basis that would avoid disruptions to our
operations.
We have not developed a formal contingency plan. Therefore, if we confront
significant Year 2000 issues, we could experience extended disruptions and a
drain on our financial and personnel resources.
8
<PAGE>
Risks Relating to Our Industry:
The intense competition we face from other retail companies may adversely
affect our financial results
Competition from mass market retailers and discounters, which have
greater brand recognition and financial and other resources
Many mass market retailers and discounters, such as Toys "R" Us, Wal-Mart
and Target, have much greater brand recognition and greater financial,
marketing and other resources than ours. We could be at a disadvantage in
responding to these competitors' merchandising and pricing strategies,
advertising campaigns and other initiatives. In addition, an increase in focus
on the specialty retail market or the sale by these competitors of more product
similar to ours could adversely affect our merchandising strategy.
Competition from smaller format, specialty educational and creative toy
retailers, whose growth can adversely affect our sales growth
Our direct competitors are smaller format, specialty educational and
creative toy and game retailers, including Noodle Kidoodle and LearningSmith.
These retailers are continuing to expand and could affect our ability to
increase our sales.
Competition from non-toy specialty retailers, which compete with our
children's book and software businesses and could limit our ability to
expand in these categories
Non-toy specialty retailers, such as Barnes & Noble and CompUSA, are
competing with our children's book and software businesses. We believe that
some of these competitors have exclusivity restrictions in their leases that
restrict co-tenants from selling similar products. Such restrictions could
hinder our expansion strategy by limiting our ability to sell some products at
those sites.
Competition from Internet-only retailers, which may have a cost advantage
and reach a broader market
We also face growing competition from internet-based retailers, such as
eToys and Amazon.com. Because internet-based retailers do not operate retail
stores, they may enjoy an overall operating cost advantage. In addition, due to
the nature of electronic commerce, they may reach a broader market.
With respect to all of our competitors, our sales and profitability could
suffer if:
. new competitors enter markets in which we are currently operating;
. our competitors implement aggressive pricing strategies;
. our competitors expand their operations;
. our suppliers sell their products directly or enter into exclusive
arrangements with our competitors; or
. our competitors adopt innovative store formats, retail sales methods or
merchandising strategies that are similar to ours.
If our suppliers and distributors do not provide us with sufficient
quantities of our products, our sales and profitability will be adversely
affected
Products supplied to us by our top ten suppliers represented approximately
40% of purchases in 1998. Our dependence on our principal suppliers involves
risk, and if there is a disruption in supply
9
<PAGE>
from a principal supplier or distributor, we may be unable to obtain the
merchandise we desire to sell. While no one supplier represented greater than
10% of purchases in 1998, a disruption in the operations of any of our key
suppliers could adversely affect our available inventory.
Our sales could decline if key specialty suppliers sell more products
through mass market retailers.
Many of our suppliers currently provide us with certain incentives,
including return privileges, volume purchasing allowances and cooperative
advertising. A reduction or discontinuation of these incentives could reduce
our profits.
In mid-1998, we entered into a relationship with a subsidiary of Ingram
Industries Inc. (Ingram Books) to be our principal book distributor. We
previously purchased books from numerous publishers and distributors, including
Ingram Books. In 1998, our purchases from book suppliers accounted for
approximately 12% of all our purchases. Barnes & Noble recently announced that
it will acquire Ingram Books. We are unable to predict whether this acquisition
will affect the distribution of books to our stores.
If we are unable to predict or react to changes in consumer demand, our sales
and profitability will be adversely affected
Our success depends on our ability to anticipate and respond in a timely
manner to changing consumer demand and preferences regarding toys, games, books
and multimedia products for children. Our products must appeal to a broad range
of consumers whose preferences cannot be predicted with certainty and are
subject to change. If we misjudge the market for our merchandise, we may
overstock unpopular products and be forced to take significant inventory
markdowns, which may have a negative impact on our profitability.
It is also common in the toy industry for some popular products, such as
Beanie Babies, Crazy Bones and yoyos, to achieve high sales, but for
unpredictable periods of time. In 1998, Beanie Babies represented over 5% of
our sales. Consumer demand for these products or others could decrease
significantly and without warning. If we are unable to identify new products
that will enjoy strong consumer demand, our sales may decline. In addition, the
introduction of new products may depress sales of existing products. Moreover,
because we sell only those products that conform to our product mission, we may
choose not to sell some products that our customers desire and thus lose
potential sales.
If a shipment of products that we import is interrupted or delayed, our
inventory levels and sales could be adversely affected
We do not own or operate any manufacturing facilities. Instead, we buy all
of our products from manufacturers and distributors. In 1998, we imported
approximately 9% of our purchases, including most of our private label
products, directly from foreign manufacturers. In addition, we believe that a
significant portion of the products that we purchase from domestic suppliers
are manufactured abroad. We anticipate that our dependence on foreign-sourced
merchandise will increase. We are subject to the following risks inherent in
relying on foreign manufacturers:
. the inability to return products;
. fluctuations in currency exchange rates;
10
<PAGE>
. economic and political instability;
. transportation delays;
. restrictive actions by foreign governments;
. the laws and policies of the United States affecting importation of
goods, including duties, quotas and taxes;
. foreign trade and tax laws;
. foreign labor practices;
. trade infringement claims; and
. increased liability as importer of record.
Interruptions or delays in our imports could cause shortages in our product
inventory and adversely affect our sales unless we secure alternative supply
arrangements. Even if we could locate alternative sources, their products may
be of lesser quality or more expensive than those we currently purchase. We
could also be affected if our suppliers experience similar problems with
foreign manufacturers.
We are subject to inventory shrinkage, which could adversely affect our
business
As is the case in our industry generally, we are subject to loss resulting
from, among other things, theft of our products, breakage and paperwork errors.
In 1998, this inventory shrinkage represented approximately 1% of total sales.
Although we have implemented loss prevention procedures, we remain susceptible
to inventory shrinkage, which could have a negative impact on our
profitability.
We are dependent on executive management and other personnel
We believe that our success depends on the continued employment of our
management team. If one or more members of our executive management team were
unable or unwilling to continue in their present positions, our business could
be materially adversely affected. We do not carry key person life insurance on
any member of our executive management team.
Our success also depends on hiring and retaining quality managers and sales
associates in our stores. We plan to expand our employee base to manage our
anticipated growth. Competition for personnel, particularly for employees with
retail expertise, is intense. Additionally, our ability to maintain consistency
in the quality of customer service in our stores is critical to our success. If
we are unable to hire and retain sales associates capable of providing a high
level of customer service, our business could be materially adversely affected.
Our intellectual property may not be protected
Our success depends in part on our ability to protect our intellectual
property. To protect our proprietary rights, we rely generally on copyright,
trademark and trade secret laws, confidentiality agreements with employees and
third parties and license agreements with consultants and suppliers. However, a
third party could, without authorization, copy or otherwise appropriate
information from us. Employees, consultants and others who participate in
development activities could breach their confidentiality agreements, and we
may not have adequate remedies for any such breach. Our failure or inability to
protect our proprietary rights could materially adversely affect us.
11
<PAGE>
Our business could be materially adversely affected if our information
systems fail
Our business depends on the efficient and uninterrupted operation of our
computer and communications software and hardware systems. We regularly make
investments to upgrade, enhance and replace our systems. We must appropriately
expand the capacity of our information systems to accommodate our anticipated
growth.
The current provider of our enterprise software system, SFR, is no longer in
business. Although we have the source code and support of former SFR employees,
we intend to replace SFR with a new software system from JDA Software, Inc.
(JDA) early in the year 2000. Any disruptions affecting our information systems
or any delays or difficulties in transitioning to JDA or other new systems
could make it more difficult to effectively operate our business.
We have no formal disaster recovery plan to prevent delays or other
complications arising from information systems failure. Our business
interruption insurance may not adequately compensate us for losses that may
occur.
We may be exposed to product liability lawsuits and are subject to government
regulation
Children can sustain injuries from toys. We may be subject to claims or
lawsuits resulting from such injuries. We maintain liability insurance in an
amount we believe to be adequate. However, there is a risk that claims or
liabilities may exceed our insurance coverage. Moreover, we may be unable to
retain adequate liability insurance in the future. We are subject to regulation
by the Consumer Product Safety Commission and similar state regulatory
agencies. If we fail to comply with government and toy industry safety
standards, we may be subject to claims, lawsuits, fines and adverse publicity.
Risks Relating to this Offering:
Provisions of our articles of incorporation and Pennsylvania law could delay
or prevent the acquisition or sale of Zany Brainy
Certain provisions of Pennsylvania law could make it more difficult for a
third party to acquire control of us, even if such change in control would be
beneficial to shareholders. Our articles of incorporation provide that our
board of directors may issue preferred stock without shareholder approval. The
issuance of preferred stock could make it more difficult for a third party to
acquire us.
Future sales by our current shareholders may adversely affect the market
price of our stock
The market price of our common stock could decline as a result of sales of a
large number of shares in the market after this offering or the perception that
such sales could occur. These factors also could make it more difficult for us
to raise funds through future offerings of common stock.
There will be 20,383,894 shares of common stock outstanding immediately
after this offering. Of these shares, the shares sold in this offering and
additional shares will be freely transferable without restriction or further
registration under the Securities Act of 1933, except for any shares purchased
by our affiliates. The remaining shares will be restricted and may be
sold in the future only pursuant to an exemption under the Securities Act. The
holders of shares of common stock have agreed not to sell any such
securities for 180 days after this offering without the prior written consent
of Donaldson, Lufkin and Jenrette Securities Corporation (DLJ). DLJ may,
12
<PAGE>
however, in its sole discretion, release all or any portion of the securities
subject to such lock-up agreements.
The holders of approximately shares of common stock, of which
are subject to the lock-up agreements described above, have demand and piggy-
back registration rights. If they exercise such rights, shares covered by a
registration statement can be sold in the public market. We also intend to
register approximately shares of common stock that we have issued or
may issue under our benefit plans or pursuant to option agreements. After such
registration statement is effective, shares issued upon exercise of stock
options to persons other than affiliates will be eligible for resale in the
public market without restriction, which could adversely affect our stock
price. Absent such registration, such shares could nevertheless be sold,
subject to limitations on the manner of sale. Sales by affiliates could also
occur, subject to certain limitations, under Rule 144 of the Securities Act.
Investors will be subject to market risks typically associated with initial
public offerings
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. If you purchase shares of common stock in this offering, you will
pay a price that was not established in the public trading markets. The initial
public offering price will be determined by negotiations among the
underwriters, the selling shareholders and us. You may not be able to resell
your shares at or above the initial public offering price and may suffer a loss
on your investment.
The market price of our common stock is likely to be highly volatile as the
stock market in general has been highly volatile. Factors that could cause
fluctuation in the stock price may include, among other things:
. actual or anticipated variations in quarterly operating results;
. changes in financial estimates by securities analysts;
. conditions or trends in our industry;
. changes in the market valuations of other retail companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, divestitures, joint ventures or other strategic
initiatives;
. capital commitments;
. additions or departures of key personnel; and
. sales of common stock.
Many of these factors are beyond our control. These factors may cause the
market price of our common stock to decline, regardless of our operating
performance.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus that are
forward-looking statements. You can identify these statements by forward-
looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," and "continue" or similar words. Forward-looking statements may
also use different phrases. Forward-looking statements address, among other
things, : (1) our future expectations; (2) projections of our future results of
operations or of our financial condition; or (3) other "forward looking"
information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or which we do not fully control that could cause actual results to
differ materially from those expressed or implied by our forward-looking
statements, including:
. our inability to manage our growth and successfully expand in new and
existing markets;
. changes in general economic and business conditions and in the specialty
retail or toy industry in particular;
. actions by our competitors;
. the level of demand for our products;
. changes in our business strategies; and
. other factors discussed under "Risk Factors."
14
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of 3,750,000 shares in this
offering will be approximately $37.0 million. This is based upon an assumed
initial public offering price of $11.00 per share and after deducting estimated
underwriting discounts and commissions and expenses payable by us estimated at
$4.2 million. We will receive additional net proceeds of up to $ million
if the underwriters exercise the option granted to them in connection with this
offering to purchase additional shares of our stock to cover over-allotments.
We will not receive any proceeds from the sale of shares by the selling
shareholders.
We plan to use $15.0 million of the proceeds from this offering to repay
bank debt, $13.0 million to open our new distribution center and additional
stores, $2.0 million to implement new enterprise software and the balance for
other working capital and general corporate purposes. Our bank debt consists of
a $35 million revolving credit facility. At March 15, 1999, the outstanding
balance under our credit facility was $11.8 million. Borrowings under the
credit facility bear interest at variable rates, and the weighted average
interest rate at March 15, 1999 was 7.75%. The initial term of the credit
facility expires on October 8, 2000, but the loan agreement provides for
automatic annual renewals. We may reborrow amounts under our credit facility. A
portion of the proceeds from this offering may be used to implement an internet
shopping site. We may also use a portion of the proceeds to acquire other
companies. Although Zany Brainy from time to time is engaged in negotiations
related to possible acquisitions, no agreements relating to acquisitions are
pending.
Pending uses of the net proceeds, we intend to invest the net proceeds in
short-term investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Our credit facility currently prohibits payment
of any dividends.
15
<PAGE>
CAPITALIZATION
The following table sets forth our actual and pro forma, as adjusted cash,
short term debt and total capitalization as of January 30, 1999. Our pro forma,
as adjusted, capitalization gives effect to:
. the conversion of all outstanding shares of preferred stock into
11,250,273 shares of common stock upon the consummation of this offering;
. the issuance and sale of the 3,750,000 shares of common stock offered by
us in this offering; and
. the application of the estimated net proceeds from the sale of our common
stock based on an assumed initial public offering price of $11.00 per
share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
You should read this table in conjunction with the consolidated financial
statements and the notes to those statements and the other financial
information included in this prospectus.
<TABLE>
<CAPTION>
As of January 30,
1999
--------------------
Pro Forma,
Actual As Adjusted
(in thousands)
<S> <C> <C>
Cash..................................................... $ 1,695 $38,708
======= =======
Short term debt and current portion of capitalized lease
obligations (a)......................................... $ 1,682 $ 1,682
======= =======
Capitalized lease obligations, net of current portion.... $ 2,860 $ 2,860
------- -------
Shareholders' equity:
Preferred stock......................................... 24 --
Common stock (b)........................................ 54 204
Additional paid-in capital.............................. 60,826 97,713
Accumulated deficit..................................... (12,613) (12,613)
------- -------
Total shareholders' equity............................. 48,291 85,304
------- -------
Total capitalization................................. $51,151 $88,164
======= =======
</TABLE>
- --------
(a) We had no outstanding borrowings under our credit facility at January 30,
1999. At March 15, 1999, the outstanding borrowings under our credit
facility were $11.8 million.
(b) The table above excludes an aggregate of 2,956,485 shares issuable upon
exercise of stock options and warrants outstanding at January 30, 1999,
plus an additional 939,820 shares reserved for issuance in connection with
future stock options and other awards under our 1993 stock incentive plan
and 1998 equity compensation plan.
16
<PAGE>
DILUTION
Our pro forma net tangible book value as of January 30, 1999 was $48.1
million or $2.89 per share. Our pro forma net tangible book value per share is
determined by subtracting the total amount of our liabilities from the total
amount of our tangible assets and dividing the remainder by the number of
shares of our common stock outstanding after giving effect to the conversion of
preferred stock into 11,250,273 shares of common stock. The pro forma net
tangible book value per share after this offering will be $4.17 less than the
price per share to the public in this offering, based on an assumed initial
public offering price of $11.00 per share. Therefore, purchasers of shares of
common stock in this offering will realize immediate dilution of $6.83 per
share. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share as of January 30,
1999........................................................... $2.89
Increase in net tangible book value per share attributable to
new investors.................................................. 1.28
-----
Pro forma net tangible book value per share after this offering... 4.17
------
Dilution per share purchased in this offering..................... $ 6.83
======
</TABLE>
The following table presents, as of January 30, 1999 and assuming an initial
public offering price of $11.00 per share, for our existing shareholders and
our new investors:
. the number of shares of our common stock purchased from us;
. the total cash consideration paid;
. the average price per share paid before deducting estimated underwriting
discounts and commissions and our estimated offering expenses; and
. the average price per share paid by the existing holders of common stock
including the holders of common stock after giving effect to the
conversion of preferred stock into 11,250,273 shares of common stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 16,633,844 81.6% $ 64,740,311 61.1% $3.89
New investors................. 3,750,000 18.4 41,250,000 38.9 11.00
---------- ----- ------------ -----
Total....................... 20,383,844 100.0% $105,990,311 100.0%
========== ===== ============ =====
</TABLE>
The tables on this page exclude all outstanding options and warrants. See
"Management--Stock Option Plan" and note 9 to our consolidated financial
statements. The exercise of outstanding options and warrants having an exercise
price less than the initial public offering price would increase the dilution
effect to new investors that is shown on the tables. Also, the second table on
this page does not give effect to sales of shares by the selling shareholders.
Sales by the selling shareholders in this offering will reduce the number of
shares held by existing shareholders to shares, or % of the
shares outstanding, and will increase the number of shares held by new
investors to shares, or % of the shares outstanding.
This offering will benefit our existing shareholders. Based on an assumed
initial public offering price of $11.00 per share, the selling shareholders
will receive $ in net proceeds. In addition, the current shareholders,
including members of management, will benefit from the creation of a public
market for our common stock and any increase in the market value of any shares
they hold. Upon consummation of this offering, the unrealized appreciation in
the value of the common stock held by existing shareholders will be $
million.
17
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
Our statement of operations data for 1996, 1997 and 1998 and the balance
sheet data as of January 31, 1998 and January 30, 1999 have been derived from
the consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, and are included in this
prospectus. Our statement of operations data for fiscal 1994 and 1995 and the
selected balance sheet data as of January 28, 1995, February 3, 1996 and
February 1, 1997 have been derived from our audited consolidated financial
statements which are not included in this prospectus. You should read the data
set forth below together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes relating to those statements appearing in the
prospectus.
When reading this data, you should be aware that:
. Our fiscal year consists of 52 or 53 weeks, ends on the Saturday nearest
January 31 and is named for the calendar year ending closest to that
date. All fiscal years presented include 52 weeks of operations, except
1995, which includes 53 weeks.
. A store becomes comparable in the 14th full month of store operations.
. Sales per square foot and average sales per store are based on stores
opened for the entire period.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1994 1995 1996 1997 1998
(in thousands, except per share,
number of stores and sales per square foot
data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales................. $23,471 $54,372 $ 92,563 $123,345 $168,471
Cost of goods sold,
including occupancy
costs.................... 17,025 40,972 69,205 89,452 118,153
------- ------- -------- -------- --------
Gross profit............. 6,446 13,400 23,358 33,893 50,318
Selling, general and
administrative expenses.. 13,310 21,110 28,732 33,581 46,376
------- ------- -------- -------- --------
Operating income (loss).. (6,864) (7,710) (5,374) 312 3,942
Interest income (expense),
net...................... 206 (118) (649) (465) (1,130)
------- ------- -------- -------- --------
Income (loss) before
income tax benefit...... (6,658) (7,828) (6,023) (153) 2,812
Income tax benefit........ -- -- -- -- (6,187)
------- ------- -------- -------- --------
Net income (loss)........ $(6,658) $(7,828) $ (6,023) $ (153) $ 8,999 (a)
======= ======= ======== ======== ========
Net income (loss) per
common share:
Basic.................... $ (1.35) $ (1.55) $ (1.19) $ (0.03) $ 1.67 (a)
Diluted (b).............. (1.35) (1.55) (1.19) (0.03) 0.51 (a)
Weighted average shares
outstanding:
Basic.................... 4,930 5,065 5,068 5,085 5,373
Diluted (b).............. 4,930 5,065 5,068 5,085 17,776
Store Data:
Number of stores at end of
fiscal year.............. 16 31 43 52 75
Total square feet at end
of fiscal year........... 189 387 538 630 868
Comparable store sales
increase................. 17.3% 0.3% 4.3% 9.1% 9.9%
Sales per square foot..... $ 245 $ 202 $ 183 $ 203 $ 227
Average sales per store... 2,502 2,382 2,286 2,523 2,746
Operating Data:
Gross profit margin....... 27.5% 24.6% 25.2% 27.5% 29.9%
Operating margin (loss)... (29.2) (14.2) (5.8) 0.3 2.3
Capital expenditures...... $ 5,432 $ 7,377 $ 6,276 $ 6,420 $ 7,309
Depreciation and
amortization............. 730 2,115 3,713 5,017 6,859
Balance Sheet Data:
Inventories............... $11,097 $20,538 $ 24,278 $ 29,822 $ 43,252
Working capital........... 9,509 15,220 21,599 20,085 25,542
Total assets.............. 25,238 41,393 56,376 59,552 82,141
Capitalized lease
obligations, less current
portion.................. 422 2,231 2,620 1,407 2,860
Total shareholders'
equity................... 16,535 28,372 38,547 39,219 48,291
</TABLE>
- --------
(a) Net income for 1998 includes a net income tax benefit of $6,187 due to the
$7,166 benefit recorded for our net operating loss carryforward, partially
offset by income tax expense of $979.
(b) Stock options, warrants and preferred stock convertible into common stock
were excluded from the calculation of diluted net loss per common share for
1994 through 1997 as they were anti-dilutive due to the losses in each of
those years.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Consolidated Financial Data" and our consolidated financial
statements and the related notes which are included in this prospectus.
Overview
Zany Brainy is a rapidly growing specialty retailer of high quality toys,
games, books and multimedia products for children, with 82 stores operating in
23 states as of April 30, 1999. From 1995 to 1998, our net sales grew at a
compound annual growth rate of 45.8%, while our operating income increased from
a loss of $7.7 million to income of $3.9 million. These increases were
principally due to the opening of new stores and comparable store sales growth.
We achieved comparable store net sales growth of 4.3%, 9.1% and 9.9% in 1996,
1997 and 1998 respectively.
We opened our first store in 1991 and embarked on an aggressive store
opening strategy in 1994. We opened 11 stores in 1994, 15 stores in 1995 and 12
stores in 1996; however, our operating results in 1995 and 1996 were
disappointing. At this time we hired our current management team, which
evaluated Zany Brainy's business strategies and reached the following
conclusions:
. sales per store did not materially differ based on store size, but our larger
stores had higher expenses;
. the clustering of stores in the same markets led, in some instances, to
significant sales cannibalization;
. our merchandise selection did not include several key product categories and
was not updated frequently enough;
. we had a poor price image; and
. our marketing efforts did not effectively reach our target customers.
To address these problems, our new management reduced the size of our
prototype store to 10,600 square feet and modified our expansion strategy to
emphasize entering new markets and opening fewer stores in any single market.
We began to update the merchandise in our stores more frequently to attract
repeat customers and added new product categories. We also took steps to
improve our price image by focusing our advertising and in-store communications
on competitive pricing and overall value. Finally, we revised our marketing
strategy by developing an enhanced and enlarged customer database. With the
information provided by this database, we used direct mail to more effectively
target our marketing efforts and expand our customer base. These strategies
have resulted in improved operating results.
With our new prototype store in place, we opened nine stores in 1997 and 23
in 1998, increasing our store base from 43 stores at the end of 1996 to 75
stores at the end of 1998. We plan to open approximately 25 new stores in 1999,
seven of which we have already opened, and approximately 25 new stores in 2000.
Over the last three years, we have decreased the average size of the new
stores we have opened from 12,476 square feet for those opened during 1996 to
10,447 square feet for those opened during 1998. As a result, our chain-wide
average store size has decreased. During the same period, our average sales per
store increased from $2.3 million to $2.7 million, and our sales per square
foot
19
<PAGE>
increased from $183 to $227. In addition, because smaller stores typically have
lower occupancy costs, our new stores have contributed to improved gross
margins.
Our fiscal year includes 52 or 53 weeks, ends on the Saturday closest to
January 31 and is named for the calendar year ending closest to that date. The
fiscal years ended February 1, 1997, January 31, 1998 and January 30, 1999
include 52 weeks. For purposes of calculating comparable store sales, a store
is deemed to become comparable in its 14th full month of operations in order to
eliminate grand opening sales distortions. Also, cost of goods sold includes
buying, distribution and store occupancy costs.
Results of Operations
The following table presents our financial data expressed as a percentage of
net sales and store data for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
---------------------
1996 1997 1998
<S> <C> <C> <C>
Net sales................. 100.0 % 100.0 % 100.0 %
Cost of goods sold........ 74.8 72.5 70.1
----- ----- -----
Gross profit............ 25.2 27.5 29.9
Selling, general and
administrative expenses.. 31.0 27.2 27.6
----- ----- -----
Operating income
(loss)................. (5.8) 0.3 2.3
Interest expense, net..... (0.7) (0.4) (0.6)
----- ----- -----
Income (loss) before
income taxes........... (6.5)% (0.1)% 1.7 %
===== ===== =====
Comparable store sales
increase................. 4.3 % 9.1 % 9.9 %
===== ===== =====
</TABLE>
1998 Compared to 1997
Net Sales. Net sales increased by $45.2 million, or 36.6%, to $168.5 million
in 1998 from $123.3 million in 1997. Sales for the 23 stores opened in 1998
contributed $25.7 million of the increase in net sales. Comparable store net
sales increased 9.9% over the prior year and contributed $11.7 million of the
increase in net sales. The growth in comparable store sales was due primarily
to an increase in the number of customer transactions. Stores open prior to
February 1, 1998 but not qualifying as comparable stores contributed $7.8
million of the increase in net sales.
Gross Profit. Gross profit increased by $16.4 million to $50.3 million in
1998 from $33.9 million in 1997. As a percentage of net sales, gross profit
increased to 29.9% in 1998 from 27.5% in 1997. The increase in the gross profit
percentage was primarily attributable to improved product margins and
leveraging store occupancy, buying and distribution costs over a higher revenue
base. Product margins increased by 1.0% of net sales in 1998 primarily due to
an increase in sales of products with a higher gross margin. The decrease in
store occupancy expense of 0.9% of net sales is primarily due to the 9.9%
increase in comparable store sales and the timing of new store openings. The
decrease in the buying and distribution costs of 0.6% of net sales was due to
the application of fixed costs over a higher revenue base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $12.8 million to $46.4 million in 1998
from $33.6 million in 1997. The dollar increase in these expenses was
principally from an increase of $4.3 million in store payroll and $1.2 million
in store preopening costs primarily due to the increase in number of stores in
1998, an
20
<PAGE>
increase of $2.7 million in corporate expenses associated with the expansion of
our store base and corporate infrastructure to support our continued growth and
an increase of $1.9 million in marketing and promotion expenditures primarily
related to the opening of stores in new market areas. As a percentage of net
sales, selling, general and administrative expenses increased by 0.4% to 27.6%
of net sales in 1998 from 27.2% of net sales in 1997. This percentage increase
was primarily related to an increase of 0.7% of net sales in marketing and
promotion and an increase of 0.5% of net sales in store preopening expenses
associated with opening 23 stores in 1998 versus nine stores in 1997. These
were partially offset by a decrease of 0.5% of net sales in store payroll and
other selling expenses due to an increase in comparable store sales during
1998.
Interest Expense, Net. Net interest expense, principally attributable to
borrowings under our credit facility, increased by $665,000 to $1.1 million in
1998 from $465,000 in 1997, due to an increase in the average outstanding loan
balance to $6.4 million in 1998 from $1.5 million in 1997. The increase in
average borrowings in 1998 reflected the opening of 23 new stores and
additional working capital requirements to support those stores.
Income Tax Benefit. In 1998, we recorded a net income tax benefit of $6.2
million due to the $7.2 million benefit recorded for our net operating loss
carryforward, partially offset by the 1998 income tax expense of $979,000. In
previous years, no benefit was recorded with respect to the net operating loss
carry forward because we established a valuation allowance. We reversed the
valuation allowance as a result of management's assessment that it is more
likely than not that our net deferred tax assets will be realized through
future taxable earnings. Management's assessment was based on the trend toward
income in 1996 and 1997, the utilization of $5.8 million of the net operating
loss carryforward in 1998, and 1999 and 2000 financial projections.
1997 Compared to 1996
Net Sales. Net sales increased by $30.7 million, or 33.3%, to $123.3 million
in 1997 from $92.6 million in 1996. Sales for the nine stores opened in 1997
contributed $14.8 million of the increase in net sales. Comparable store net
sales increased 9.1% over the prior year and contributed $7.9 million of the
increase in net sales. We believe the increase in comparable store sales in
1997 was primarily the result of an increase in the size of our average
customer transaction. Stores open prior to 1997 but not qualifying as a
comparable store contributed $8.0 million of the increase in net sales.
Gross Profit. Gross profit increased by $10.5 million to $33.9 million in
1997 from $23.4 million in 1996. As a percentage of net sales, gross profit
increased to 27.5% in 1997 from 25.2% in 1996. This increase was primarily due
to a reduction in store occupancy, buying and distribution expense as a
percentage of net sales. The decrease in store occupancy expense of 1.2% of
sales was primarily due to the 9.1% increase in comparable store sales and the
timing of new store openings. The decrease in buying and distribution costs of
0.9% of net sales was due to the application of fixed costs over a higher
revenue base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.9 million to $33.6 million in 1997 from
$28.7 million in 1996. The dollar increase in such expenses was primarily
attributable to $3.2 million in store payroll and other selling expenses
21
<PAGE>
associated with the opening of nine stores in 1997. As a percentage of net
sales, selling, general and administrative expenses decreased by 3.8% to 27.2%
of net sales in 1997 from 31.0% of net sales in 1996. This decrease was
primarily due to a 2.2% decrease as a percent of net sales in corporate
expenses as a percentage of sales, reflecting the application of fixed costs
over a higher revenue base, and a 1.2% decrease as a percent of net sales in
store payroll and other expense, principally due to the 9.1% increase in
comparable store sales..
Interest Expense, Net. Net interest expense, principally attributable to our
credit facility, decreased by $184,000 to $465,000 in 1997 from $649,000 in
1996.
Quarterly Results of Operation and Seasonality
The following table presents certain unaudited results of operations for our
eight fiscal quarters ending January 30, 1999. The unaudited quarterly
information includes all normal recurring adjustments which we consider
necessary for a fair presentation of the information shown. We do not believe
that these quarterly results are necessarily indicative of future results.
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $22,382 $21,943 $23,446 $55,574 $27,452 $29,654 $30,661 $80,704
As a % of full year.... 18.1 % 17.8 % 19.0 % 45.1% 16.3 % 17.6 % 18.2 % 47.9%
Gross profit............ $ 5,252 $ 4,992 $ 6,331 $17,318 $ 7,315 $ 7,544 $ 8,590 $26,869
As a % of full year.... 15.5 % 14.7 % 18.7 % 51.1% 14.5 % 15.0 % 17.1 % 53.4%
As a % of net sales.... 23.5 22.8 27.0 31.2 26.6 25.4 28.0 33.3
Operating income
(loss)................. $(2,420) $(2,677) $(1,916) $ 7,325 $(2,344) $(4,048) $(3,485) $13,819
As a % of net sales.... (10.8)% (12.2)% (8.2)% 13.2% (8.5)% (13.7)% (11.4)% 17.1%
Number of stores:
Opened during period... 2 1 5 1 1 4 8 10
Open at end of period.. 45 46 51 52 53 57 65 75
Comparable store sales
increase............... 9.5 % 8.2 % 7.0 % 10.4% 6.8 % 13.4 % 9.1 % 10.0%
</TABLE>
We have experienced, and we expect to continue to experience, substantial
seasonal fluctuations in our sales and operating results, which is typical of
many retailers. This is primarily due to the Christmas holiday shopping season
as well as the contribution of new stores opened during the year. We have
historically experienced net operating losses in the first three quarters of
each year, which we expect to continue. In addition, the timing of new store
openings and related preopening expenses and the revenue contributions of new
and existing stores may cause our quarterly results to fluctuate.
Liquidity and Capital Resources
Our main sources of liquidity have been cash flows from operations,
borrowing under our credit facilities and proceeds from equity financings. We
require cash principally to finance capital investment in new stores, new store
inventories and seasonal working capital. We opened 12 stores in 1996, nine
stores in 1997 and 23 stores in 1998.
Cash flows provided by our operating activities were $5.4 million in 1998,
compared to $3.5 million in 1997. Cash flows provided by operating activities
in 1998 were primarily from net income, adjusted for depreciation and
amortization and the deferred portion of the income tax benefit, and an
increase in accounts payable partially offset by an increase in inventories.
Cash provided by operating activities in 1997 reflects increases in payables,
accrued liabilities and depreciation and
22
<PAGE>
amortization partially offset by an increase in inventories. Cash flows used in
operating activities were $2.7 million in fiscal 1996 primarily due to a loss
of $6.0 million offset by the impact of depreciation and amortization.
Cash used in investing activities in 1998 was $7.3 million, compared to $6.4
million in 1997 and $6.3 million in 1996. Our cash used in investing activities
primarily represents our capital expenditures in opening new stores and
continued infrastructure development.
Cash used in financing activities in 1998 was $1.4 million and $782,000 in
1997. Cash provided by financing activities was $15.2 million in 1996. Over the
last three years our primary financing activities have involved borrowings and
repayments under our credit agreement and sales of equity securities. Cash used
in financing in 1997 and 1998 was primarily from the repayment of capital
leases partially offset in 1997 by proceeds from the exercise of warrants. Our
cash provided by financing activities in 1996 was from the sale of $16.2
million of preferred stock.
Our principal use of operating cash is to purchase inventory for our stores.
Our need for working capital to purchase inventory is reduced by supplier
credit terms that allow us to finance a portion of our purchases.
Our primary long-term capital requirement is for the opening of new stores.
We lease all of our stores. We currently expect to open approximately 25 stores
in 1999, seven of which we have already opened, and approximately an additional
25 stores in 2000. The average net cost of opening a store in 1998 was
approximately $750,000. This amount included approximately $320,000 of
inventory, net of accounts payable, $340,000 for leasehold improvements and
fixtures, net of landlord allowances, and $90,000 for pre-opening expenses. We
expense our pre-opening expenses as they are incurred. Our actual cost to open
new stores varies widely and depends on factors such as the extent and expense
of required construction, changes in store format and any landlord allowances.
We estimate that capital expenditures for 1999 will be approximately $17.0
million, and will be used to develop new stores, enhance our management
information systems and purchase fixtures and equipment for our new
distribution facility. This estimate does not include any expenditure that we
may make to develop an internet shopping site.
We currently have a credit facility that provides for revolving loans in an
aggregate outstanding principal amount of up to $35 million, including up to
$7.5 million in the form of letters of credit, with an option to increase the
total available to $60 million under certain conditions. The actual
availability under our credit facility is limited to a seasonally-based
calculation of 55% to 65% of our eligible inventory, less any letters of credit
outstanding. At January 30, 1999, the total borrowing limit, including letters
of credit, was $22.1 million. At March 15, 1999, $11.8 million of borrowings
and $830,000 of letters of credit were outstanding. Interest on outstanding
indebtedness under the revolving credit facility accrues at the lender's prime
commercial lending rate or, if we elect, at LIBOR plus 2.5%. Our obligations
under the loan agreement are secured by interests in substantially all of our
personal property, including, our accounts receivable, inventories, equipment,
machinery, contract rights and chattels. The credit facility matures on October
8, 2000. We use our credit facility to meet our seasonal working capital
requirements.
The credit facility contains a tangible net worth covenant and other
restrictions regarding our ability to merge, consolidate or acquire non-
subsidiary entities, make loans, incur debts or liens, pay
23
<PAGE>
cash dividends, or engage in substantial asset sales. As of January 30, 1999,
we were in compliance with the terms of the credit facility.
At January 30, 1999, we had a deferred tax asset of $5.7 million for net
operating loss carryforwards which is available for use in future periods.
We believe that cash flow from operations, funds available under our credit
facilities and the net proceeds from this offering will be sufficient to
satisfy our capital requirements for at least the next 12 months.
Year 2000 Compliance
Zany Brainy is conducting a comprehensive review of its computer systems and
other microprocessor -based equipment to identify how we may be affected by the
Year 2000 issue. The Year 2000 issue results from the writing of computer
programs using two digits, rather than four, to define the applicable year. As
a result, commencing in 2000, date-sensitive software may recognize a date
using "00" as 1900 rather than 2000. This could result in a systems failure or
miscalculations causing disruptions of operations, including a temporary
inability to receive shipments, process financial information, process credit
card transactions, deliver products or engage in other normal business
activities.
Our Year 2000 Readiness
Information Technology Systems. Our core business is run on SFR, an
enterprise software system. The functions supported by SFR include buying,
replenishment, physical distribution, general ledger and payables. SFR is a
product from CDS, a subsidiary of Sterling Software. CDS has recently
discontinued operations. The upgrade to version 7.0, which is Year 2000
compliant, was completed in the first quarter of 1999.
Late in 1998, we agreed to purchase new enterprise software from JDA
Software. This software will replace SFR for all of the functional areas
currently served by SFR. This software has been certified Year 2000 compliant
by the Information Technology Association of America and runs on IBM AS400
hardware which has been certified by IBM to be Year 2000 compliant. We intend
to have the conversion process completed and ready for implementation in
December 1999. However, given the increased business volume during the
Christmas season, we have decided to defer implementation until after the
Christmas selling season. In the event the SFR system fails to operate on
January 1, 2000, we believe we will be positioned to implement the Year 2000
compliant JDA software.
Our in-store systems consist of two application suites and a common
Microsoft NT server network which is Intel based. The application suites are
supplied by ICL Retail, Inc. (ICL), and provide point-of-sale (POS) and store
inventory systems (SIS) support for store management functions. We have
determined that our POS and SIS systems are not Year 2000 compliant, but are
currently assessing whether the Year 2000 issues are raised by the application
suites themselves or by certain Microsoft tools that we use with the
application suites. We expect to complete this assessment in May 1999.
Due to potential compatibility issues, we plan to upgrade the Microsoft NT
operating systems in all stores. The new operating system has been certified by
Microsoft to be Year 2000 compliant. We
24
<PAGE>
are currently testing the new operating system, and expect to complete testing
in May 1999. Some of the store register hardware is not Year 2000 compliant,
but we believe that we can achieve compliance by rebooting the system and
adjusting time and date parameters. We intend to take these measures prior to
the opening of businesses following December 31, 1999. We are engaged in a
project with ICL that is designed to achieve Year 2000 compliance by the third
quarter of 1999.
We are currently assessing the Year 2000 readiness of our server, SIS
workstation hardware, email applications, and software demonstration stations.
We anticipate that this assessment will be completed in May 1999. We plan to
have our store systems achieve Year 2000 compliance for software, operating
systems and hardware in the third quarter of 1999.
Non-Information Technology Systems. Non-information technology systems
include the security systems in our stores, headquarters and distribution
centers, faxes and voicemail. Based on our assessment of these systems, we have
determined that these systems do not raise Year 2000 issues.
Significant Third Party Relationships. We have initiated formal
communications with our significant suppliers to determine our vulnerability if
these third parties fail to remedy their own Year 2000 problems. We believe
that Year 2000 issues faced by our key suppliers, credit card processors and
telecommunications providers, if not effectively remediated, could adversely
affect our business. We are not currently able to assess the scope of such
issues as they may affect these suppliers and providers or the effect of such
issues on us.
Possible Consequences of Year 2000 Issue
If store systems should cease to operate on January 1, 2000, we have several
options available to continue to process sales and receipts in our stores. In a
worst case scenario, the existing disaster procedure to hand-write receipts
would be put into place. The receipt of purchase orders and transfers would
also be recorded manually. If the situation were a result of the registers' and
servers' failure to recognize the new year, the capability exists to set the
system dates back to 1999 and continue to process sales transactions. Sales
receipts would need to be date stamped by hand. Additional effort would be
required to ensure sales and receipt data is subsequently processed correctly.
This would require incremental manual intervention. While the cost of manual
intervention would not be material, the use of manual intervention would
significantly disrupt store operations.
If our telecommunications and credit card processing service providers are
not Year 2000 compliant on a timely basis, our operations could be materially
adversely affected. If our telecommunications providers are not compliant, we
would be required to migrate our service to a compliant vendor. If our credit
card processor is not compliant, we would be required to approve and settle
credit requests manually.
Anticipated Costs of Year 2000 Compliance
We have incurred approximately $25,000 in costs associated with Year 2000
issues, all of which is attributable to software upgrades, including version
7.0 of SFR. The total cost associated with modifications, upgrades and/or
replacements to become Year 2000 compliant is not expected to be material to
our financial position. We currently estimate that we will incur costs of
approximately $150,000 relating to Year 2000 compliance, including $110,000 for
software and operating system compliance and $40,000 for hardware compliance.
These costs will be expensed as incurred. We intend to use funds from
operations to cover our Year 2000 costs.
25
<PAGE>
Lack of Contingency Plans
We have not developed a formal contingency plan. If Year 2000 problems are
discovered, we will address these issues as they occur.
Inflation
We do not believe that inflation has had a material effect on our financial
position or results of operations during the past three years. However, we
cannot predict the future effects of inflation.
26
<PAGE>
OUR BUSINESS
Zany Brainy is a leading and rapidly growing specialty retailer of high
quality toys, games, books and multimedia products for kids. We are a
different kind of toy store with a unique product mission and a passionate
commitment to our customers. We believe that learning should be fun. We sell
over 15,000 products that entertain, educate and spark the imaginations of
children up to 12 years of age. Zany Brainy combines this distinctive
merchandise offering with superior customer service and daily in-store events
to create an interactive, "kid-friendly" and exciting shopping experience for
children and adults.
We opened our first store in Wynnewood, Pennsylvania in 1991. The current
management team assumed leadership during 1995 and 1996. This team refined our
store model and operating strategies and, starting in 1997, accelerated our
store growth. We opened 23 new stores last year and, as of April 30, 1999,
Zany Brainy operated 82 stores in 23 states. We plan to add approximately 25
stores in 1999, seven of which we have already opened, and approximately 25
stores in 2000. Our sales grew 36.6% in 1998 to $168.5 million and we
experienced comparable store sales growth of 9.1% in 1997 and 9.9% in 1998.
Our Strategies
Our goals are to establish Zany Brainy as the leading specialty retailer of
high quality toys, games, books and multimedia products for kids and to build
Zany Brainy into a national brand that represents the "best stuff for kids."
The key elements of our growth and operating strategies to achieve these goals
include:
Pursue Store Expansion Program
We believe that Zany Brainy has nationwide appeal and significant new store
expansion opportunities over the next several years. We anticipate opening
approximately 25 stores in 1999, seven of which we have already opened, and
approximately 25 stores in 2000. Our expansion strategy is to continue to open
new stores in markets where we believe we can become the dominant retailer of
high quality toys, games, books and multimedia products for children as well
as to open more stores in our existing markets. In 1999, we plan to open 14
stores in new markets and to open 11 stores in existing markets.
Increase Sales Productivity of Existing Store Base
We are committed to increasing productivity in existing stores through the
following initiatives:
. frequently updating our merchandise presentation and selection to attract
repeat customers;
. utilizing advertising to attract and retain customers and expand consumer
awareness of our brand;
. continuing to invest in the training of sales associates; and
. further improving our in stock position and speed-to-market with new
products by upgrading our distribution and management information systems
infrastructure.
Offer a Unique Merchandise Mix
We strive to carry a product selection that addresses the needs of our
customers and which meaningfully differs from that of our competitors. We
believe that our selection represents a comprehensive offering for customers
seeking products that enable their children to have fun while
27
<PAGE>
learning. We do not sell products that we believe are inconsistent with our
mission, such as toys that may reinforce gender stereotypes or encourage
violence. In addition, we generally do not offer TV-promoted, mass marketed
items. Excluding books and multimedia, we believe that less than 30% of the
stock keeping units that we carry are available at Toys "R" Us. We seek to keep
our merchandise selection new and exciting, and to satisfy our customers'
changing preferences. Accordingly, we seek to update at least 20% of our
merchandise each year. To further differentiate our merchandise selection, we
work closely with several specialty suppliers to secure exclusive product or
licensing arrangements.
Provide Exceptional Customer Service
We believe that our high level of service differentiates the shopping
experience at our stores, enables us to attract customers and creates customer
loyalty and trust. We actively recruit educators, child care providers and
back-to-work parents as sales associates because we believe they have a respect
and affection for children and an appreciation of how children learn through
play. Our employees participate in an extensive training program and learn to
proactively assist our customers in selecting products. In addition, we staff
our stores with book, multimedia and other specialists who have an in-depth
knowledge of their specific areas. We also provide convenient services, such as
free gift wrapping and shipping at cost.
Provide a Destination Store Environment
We design our stores to be a destination for both children and adults to
enjoy free fun every day. We offer daily, in-store events such as mini-
concerts, story time, face-painting, character appearances and a summer reading
club. We provide a hands-on shopping experience and encourage children to play
with our products in the store. Our "kid-friendly" stores are colorful,
welcoming and exciting with attractive carpeting and designated play areas
located throughout the store.
Develop an Internet Sales Channel
We intend to implement an internet shopping site in time for the 1999
Christmas holiday shopping season. We currently anticipate that our internet
shopping site will be developed through a joint venture arrangement that will
enable us to sell our products over the internet.
Industry and Competition
We believe that the market for our product categories was approximately $14
billion in 1998. However, we do not sell some of the products included in these
categories because they are inconsistent with our product mission or
inappropriate for children 12 years and under.
The toy retailing market is comprised of:
. mass market retailers, including superstores such as Toys "R" Us and
discounters such as Wal-mart and Target;
. smaller format specialty educational and creative toy and game retailers
such as Noodle Kidoodle and LearningSmith;
. non-toy specialty retailers, such as traditional book, music, video and
software retailers;
. internet-only retailers; and
28
<PAGE>
. a variety of other retailers offering a subset of our products including
card and gift shops, craft stores and department stores.
The mass market retailers have traditionally offered a broad range of
products with a particular focus on TV-promoted products. We believe that mass
market retailers' emphasis on these products, combined with the impersonal
environment and reduced service levels typical of a large format superstore,
limits their ability to meet the needs of our customers.
Some of the smaller format specialty educational and creative toy and game
retailers offer products similar to ours. However, we generally operate larger
stores, which enables us to carry a wider product assortment. In addition, some
of these competitors supplement their product offering with items that we
believe are inconsistent with our mission to sell the "best stuff for kids."
Moreover, we provide a broader program of special events than these
competitors.
Many non-toy speciality retailers, such as traditional book and software
retailers, offer an extensive selection of products in specific categories.
However, we believe our comprehensive merchandise offering of toys, games,
books and multimedia products for kids satisfies our customers' need for a
variety and selection of products. Internet-only retailers provide customers
with an on-line shopping forum. We believe we differentiate ourselves from
internet competitors by providing a high level of customer service and a "kid
friendly" environment in which children are encouraged to see, touch and play
with our products.
Our Merchandising Approach
We believe that our customers trust us to provide high quality merchandise
for kids at the right price. We carefully select products that encourage
children's educational, emotional or physical development. We do not sell
products that we believe are inconsistent with our mission, such as toys that
reinforce gender stereotypes or encourage violence. In addition, we generally
do not offer TV-promoted, mass marketed items. We believe that this
merchandising philosophy has enabled us to earn the confidence, loyalty and
trust of our customers.
Our Distinctive Merchandise Selection
We purchase over 15,000 stock keeping units from more than 400 suppliers in
20 different countries. While our products generally range in price from less
than one dollar up to $200, the average price paid for a single product is less
than $10. We present our merchandise across 11 product categories to satisfy a
broad spectrum of customer needs. Our extensive selection of merchandise
includes:
<TABLE>
<CAPTION>
Category Description
- -------- -----------
<S> <C>
Toys and Games
Brainy Games and Puzzles......... Board games and puzzles.
Bright Start..................... Toys for ages up to three.
Creativity....................... Arts and crafts supplies and kits.
Good Sports...................... Indoor and outdoor sport-theme toys.
Kidtronics....................... Electronic learning aids and musical
instruments.
Let's Pretend.................... Pretend play, dress up and doll houses.
Our Planet....................... Science-related toys.
Plush and Dolls.................. Stuffed animals and dolls.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Category Description
- -------- -----------
<S> <C>
Young Builders................... Building toys and trains.
Books................................ Extensive selection of over 7,000 titles.
Multimedia........................... Software, audio and video.
</TABLE>
We regularly offer numerous limited distribution, innovative products. In
many cases, we have worked with suppliers to first introduce their products in
our stores. We believe many manufacturers of specialty products do not sell
their products through discounters or mass market retailers. To further
differentiate our merchandise offering, we also work closely with several
specialty suppliers to secure exclusive product or licensing arrangements. We
also supplement our merchandise offering with our own product development
efforts. We sell our private label products under such brand names as "Ready,
Set, Grow!" and "Kidstruments."
Our Competitive Pricing
We generally position ourselves to be competitive in price, but we do not
attempt to be the discount leader in a given market. We do, however, maintain a
policy of matching our competitors' advertised prices.
Store Operations
Our Store Design
We design our stores to be bright, colorful and inviting for children and
adults. Our current store prototype is 10,600 square feet and contains 11 major
categories of products. Large banners with unique graphics identify each of
these categories to enable customers to find specific items quickly. Our stores
are fully carpeted and have low shelving to encourage children to see, touch
and play with our products. Departments are located around the perimeter of the
store in a "racetrack" style to promote browsing and impulse sales. We have a
play center in the middle of our stores that is surrounded with large red
pillars so children can locate it easily. We also provide seating in the play
center so adults can comfortably play with their children. We typically locate
our Zany Showtime Theater, which is used to show the latest video releases,
adjacent to the play center so we can combine the two spaces to accommodate
larger special events. A reading area is situated next to our book department,
and software demonstration stations are placed near our multimedia department
to encourage sampling of these items.
[Store layout graphic]
30
<PAGE>
Our Store Associates
We strive to complement our innovative store design with superior customer
service to provide an enjoyable shopping experience. We believe our prompt,
knowledgeable and enthusiastic service fosters the confidence and loyalty of
our customers and differentiates us from our competitors. We actively recruit
educators, child care providers and back-to-work parents as store employees
because we believe that these people are most likely to have a respect and
affection for children, and an appreciation of how children learn through play.
Because we consider customer relations and product knowledge to be critical
components of our merchandising strategy, we emphasize product and customer
service training. Our sales associates receive approximately 25 hours of
training within their first month of employment and are tested before they are
designated a "Certified Kidsultant." We train our sales associates to
proactively advise customers on product features, benefits and age-
appropriateness.
In addition, some of our sales associates receive supplemental training to
become specialists in various areas including books, multimedia and events. We
also provide an abbreviated form of training for seasonal employees. Once a
year, all store managers attend a "Play Day" where they are introduced to and
trained in the features and benefits of various new products. The store
managers then train our sales associates in these products.
Our stores are typically staffed with a general manager, three assistant
managers, four specialists, and a varying number of part-time sales associates,
depending on store volume and time of year. A general manager and three
assistant managers, who may be specialists, typically manage each store, and
are responsible for building relationships within the community. The operations
of each store are supervised by one of 11 district managers who each in turn
report to one of three regional managers. Each regional manager reports to the
vice president of stores.
Zany Brainy stores are open seven days a week, generally from 10:00 a.m. to
9:00 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday.
Store Locations
We select geographic markets and store sites on the basis of demographic
information, quality and nature of co-tenants store visibility and
accessibility. Key demographics include population density, household income,
the number of households with children and education level. We locate our
stores primarily in suburban strip or power centers as well as in selected
free-standing locations. We typically seek sites with co-tenants that are
strong, destination and lifestyle-oriented retailers such as Borders, Old Navy,
PETsMART, Bed, Bath & Beyond or upscale supermarkets.
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<PAGE>
The map and store list below present the stores we operate as of April 30,
1999:
[Map of United States showing store locations]
<TABLE>
Pre-1995 Openings
- --------------------------
<S> <C>
Sq.
City, State Footage
- ------------------- -------
Wilmington, DE 8,400
Marietta, GA 12,500
Sandy Springs, GA 13,500
Annapolis, MD 12,045
Columbia, MD 12,000
Rockville, MD 12,368
East Brunswick, NJ 12,000
Mount Laurel, NJ 10,208
Wayne, NJ 13,500
Jenkintown, PA 12,460
Lancaster, PA 12,150
Newtown, PA 10,846
Strafford, PA 8,500
Wynnewood, PA 10,875
Fairfax, VA 13,801
Sterling, VA 12,421
1996 Openings
---------------------------
Sq.
City, State Footage
------------------ -------
Naperville, IL 12,481
Oak Brook, IL 12,996
Orland Park, IL 13,614
Durham, NC 13,010
Raleigh, NC 12,701
Marlton, NJ 15,520
Edison, NJ 14,000
Springfield, NJ 12,530
Akron, OH 10,052
Columbus, OH 12,015
Mayfield Heights,
OH 9,556
Fairless Hills, PA 11,236*
1998 Openings
---------------------------
Sq.
City, State Footage
------------------ -------
Brea, CA 10,350
Concord, CA 10,500
Mission Viejo, CA 11,116
Montclair, CA 10,816
Newport Beach, CA 10,876
Orange, CA 10,644
Pasadena, CA 10,600
San Mateo, CA 10,687
Valencia, CA 10,081
Overland Park, KS 10,600
Lexington, KY 12,850
Gaithersburg, MD 10,500
Ballwin, MO 10,600
Brentwood, MO 10,418
Scarsdale, NY 9,207
Winston-Salem, NC 8,249
Columbus, OH 10,600
Cool Springs, TN 10,650
Brentwood, TN 10,088
Fredericksburg, VA 8,039
Redmond, WA 10,479
Tukwila, WA 11,200
Brookfield, WI 11,122
-----------------------------------------
Average Sq.
Footage........... 12,476
1997 Openings
---------------------------
Sq.
City, State Footage
------------------ -------
Birmingham, AL 10,000
San Diego, CA 10,500
Thousand Oaks, CA 10,440
Torrance, CA 10,500
Indianapolis, IN 10,016
Louisville, KY 11,841
Charlotte, NC 12,500
Madison, WI 10,000
Milwaukee, WI 9,885
- -----------------------------------------
Average Sq.
Footage........... 11,723
1995 Openings
- --------------------------
Sq.
City, State Footage
- ------------------- -------
Alpharetta, GA 13,582
Marietta, GA 11,100*
Norcross, GA 15,001
Northbrook, IL 15,058
Schaumburg, IL 15,000
Wheaton, IL 12,499 Average Sq.
Eatontown, NJ 13,044 Footage.......... 10,447
Princeton, NJ 11,372 1999 Openings
Warrington, PA 12,500 ---------------------------
Huntingdon Valley,
PA 12,500 Sq.
Bailey's City, State Footage
Crossroads, VA 13,329 ------------------ -------
Woodbridge, VA 12,593
Fairfax, VA 12,814 Dublin, CA 10,500
Reston, VA 12,716 Huntington Beach,
Springfield, VA 12,000 CA 10,625
Colorado Springs,
CO 9,108
Timonium, MD 10,184
Roseville, MN 10,607
Omaha, NB 10,500
Murray, UT 9,470
-----------------------------------------
Average Sq.
Footage.......... 10,631
- -----------------------------------------
Average Sq.
Footage........... 13,007
- --------
*Excludes square footage licensed to a third party.
Average Sq.
Footage.......... 10,142
</TABLE>
32
<PAGE>
Marketing
Advertising
We use direct mail and newspaper advertising to promote Zany Brainy products
and increase awareness of our stores and brand. We primarily rely on direct
mail advertising, which allows us to capitalize on our growing, internally-
generated database. A variety of direct mail pieces, including our large, color
"Zany Zone" catalog, are mailed throughout the year to both current and
prospective customers. We also use full color newspaper inserts for broader
consumer reach during our peak selling periods. We advertise most heavily
during the Christmas holiday and back-to-school seasons. Our suppliers
contribute to some of our advertising costs through co-op advertising.
We use grand opening events to create traffic in new stores and to introduce
Zany Brainy to the community. Through a combination of advertising promotions,
public relations efforts and community outreach activities, we seek to generate
strong opening weekend sales, significant media exposure and community
involvement with Zany Brainy. For example, we design our grand opening events
to enable our store employees to initiate relationships with children-focused
organizations such as schools, museums, zoos and daycare centers.
Free Fun Every Day
The Zany Brainy store environment and special events program are integral
parts of our marketing strategy. We believe they provide an exciting shopping
and learning experience for kids and adults. Our stores always feature several
interactive areas, including play centers and software demonstration stations.
In addition, we show movies throughout the day at our Zany Showtime Theater. We
publish a monthly calendar of free events for our stores. Each of our stores
hosts regular daily activities for kids, including creative arts and crafts
activities, character and author appearances and mini-concerts by nationally
known children's performers. In order to enhance customer loyalty, we
established a summer reading club in 1993. In 1998, the summer reading club had
approximately 26,000 members. The National Geographic Society and America
Online are among the organizations that have sponsored our summer reading club.
We believe that these activities create an enjoyable shopping experience and
strengthen our position as a family-oriented destination store.
Purchasing and Suppliers
We purchase merchandise from over 400 suppliers in 20 different countries.
We believe that our buying power and ability to make centralized purchases
enable us to acquire products on favorable terms.
In mid-1998, we entered into a relationship with Ingram Books to be our
principal book distributor. We believe that this arrangement provides a
comprehensive, cost-effective alternative to purchasing books from multiple
publishers and distributors. In addition, Ingram ships directly to each of our
stores, improving our in-stock position and ensuring that we carry current,
popular titles.
Additionally, we host vendor-supported in-store programs to increase
customer product knowledge in a friendly, hands-on environment. For example, we
periodically schedule "Young Builders Days," when representatives from
suppliers provide children with the opportunity to play with and learn about
their products.
Our central buying staff is comprised of one vice president, two divisional
merchandise managers and seven buyers, each of whom is responsible for
purchasing selected categories of our
33
<PAGE>
products. Our buyers generally have extensive purchasing experience with major
toy or other speciality retailers. We also maintain an in-house private label
product development team that develops products which are unique to Zany Brainy
and offer higher profit margins. In addition, we have a merchandise planning
team that manages inventory levels and the flow of merchandise through our
stores. This team works closely with our buying staff to react quickly to sales
trends and improve in stock levels at our stores.
Distribution
We currently operate one distribution center in Delaware that contains
approximately 120,000 square feet. Approximately 80% of our products are
distributed through this facility and the balance is shipped to the stores
directly by the manufacturer or supplier. Our automated inventory replenishment
system optimizes the inventory levels at each of our stores. This computerized
system retrieves sales information from our stores, enabling us to pick, price
and ship products to each of our stores on a weekly basis. This method of
allocation and distribution improves our operating performance by reducing
overall inventory costs while maintaining high in stock percentages.
After analyzing our distribution facilities and systems in light of our
anticipated growth, we decided to close our two distribution centers in
Delaware, one of which closed in April 1999, and consolidate distribution
center operations in a new 250,000 square foot facility in Swedesboro, New
Jersey. We anticipate closing the other Delaware facility in connection with
the opening of our new Swedesboro facility, which is scheduled to occur in the
summer of 1999. The new distribution center will be automated to increase
productivity. We also plan to implement a new warehouse management system as
part of the JDA software installation that we anticipate completing in early
2000. This more sophisticated system should enable us to accept smaller but
more frequent deliveries from suppliers, reducing inventory in the distribution
center and stockouts at our stores.
Management Information Systems
Our management information systems include a business-wide software package,
SFR, that supports our major back-office functions, including buying,
replenishment, physical distribution, general ledger and payables. In late
1998, we agreed to purchase a more sophisticated software package from JDA. JDA
to replace SFR. JDA will support the same business functions as SFR, but it
also includes forecasting capabilities and more advanced replenishment and
trend algorithms. We believe the implementation of JDA, which we anticipate
completing in the second quarter of 2000, will further increase our operating
efficiencies.
At the store level, we utilize a point-of-sale system to capture sales
transactions that includes a price look-up, UPC scanning, check and credit
authorization and zip code capture. Our store systems interface with our
business-wide software system to automatically replenish inventory, by stock
keeping unit, to each store. We also analyze this information to tailor our
merchandise assortment, determine markdowns, generate forecasts and evaluate
product and supplier performance.
Proprietary Rights
To protect our proprietary rights, we generally rely on copyright, trademark
and trade secret laws, confidentiality agreements with employees and third
parties and license agreements with consultants and suppliers. Each of "Zany
Brainy," "A Zillion Neat Things for Kids," "Zany Zone" and "Price Chomper" has
been registered as a service mark and/or trademark with the United States
34
<PAGE>
Patent and Trademark Office. In addition, we have numerous pending applications
for trademarks. "ZanyBrainy.com" has also been registered as an internet domain
name.
Employees
As of January 30, 1999, we employed over 2,000 employees, 729 of whom were
employed full-time. We also employ additional personnel during peak selling
periods. We consider our relationships with our employees to be good. None of
our employees are covered by collective bargaining agreements.
Properties
Our corporate headquarters are located at 308 East Lancaster Avenue in
Wynnewood, Pennsylvania, where we lease approximately 36,000 square feet. Our
lease expires June 30, 1999. We plan on relocating our corporate headquarters
to King of Prussia, Pennsylvania in June 1999 to increase our office space to
approximately 52,000 square feet. We have an option to lease another 10,000
square feet in the new location. The lease has an initial term of ten years
with two five-year renewal options.
We also currently lease one distribution center in New Castle, Delaware
consisting of approximately 120,000 square feet. This lease will expire in
March 2000. We plan on closing our New Castle distribution center and moving
into a facility in Swedesboro, New Jersey in the summer of 1999. The lease for
the distribution center in New Castle will be assumed by our new landlord
following our occupancy of the new facility in Swedesboro. The new distribution
center consists of approximately 250,000 square feet, and we have an option to
expand the distribution center by a minimum of 100,000 and up to 250,000 square
feet. The new distribution center lease has an initial term of five years with
two five-year renewal options. We closed a smaller distribution center in April
1999 when its lease expired.
We lease all of our stores. Initial lease terms are generally for ten years,
and most leases contain multiple five-year renewal options. We generally select
a new store site 6 -18 months before its opening. Our stores are primarily in
suburban strip or power shopping centers as well as in selected free-standing
locations. As of April 30, 1999, we had 25 signed leases for stores we plan to
open in 1999, seven of which we have already opened, and two signed leases for
stores we plan to open in 2000.
Legal Proceedings
We are from time to time involved in litigation that we believe ordinarily
accompanies a retail business. We do not believe that any of our pending or
threatened litigation will result in an outcome that would materially affect
our business.
35
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Keith C. Spurgeon......... 44 Chairman of the Board and Chief Executive Officer
Thomas G. Vellios......... 44 President
Robert A. Helpert......... 55 Chief Financial Officer, Secretary and Treasurer
C. Donald Dorsey.......... 57 Director
Robert A. Fox............. 69 Director
Gerald R. Gallagher....... 58 Director
Henry Nasella............. 52 Director
Yves B. Sisteron.......... 43 Director
David V. Wachs............ 73 Director
</TABLE>
The current executive officers and directors, along with their backgrounds,
are set forth below:
Keith C. Spurgeon has served as our Chairman of the Board and Chief
Executive Officer since January 1998. He served as our President and Chief
Executive Officer from June 1996 to January 1998. Prior to joining us, Mr.
Spurgeon was at Toys "R" Us for over ten years where he served in various
capacities, most recently as Vice President for Asia and Australia.
Thomas G. Vellios has served as our President since January 1998. He joined
Zany Brainy in November 1995 as Executive Vice President of Merchandising and
Marketing. Prior to joining us, Mr. Vellios was at Caldor, Inc. for nine
years, where he served in various capacities, most recently as Senior Vice
President and General Merchandise Manager.
Robert A. Helpert has served as our Chief Financial Officer, Secretary and
Treasurer since May 1995. Prior to joining us, from February 1994 to May 1995,
Mr. Helpert was the Executive Vice President and Chief Financial Officer for
Trans World Entertainment Corporation. Prior to joining Trans World, from 1988
to 1994, he was President and Chief Operating Officer of W.H. Smith, Inc., an
operator of hotel and airport newsstands and gift shops.
C. Donald Dorsey has served as one of our directors since June 1994. Mr.
Dorsey has served as Executive Vice President of PETsMART, Inc. since 1994.
From 1989 to February 1997 and November 1997 to March 1998, Mr. Dorsey also
served as PETsMART's Chief Financial Officer.
Robert A. Fox has served as one of our directors since January 1993. Mr.
Fox is the President of R.A.F. Industries, Inc. and affiliates, diversified
manufacturing, distribution and service companies, which he founded in 1979.
Mr. Fox also currently serves as a director of Safeguard Scientifics, Inc. and
Prime Bancorp, Inc.
Gerald R. Gallagher has served as one of our directors since June 1994. Mr.
Gallagher has been a general partner of Oak Investment Partners, a venture
capital firm, since 1987. Before joining Oak Investment Partners, he was Vice
Chairman of Dayton Hudson Corporation. Currently, Mr. Gallagher serves as a
director of P.F. Chang's China Bistro, Inc.
Henry Nasella has served as one of our directors since October 1993. Mr.
Nasella has been the Chairman, Chief Executive Officer and President of Star
Markets Company, Inc., a Boston-based
36
<PAGE>
grocery retailer since September 1994. From January 1994 to September 1994, he
was a principal of Phillips-Smith Specialty Venture Capital. Mr. Nasella
formerly served as President and Chief Operating Officer of Staples Inc. He
currently serves as a director of Au Bon Pain Co., Inc.
Yves B. Sisteron has served as one of our directors since June 1994. Mr.
Sisteron has been a principal of Global Retail Partners, L.P., an investment
fund, since January 1996 and a manager of U.S. investments for Carrefour S.A.
since 1993. Mr. Sisteron currently serves as a director of P.F. Chang's China
Bistro, Inc.
David V. Wachs has served as one of our directors since October 1993. Mr.
Wachs currently serves as a consultant to Charming Shoppes, Inc., a retail
company he co-founded.
Mr. Nasella was elected to our board pursuant to a provision of our
shareholders agreement that entitles David Schlessinger, the founder and former
chairman of Zany Brainy, to designate two directors to our board. In August
1998, Mr. Schlessinger waived his right to designate directors in the future.
Messrs. Fox and Wachs were elected to our board pursuant to a provision of our
shareholders agreement that entitles Mr. Fox to designate one director, in
addition to himself, to our board. Messrs. Gallagher and Sisteron were elected
to our board pursuant to a provision of our shareholders agreement that
entitles Oak Investment Partners V Limited Partnership and Fourcar B.V.,
respectively, to designate directors to our board. The shareholders agreement
terminates upon consummation of this offering.
Committees of the Board of Directors
The board of directors has established an audit committee, a compensation
committee and a nominating committee.
Messrs. Dorsey, Fox and Wachs comprise the audit committee. The audit
committee reviews with management our internal financial controls, accounting
procedures and reports. The audit committee also reviews the engagement of our
independent auditors, makes recommendations to the board of directors regarding
the selection of independent auditors and reviews the scope, fees and results
of any audit.
Messrs. Gallagher, Nasella and Sisteron comprise the compensation committee.
The compensation committee administers all of our salary and incentive
compensation policies. The compensation committee also administers our stock
option plans and establishes the terms and conditions of all stock option
grants.
Messrs. Nasella and Spurgeon comprise the nominating committee. The
nominating committee evaluates board performance and recommends nominees to the
board of directors.
Director Compensation
Directors do not receive any cash compensation for service as directors,
however, they are reimbursed for the expenses they incur in attending meetings
of the board or board committees. All directors are eligible to participate in
our stock option plans.
37
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation
earned by our chief executive officer and our two other executive officers for
services rendered in all capacities to us in the year ended January 30, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
----------------- All Other
Name and Principal Position Year Salary Bonus Compensation(a)
- --------------------------- ---- ------ -------- ---------------
<S> <C> <C> <C> <C>
Keith C. Spurgeon, Chairman and Chief
Executive Officer..................... 1998 $300,000 $135,000 $2,335
Thomas G. Vellios, President........... 1998 275,000 110,000 2,466
Robert A. Helpert, Chief Financial
Officer, Secretary and Treasurer...... 1998 262,500 91,875 6,666
</TABLE>
- --------
(a) Represents premiums paid by us with respect to term life insurance for the
benefit of the named executive officer.
Stock Option Information
There were no stock option grants to any of the executive officers named in
the Summary Compensation Table during fiscal year 1998.
The following table sets forth information with respect to the number and
value of outstanding options held by executive officers named in the Summary
Compensation Table at the end of 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year End(#) at Year End ($)(a)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keith C. Spurgeon........... 237,500 462,500 1,796,500 3,472,000
Thomas G. Vellios........... 175,000 275,000 1,325,500 2,059,000
Robert A. Helpert........... 113,750 161,250 866,600 1,219,200
</TABLE>
- --------
(a) Based on an assumed initial public offering price of $11.00 per share,
minus the exercise price, multiplied by the number of shares underlying the
option.
In April 1999, Messrs. Spurgeon, Vellios and Helpert received options to
purchase 100,000, 125,000, and 25,000 shares of common stock, respectively, at
an exercise price of $11.75 per share. Each of the options vests in four equal
installments commencing on the first anniversary of the date of grant and
expires ten years from the date of grant.
Stock Option Plans
1993 Stock Incentive Plan
We have a 1993 stock incentive plan, under which we have reserved for
issuance 2,500,000 shares of common stock. The 1993 plan provides for grants of
incentive stock options, nonqualified
38
<PAGE>
stock options, stock appreciation rights and stock awards to our key employees
and non-employee directors. The compensation committee of the board of
directors administers and interprets the plan.
The exercise price of common stock underlying an option may be greater, less
than or equal to fair market value. However, the exercise price of an incentive
stock option must be equal to or greater than the fair market value of a share
of common stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of the fair market
value of the underlying shares of common stock on the date of grant.
The maximum term of an option is ten years from the date of grant except
that the term of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the date of grant.
The compensation committee may accelerate the exercisability of any or all
outstanding options in the event of a dissolution, liquidation or change in
control.
As of March 15, 1999, 2,494,106 options were outstanding under the 1993
plan. Zany Brainy does not anticipate that any additional stock options will be
granted under the 1993 plan after the date of the offering.
1998 Equity Compensation Plan
We have a 1998 equity compensation plan under which, as of March 17, 1998,
we have reserved for issuance 3,000,000 shares of common stock. The 1998 plan
provides for grants of incentive stock options, nonqualified stock options,
stock appreciation rights, restricted stock and performance units to our
designated employees, advisors and consultants, and to non-employee directors.
The 1998 plan provides that no more than 500,000 shares in the aggregate may be
granted to any individual in any calendar year. The compensation committee of
the board of directors administers and interprets the plan.
The exercise price of common stock underlying an option may be greater, less
than or equal to fair market value. However, the exercise price of an incentive
stock option must be equal to or greater than the fair market value of a share
of common stock on the date such incentive stock option is granted, and the
exercise price of an incentive stock option granted to an employee who owns
more than 10% of the common stock may not be less than 110% of the fair market
value of the underlying shares of common stock on the date of grant.
The maximum term of an option is ten years from the date of grant except
that the term of an incentive stock option granted to an employee who owns more
than 10% of the common stock may not exceed five years from the date of grant.
The compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason.
Upon a change of control, the compensation committee may determine that:
. 50% of all unvested options shall immediately vest;
. the restrictions and conditions on all outstanding restricted stock shall
immediately lapse; and
. holders of performance units shall receive a payment in settlement of
such units, in an amount determined by the compensation committee in its
sole discretion.
As of March 15, 1999, 225,700 options were outstanding under the 1998 plan.
39
<PAGE>
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may be
precluded from claiming a federal income tax deduction for total remuneration
in excess of $1,000,000 paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total remuneration
would include amounts received upon the exercise of stock options granted under
the plan and the value of shares received when the shares of restricted stock
became transferable or such other time when income is recognized. An exception
does exist, however, for "performance-based compensation," including amounts
received upon the exercise of stock options pursuant to a plan approved by
shareholders that meets certain requirements. The 1998 plan has been approved
by shareholders and is intended to make grants of options thereunder meet the
requirements of "performance-based compensation." Awards of restricted stock
generally will not qualify as "performance-based compensation."
Nonqualified Stock Options
Prior to the adoption of the 1993 stock incentive plan and subsequent to the
1993 plan's adoption with respect to certain persons or entities unable to
receive grants under the 1993 plan, we granted to certain employees, directors,
consultants and advisors non-qualified stock options under individual
agreements with the grantees. As of March 15, 1999, 130,000 options were
outstanding under these separate agreements. All of these options expire ten
years after the date of grant.
Employment Agreements
In 1996, we entered into employment agreements with each of Keith C.
Spurgeon, Thomas G. Vellios and Robert A. Helpert. Under these employment
agreements, Messrs. Spurgeon, Vellios and Helpert are entitled to receive a
base salary, which may be increased from time to time, and such additional
compensation as may be awarded to them. In addition, Messrs. Spurgeon, Vellios
and Helpert received stock option grants under these employment agreements for
400,000 shares, 200,000 shares and 140,000 shares, respectively, at an exercise
price of $4.00 per share. These stock option grants were subsequently repriced
to $3.33 per share and are governed by the terms of our 1993 stock incentive
plan. The 1999 base salaries for Messrs. Spurgeon, Vellios and Helpert are
$300,000, $300,000 and $275,000, respectively.
Each of the employment agreements contains the following principal terms:
. severance payment equal to six months of the employee's base salary if
the employee is terminated for any reason other than for cause or a
change of control.
. severance payment equal to one year of the employee's base salary, if the
employee is terminated or the employee's responsibilities are
significantly reduced after a change in control.
. the option to resign and still receive a severance payment equal to one
year of the employee's base salary within one year after a change of
control if, after the change in control, the successor organization does
not offer to extend the employee's employment agreement for two years on
substantially the same terms.
Each of the employment agreements may be terminated at will by either party.
40
<PAGE>
CERTAIN TRANSACTIONS
Issuance of Capital Stock
In September and November 1996, we issued 525,025 shares and 224,959 shares,
respectively, of series C convertible preferred stock for an aggregate of
$16,874,640. In order to encourage our existing shareholders to participate in
the series C financing, we also offered them the opportunity, in some
circumstances, to exchange their shares of series B preferred stock for an
equal number of shares of series BB preferred stock, which has a more favorable
conversion rate to common stock. As a result, in September 1996, we issued
748,334 shares of series BB convertible preferred stock in exchange for an
equal number of shares of series B convertible preferred stock. In addition, as
set forth below, one of our former shareholders also sold all of its shares of
common stock on a pro rata basis to the investors in the series C financing.
All of the shares of convertible preferred stock will convert to common stock
at the closing of this offering.
Specifically, in connection with the series C preferred stock sale, we
issued:
. 8,940 shares of common stock to the C. Donald Dorsey and Lydia Dorsey
Family Trust dated August 5, 1993, for which C. Donald Dorsey, one of our
directors, serves as trustee;
. an aggregate of 164,590 shares of common stock to Robert A. Fox, one of
our directors, for himself and for a voting trust in his name;
. 121,755 shares and 2,740 shares of common stock to Oak Investment
Partners V, L.P. and Oak V Affiliates Fund, L.P., respectively,
partnerships in which Gerald R. Gallagher, one of our directors, is a
general partner;
. 810,805 shares, 131,530 shares and 51,050 shares of common stock to
Fourcar, B.V., Lacomble Retailing, SA and Fondation Consuelo,
respectively, each of which is an entity affiliated with Carrefour S.A.,
for which Yves Sisteron, one of our directors, serves as the manager of
U.S. investments;
. 70,620 shares of common stock to Frontenac VI Limited Partnership, one of
our greater than 5% shareholders;
. 1,015,455 shares and 5,040 shares of common stock to Nassau Capital
Partners II L.P., one of our greater than 5% shareholders, and NAS
Partners I L.L.C., respectively;
. 993,375 shares of common stock to Vulcan Ventures, Inc., one of our
greater than 5% shareholders; and
. an aggregate of 5,605 shares of common stock to employees of DLJ.
In connection with the exchange of series B convertible preferred stock for
series BB convertible preferred stock, we issued:
. 4,571 shares of common stock to the C. Donald Dorsey Trust; and
. an aggregate of 448,388 shares of common stock to Mr. Fox, for himself
and for a voting trust in his name;
. 372,571 shares and 8,379 shares of common stock to Oak Investment
Partners V, L.P. and Oak V Affiliates Fund, L.P., respectively;
. 321,152 shares, 71,195 shares, 35,597 shares, 35,597 shares, 28,571
shares, 13,714 shares and 28,571 shares of common stock to Fourcar, B.V.,
Lacomble Retailing, SA, Fidas
41
<PAGE>
Business S.A., SG Cowen, Fundacion Juan March, Fundacion Appomatox and
Daniel Bernard, respectively, each of which is an entity affiliated with
Mr. Sisteron and which Fourcar, B.V. and Lacomble Retailing, SA are
entities affiliated with Carrefour S.A.;
. 761,911 shares of common stock to Frontenac VI Limited Partnership;
. 257,526 shares of common stock to Vulcan Ventures, Inc; and
. an aggregate of 2,550 shares of common stock to employees of DLJ.
Recent Sales of Securities by Shareholders
In September and November 1996, one of our former shareholders sold an
aggregate of 600,000 shares of common stock to certain of our shareholders for
an aggregate purchase price of $2.0 million, or $3.33 per share, including:
. 1,430 shares of common stock to the C. Donald Dorsey Trust;
. an aggregate of 26,334 shares of common stock to Mr. Fox, for himself and
for a voting trust in his name;
. 19,481 shares and 438 shares of common stock to Oak Investment Partners
V, L.P. and Oak V Affiliates Fund, L.P., respectively;
. 129,729 shares, 21,045 shares and 8,168 shares of common stock to
Fourcar, B.V., Lacomble Retailing, SA and Fondation Consuelo,
respectively;
. 11,300 shares of common stock to Frontenac VI Limited Partnership;
. 162,474 shares and 807 shares of common stock to Nassau Capital Partners
II L.P. and NAS Partners I L.L.C., respectively;
. 158,940 shares of common stock to Vulcan Ventures, Inc.; and
. an aggregate of 898 shares of common stock to employees of DLJ.
In July and August 1998, Mr. Schlessinger sold an aggregate of 410,000
shares of common stock to certain of our shareholders for an aggregate purchase
price of $2,460,000, or $6.00 per share, including:
. an aggregate of 40,261 shares of common stock to Mr. Fox, for himself and
for a voting trust in his name;
. 28,149 shares and 633 shares of common stock to Oak Investment Partners
V, L.P. and Oak V Affiliates Fund, L.P., respectively; and
. 1,081 shares of common stock to Henry Nasella, one of our directors.
. 36,783 shares and 229 shares of common stock to Nassau Capital Partners
II L.P. and NAS Partners I L.L.C., respectively;
. 65,247 shares of common stock to Vulcan Ventures, Inc.;
. 105,549 shares of common stock to DLJ and 1,071 shares of common stock to
an employee of DLJ;
In December 1998, DLJ transferred the 105,549 shares of common stock it
purchased from Mr. Schlessinger to Global Retail Partners, L.P., an investment
partnership of which Mr. Sisteron, one of our directors, is a principal, and to
its affiliates.
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock by:
. our chief executive officer, other executive officers and directors;
. each selling shareholder;
. all directors and executive officers as a group; and
. each person known to us to own beneficially more than 5% of our
outstanding shares.
A person has beneficial ownership of shares if he has the power to vote or
dispose of the shares. This power can be exclusive or shared, direct or
indirect. In addition, a person is considered by SEC rules to beneficially own
shares underlying options that are presently exercisable or will become
exercisable within 60 days. The shares listed in this table below under "Number
of Shares Underlying Options" include shares issuable upon the exercise of
options that are presently exercisable or will become exercisable within 60
days of April 30, 1999.
As of April 30, 1999, there were 16,633,894 shares of our common stock
outstanding, after giving effect to the conversion of all shares of preferred
stock into common stock. To calculate a shareholder's percentage of beneficial
ownership, we must include in the numerator and denominator those shares
underlying options that the shareholder is considered to beneficially own.
Shares underlying options held by other shareholders, however, are disregarded
in this calculation. Therefore, the denominator used in calculating beneficial
ownership among our shareholders may differ.
<TABLE>
<CAPTION>
Shares
Beneficially
Shares Beneficially Owned Prior to Owned After
Offering Offering
---------------------------------------- Number of -----------------
Number of Shares of
Number of Shares Common Stock
Outstanding Underlying to be Sold
Name of Beneficial Owner Shares Options Total Percent in Offering Number Percent
------------------------ ----------- ---------- ----- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and Directors
Keith C. Spurgeon .............. 0 237,500 237,500 1.4% 0 237,500 1.2%
Thomas G. Vellios .............. 0 175,000 175,000 1.0 0 175,000 *
Robert A. Helpert .............. 0 113,750 113,750 * 0 113,750 *
C. Donald Dorsey (a)............ 19,512 34,000 53,512 * 0 53,512 *
Robert A. Fox (b)............... 1,840,912 4,000 1,844,912 11.1 148,604 1,696,308 8.3
Gerald R. Gallagher (c)......... 1,316,047 84,000 1,400,047 8.4 0 1,400,047 6.8
Henry Nasella .................. 8,336 39,000 47,336 * 0 47,336 *
Yves B. Sisteron (d)............ 3,220,836 4,000 3,224,836 19.4 0 3,224,836 15.8
David V. Wachs (e).............. 217,558 34,000 251,558 1.5 35,821 181,737 *
All executive officers and
directors as a group
(9 persons).................... 6,614,865 725,250 7,348,451 42.3 184,425 7,164,026 33.9
Five Percent Holders
Frontenac VI Limited Partnership
(f)............................ 843,831 0 843,831 5.1 210,957 632,774 3.1
Fourcar, B.V. (g)............... 2,438,154 4,000 2,442,154 14.7 0 2,442,154 12.0
Nassau Capital Partners II L.P.
(h)............................ 1,220,788 0 1,220,788 7.3 305,197 915,591 4.5
David Schlessinger (i).......... 2,054,550 0 2,054,550 12.4
Vulcan Ventures, Inc. (j)....... 2,141,757 0 2,141,757 12.9 0 2,141,757 10.5
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially
Shares Beneficially Owned Prior to Owned After
Offering Offering
-------------------------------------- Number of ---------------
Number of Shares of
Number of Shares Common Stock
Outstanding Underlying to be Sold
Name of Beneficial Owner Shares Options Total Percent in Offering Number Percent
- ------------------------ ----------- ---------- ----- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling Shareholders
David M. Adelson........ 46,616 0 46,616 * 10,679 35,937 *
James F. Adelson........ 29,428 0 29,428 * 5,714 23,714 *
Robert S. Adelson....... 224,928 0 224,928 1.4 39,428 185,500 *
Thomas A. Adelson....... 50,115 0 50,115 * 10,679 39,436 *
Arabella................ 76,167 0 76,167 * 19,046 57,121 *
Rosa Aukburg............ 0 30,000 30,000 * 25,000 5,000 *
Deanmore Holdings Ltd... 9,552 0 9,552 * 2,380 7,142 *
Dulverton Holdings Ltd.. 9,552 0 9,552 * 2,380 7,142 *
Michael Feuer........... 21,246 0 21,246 * 5,311 14,935 *
Craig J. Foley.......... 27,444 0 27,444 * 6,861 20,583 *
IPP95, L.P.............. 297,375 0 297,375 1.8 74,343 223,032 1.1
Marbre Services Ltd. ... 118,849 0 118,849 * 29,712 89,137 *
Alan Mirken 1997 Three-
Year
Trust (k).............. 467,376 0 467,376 2.8 116,844 350,532 1.7
David M. Rubenstein..... 10,559 0 10,559 * 2,639 7,920 *
Anthony L. Schaeffer.... 60,340 0 60,340 * 15,085 45,255 *
James R. Schaeffer (l).. 60,340 0 60,340 * 15,085 45,255 *
Robert D. Schaeffer..... 99,663 0 99,663 * 24,915 74,748 *
Shoemaker Family
Partners............... 29,423 0 29,423 * 7,355 22,068 *
</TABLE>
- --------
* Percentage of shares of common stock beneficially owned does not exceed one
percent.
(a) 19,512 outstanding shares of common stock held by the C. Donald Dorsey and
Lydia Dorsey Family Trust Dated August 5, 1993.
(b) Outstanding shares include 594,416 shares held by Robert A. Fox, as Voting
Trustee pursuant to a Voting Trust Agreement Dated January 20, 1993, of
which 148,604 shares will be sold in this offering. Mr. Fox's address is
One Pitcairn Place, Suite 2100, 165 Township Line Road, Jenkintown, PA
19046.
(c) Includes (1) 1,287,099 shares owned by Oak Investment Partners V, Limited
Partnership, (2) 82,152 shares of common stock underlying presently
exercisable options held by Oak Investment Partners V, Limited Partnership,
(3) 28,948 shares owned by Oak V Affiliates Fund, Limited Partnership and
(4) 1,848 shares of common stock underlying presently exercisable options
held by Oak V Affiliates Fund, Limited Partnership. The address for Oak
Investment Partners V, Limited Partnership is 4550 Norwest Center,
Minneapolis, MN 55401. Mr. Gallagher is a partner of Oak Investment
Partners with certain voting and investment power over such shares.
Although Mr. Gallagher may be deemed to be a beneficial owner of such
shares, he disclaims all such beneficial ownership, except to the extent of
any pecuniary interest therein which he may have.
(d) Outstanding shares includes (1) 2,023,085, 414,119, 130,774, 130,769,
154,390, 104,708, 51,784 and 104,708 shares of common stock held by
Fourcar, B.V., Lacomble Retailing, SA, Fidas Business S.A., SG Cowen,
Fondation Consuelo, Fundacion Juan March, Fundation Appomatox and Daniel
Bernard, respectively (collectively, the "Sisteron Affiliates") and (2)
67,672, 4,399, 4,659, 20,165, 7,489 and 1,165 shares of common stock held
by Global Retail Partners, L.P., GRP Partners, L.P., Global Retail
44
<PAGE>
Partners Funding, Inc., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P. and DLJ ESC II, L.P., respectively (collectively, the
"GRP Affiliates"). Mr. Sisteron is a manager of U.S. investments of
Carrefour S.A. and has certain voting rights with respect to the shares
owned by each of the Sisteron Affiliates. Although Mr. Sisteron may be
deemed to be a beneficial owner of the shares owned by the Sisteron
Affiliates, he disclaims all such beneficial ownership, except to the
extent of any pecuniary interest therein which he may have. Mr. Sisteron
is also a principal of Global Retail Partners, L.P. Global Retail
Partners, L.P. and the other GRP Affiliates are affiliated with DLJ.
Although Mr. Sisteron may be deemed a beneficial owner of the shares owned
by the GRP Affiliates, he disclaims all such beneficial ownership, except
to the extent of any pecuniary interest therein which he may have.
(e) Outstanding shares include 142,558 shares of common stock held by Wachs
Partners, of which 8,571 will be sold in this offering. Mr. Wachs is the
general partner of Wachs Partners. Mr. Wachs is selling 27,250 shares in
this offering.
(f) Frontenac's address is 135 S. LaSalle Street, Suite 3800, Chicago,
Illinois 60603. Frontenac's general partners are Paul D. Carbery, James E.
Cowie, James E. Crawford, III, Rodney L. Goldstein, M. Laird Koldyke,
Martin J. Koldyke, Roger S. McEnvy, Laura P. Pearl and Jeremy H.
Silverman.
(g) Outstanding shares include (1) 414,119 shares of common stock held by
Lacomble Retailing and (2) 950 shares of common stock held by Yves
Sisteron. The address for Fourcar B.V. is Gebouw Autumn, Overschiestraate
No. 184P, 1062XK Amsterdam Netherlands.
(h) Outstanding shares include 6,076 shares of common stock held by NAS
Partners I L.L.C., of which 1,519 shares will be sold in this offering.
Nassau Capital Partners II L.P. is selling 303,678 shares in the offering
and its address is 22 Chambers Street, Princeton, NJ 08542. The two
managing members of NAS Partners are John G. Quigley and Randall A. Hack.
The general partner of Nassau Capital Partners is Nassau Capital LLC whose
members are Messrs. Quigley and Hack, Jonathan Sweemer and Robert L.
Honstein.
(i) Mr. Schlessinger resigned as one of our directors in August 1998. His
address is 125 Lincoln Avenue, Suite 400, Santa Fe, NM 87501.
(j) Vulcan Ventures' address is 110--110th Avenue, N.E., Suite 550, Bellevue,
WA 98004.
(k) Mitchell J. Rubin is the Trustee of the Alan Mirken 1997 Three Year Trust.
(l) Mr. Schaeffer's shares are held jointly with his spouse.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.01 per share, and 5,000,000 shares of preferred stock, par value
$.01 per share.
Common Stock
As of March 15, 1999, our outstanding common stock consisted of 16,633,894
shares of common stock, after giving effect to the conversion of all shares of
preferred stock into common stock upon the closing of this offering, held by
shareholders of record. Holders of common stock are entitled to one
vote for each share held of record on all matters on which shareholders may
vote, and do not have cumulative voting rights in the election of directors.
Holders of common stock are entitled to receive, as, when and if declared by
the board of directors from time to time, such dividends and other
distributions in cash, stock or property from our assets or funds legally
available for such purposes subject to any dividend preferences that may be
attributable to our outstanding preferred stock.
No preemptive, conversion, redemption or sinking fund provisions apply to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in the assets available
for distribution.
Preferred Stock
Upon the closing of this offering, we will have no outstanding shares of
preferred stock. Our board of directors, without further action by the
shareholders, is authorized to issue an aggregate of 5,000,000 shares of
preferred stock. We have no plans to issue a new series of preferred stock. Our
board of directors may issue preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of common stock. Issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage or delay a
third party from acquiring control.
Common Stock Warrants
We have issued warrants which entitle the holders to purchase an aggregate
of 103,623 shares of common stock at exercise prices ranging from $4.00 to
$6.00 per share. These warrants expire between June 1999 and January 2003. Some
of these warrants will be exercised in connection with this offering.
The exercise price and number of shares of common stock issuable upon the
exercise of each of the warrants may be adjusted upon the occurrence of certain
events, including stock splits, stock dividends, reorganization,
recapitalization, merger, or sale of all or substantially all of our assets. In
addition, some of the warrants and shares of stock issuable upon exercise of
those warrants have registration rights as described under "Registration
Rights" below.
46
<PAGE>
Indemnification of Directors and Officers
Section 1741 of the Pennsylvania Business Corporation Law, as amended (the
"BCL"), provides us with the power to indemnify any officer or director acting
in his or her capacity as a representative of Zany Brainy 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 our right. Generally, the
only limitation on our ability to indemnify our 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 willful misconduct or recklessness.
Our 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
our right by reason of the fact that such director or officer is or was serving
as our director, officer or employee or, at our 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.
Our 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.
Our bylaws authorize us to take steps to ensure that all persons entitled to
the indemnification are properly indemnified, including, if the board so
determines, purchasing and maintaining insurance.
Limitation of Liability
Our bylaws provide that none of our directors shall be personally liable to
us or our shareholders for monetary damages for any action taken or failure to
take any action, unless:
. such director has breached or failed to perform such person's duties
under the Pennsylvania corporate laws; and
. the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
We maintain directors and officers' liability insurance to provide directors
and officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts. At present, there
is no pending litigation or proceeding, and we are not aware of any threatened
litigation or proceeding, involving any director, officer, employee or agent
where indemnification will be required or permitted under our bylaws.
Pennsylvania Takeover Laws
The BCL contains provisions applicable to publicly held Pennsylvania
corporations that may be deemed to have an anti-takeover effect. We have
specifically opted out of all but Section 1715 of the BCL, which remains
applicable to us.
47
<PAGE>
Under Section 1715 of the BCL, our directors are not required to regard the
interests of the shareholders as being dominant or controlling in considering
the best interests of Zany Brainy. The directors may consider, to the extent
they deem appropriate, such factors as:
. the effects of any action upon any group affected by such action
(including our shareholders, employees, suppliers, customers and
creditors and upon communities in which we have stores, offices or other
establishments);
. the short term and long term interests of Zany Brainy (including benefits
that may accrue to us from our long term plans and the possibility that
these interests may be best served by our continued independence);
. the resources, intent and conduct of any person seeking to acquire
control of Zany Brainy; and
. all other pertinent factors.
Section 1715 of the BCL further provides that any act of our board of
directors, a committee of the board or an individual director relating to or
affecting an acquisition or potential or proposed acquisition of control to
which a majority of our disinterested directors have assented will be presumed
to satisfy the standard of care set forth in the BCL, unless it is proven by
clear and convincing evidence that our disinterested directors did not consent
to such act in good faith after reasonable investigation. As a result of this
and the other provisions of Section 1715 of the BCL, our directors are provided
with broad discretion with respect to actions that may be taken in response to
acquisitions or proposed acquisitions of corporate control.
Section 1715 of the BCL may discourage open market purchases of our common
stock or a non-negotiated tender or exchange offer for our common stock and,
accordingly, may be considered disadvantageous by a shareholder who would
desire to participate in any such transaction. In addition, Section 1715 of the
BCL may have a depressive effect on the price of our common stock.
In addition, the ability of the board of directors to establish the rights
of, and to issue, substantial amounts of preferred stock without the need for
shareholder approval may discourage, delay or prevent a change in control. Such
preferred stock, among other things, may be used to create voting impediments
with respect to any changes in control or to dilute the stock ownership of
holders of common stock seeking to obtain control.
Registration Rights
After the consummation of this offering, the holders of shares of
common stock will be entitled to certain registration rights with respect to
the registrable securities. These rights are provided under the terms of the
registrable securities and agreements between us and the holders of such
securities. Such agreements and registrable securities provide, in certain
instances, demand registration rights. In addition, pursuant to these
agreements, the holders of such securities are entitled, subject to certain
limitations, to require us to include their registrable securities in
registration statements we file under the Securities Act of 1933. In accordance
with the terms of such piggyback registration rights, included in this offering
are certain securities requested to be included by the holders of piggyback
registration rights. Registration of shares of common stock pursuant to the
exercise of demand registration rights or piggyback registration rights under
the Securities Act of 1933 would result in such shares becoming freely tradable
without restriction under the Securities Act of 1933 immediately upon the
effectiveness of such registration.
Transfer Agent
The transfer agent for our common stock is StockTrans, Inc.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us.
Of the 20,383,894 shares to be outstanding after the offering, the 3,750,000
shares of common stock offered hereby and an additional shares of
common stock will be freely tradeable without restriction in the public market
unless such shares are held by "affiliates," as that term is defined in Rule
144(a) under the Securities Act. For purposes of Rule 144, an "affiliate" of an
issuer is a person that, directly or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
such issuer. The remaining shares of common stock to be outstanding
after the offering are "restricted securities" under the Securities Act and may
be sold in the public market upon the expiration of certain holding periods
under Rule 144, subject to the volume, manner of sale and other limitations of
Rule 144.
In addition, as of March 15, 1999, there were outstanding warrants to
purchase 103,623 shares of common stock and options to purchase 2,849,806
shares of common stock. An additional 942,826 shares were reserved for issuance
under our option plans. We intend to register the shares of common stock
issued, issuable or reserved for issuance under our option plans as soon as
practicable following the date of this prospectus.
Certain holders of shares of common stock and holders of warrants
to purchase shares of common stock are entitled to certain registration
rights with respect to such shares for resale under the Securities Act. If such
holders, by exercising their registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the common stock.
Lock-Up Arrangements
Along with our officers and directors, and certain other shareholders, we
have agreed not to sell or otherwise dispose of any shares of common stock for
a period of 180 days after the date of this prospectus without the prior
written consent of DLJ. See "Underwriting."
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex.
Brown Incorporated, William Blair & Company, L.L.C. and U.S. Bancorp Piper
Jaffray Inc. have severally agreed to purchase from the selling shareholders
and from us the respective number of shares of common stock set forth opposite
their names below.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
BT Alex. Brown Incorporated........................................
William Blair & Company, L.L.C.....................................
U.S. Bancorp Piper Jaffray Inc.....................................
-----
Total............................................................
=====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations and
those of the selling shareholders, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a material
adverse effect on Zany Brainy. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock, other than those covered by
the over-allotment option described below, if they purchase any of the shares
of common stock.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares of common stock to
dealers (including the underwriters) at the initial public offering price less
a concession not in excess of $ per share. The underwriters may allow,
and such dealers may re-allow, a concession not in excess of $ per
share on sales to other dealers. After the initial offering of the common stock
to the public, the representatives of the underwriters may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
DLJdirect Inc., an affiliate of DLJ and a member of the selling group, is
facilitating the distribution of the shares sold in this offering over the
internet. The underwriters have agreed to allocate a limited number of shares
to DLJdirect Inc. for sale to its brokerage account holders.
The following table shows the underwriting fees to be paid to the
underwriters by the selling shareholders and by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
50
<PAGE>
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Zany Brainy:
Per share............................................. $ $
Total................................................. $ $
Selling shareholders:
Per share............................................. $
Total................................................. $
</TABLE>
Zany Brainy has granted to the underwriters an option, exercisable for 30
days after the date of the underwriting agreement, to purchase up to
additional shares of common stock at the initial public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
overallotments, if any, made in connection with this offering. To the extent
that the underwriters exercise such option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
We estimate expenses relating to this offering will be $1,350,000.
The selling shareholders, the underwriters and Zany Brainy have agreed to
indemnify each other against liabilities, including liabilities under the
Securities Act of 1933.
Each of Zany Brainy, our executive officers and directors and some of our
shareholders (including the selling shareholders) has agreed that, for a period
of 180 days from the date of this prospectus and subject to certain exceptions,
they will not, without the prior written consent of DLJ do either of the
following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. In addition, during such period
and subject to certain exceptions, we have agreed not to file any registration
statement with respect to, and each of our executive officers and directors and
the selling shareholders, has agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of common stock or
any securities convertible into or exercisable for common stock without the
prior written consent of DLJ.
At our request, the underwriters have reserved up to five percent of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers and directors and other individuals associated with
us and members of their families. Individuals who purchase these reserved
shares must hold such shares for a minimum of three months after this offering.
The number of shares of common stock available for sale to the general public
will be reduced to the extent these individuals purchase or confirm for
purchase, orally or in writing, such reserved shares. Any reserved shares not
purchased or confirmed for purchase will be offered by the underwriters to the
general public on the same basis as the other shares offered by this
prospectus.
51
<PAGE>
We intend to apply to list our common stock for quotation on the Nasdaq
National Market under the symbol "ZANY."
Other than in the United States, no action has been taken by the selling
shareholders, the underwriters or us that would permit a public offering of the
shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares of common stock included in
this offering may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisement in connection with
the offer and sale of any shares of common stock be distributed or published in
any jurisdiction, except under circumstances that will result in compliance
with the applicable rules and regulations of such jurisdiction. Persons who
receive this prospectus are advised to inform themselves about and to observe
any restrictions relating to this offering of the common stock and the
distribution of this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy any shares of common stock included in this
offering in any jurisdiction in which that would not be permitted or legal.
DLJ and certain of its affiliates, including Global Retail Partners, L.P.,
are shareholders of Zany Brainy. In June 1994, DLJ acquired a five-year warrant
to purchase 56,073 shares of common stock at an exercise price of $6.00 per
common share in connection with a transaction in which it acted as placement
agent and performed other services for Zany Brainy. DLJ intends to exercise
this warrant on a cashless basis in connection with this offering by exchanging
the warrant for shares of common stock. DLJ and its employees and affiliates
own an aggregate of less than three percent of the issued and outstanding
common stock.
Yves Sisteron, who is a principal of Global Retail Partners, L.P., and a
director of Zany Brainy, has been elected to the board of directors pursuant to
the provisions of a shareholders agreement which entitles Fourcar, B.V. to
elect two of the directors of Zany Brainy. Such shareholders agreement
will terminate upon consummation of this offering. See "Certain Transactions."
DLJ or its affiliates have provided and may in the future provide investment
banking or other financial services to us and our affiliates in the ordinary
course of business, for which they have received and are expected to receive
customary fees and expenses.
Stabilization
In connection with this offering, any of the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short
position or to stabilize the price of the common stock. In addition, the
underwriting syndicate may reclaim selling concessions from syndicate members
and selected dealers if DLJ repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise or
if DLJ receives a report that indicates that the clients of such syndicate
members have "flipped" the common stock. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities, and may end
any of these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established market for the common
stock. The initial public offering price for the shares of common stock offered
by this prospectus will be determined by
52
<PAGE>
negotiation among the selling shareholders, the representatives of the
underwriters and Zany Brainy. The factors to be considered in determining the
initial public offering price include:
. the history of, and the prospects for, the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable companies;
and
. the general conditions of the securities market at the time of this
offering.
EXPERTS
Our consolidated financial statements as of January 31, 1998 and January 30,
1999 and for the three fiscal years in the period ended January 30, 1999,
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Latham & Watkins,
Los Angeles, California, has acted as counsel for the underwriters in
connection with this offering.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the common stock offered in this
prospectus. This prospectus omits certain information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to Zany Brainy and the common stock offered in this
prospectus, reference is made to such registration statement, exhibits and
schedules.
The registration statement, including the exhibits and schedules filed
therewith, may be inspected free of charge at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices located at 7 World Trade
Center, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates and
from the SEC's internet site at http://www.sec.gov. We intend to list our
common stock on The Nasdaq National Market. Reports, proxy statements and other
information concerning Zany Brainy can be inspected at the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
53
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS .................................. F-2
CONSOLIDATED BALANCE SHEETS ............................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS ..................................... F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ........................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ..................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Zany Brainy, Inc.:
We have audited the accompanying consolidated balance sheets of Zany Brainy,
Inc. (formerly Children's Concept, Inc.) (a Pennsylvania corporation) and
subsidiaries 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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zany
Brainy, Inc. and subsidiaries as of January 31, 1998 and January 30, 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 5, 1999
F-2
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
<TABLE>
<CAPTION>
January 31, January 30,
ASSETS 1998 1999
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 5,030 $ 1,695
Receivables, net..................................... 1,631 3,390
Inventories, net..................................... 29,822 43,252
Deferred tax asset................................... -- 4,313
Prepaid expenses..................................... 672 940
-------- --------
Total current assets............................... 37,155 53,590
PROPERTY AND EQUIPMENT, net............................ 21,996 25,905
DEFERRED TAX ASSET..................................... -- 2,024
OTHER ASSETS, net...................................... 401 622
-------- --------
$ 59,552 $ 82,141
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of capitalized lease obligations..... $ 1,199 $ 1,682
Accounts payable..................................... 8,596 16,161
Income taxes payable................................. -- 150
Accrued liabilities.................................. 7,275 10,055
-------- --------
Total current liabilities.......................... 17,070 28,048
-------- --------
DEFERRED RENT.......................................... 1,856 2,942
-------- --------
CAPITALIZED LEASE OBLIGATIONS, net of current portion.. 1,407 2,860
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
Convertible Preferred stock, $.01 par value,
4,000,000 shares authorized, 2,402,955 shares issued
and outstanding, liquidation value of $56,546 at
January 30, 1999.................................... 24 24
Common stock, $.01 par value, 25,000,000 shares
authorized, 5,361,523 and 5,383,571 shares issued
and outstanding..................................... 54 54
Additional paid-in capital........................... 60,753 60,826
Accumulated deficit.................................. (21,612) (12,613)
-------- --------
Total shareholders' equity......................... 39,219 48,291
-------- --------
$ 59,552 $ 82,141
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES................................. $92,563 $123,345 $168,471
COST OF GOODS SOLD, including occupancy
costs.................................... 69,205 89,452 118,153
------- -------- --------
Gross profit........................... 23,358 33,893 50,318
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 28,732 33,581 46,376
------- -------- --------
Operating income (loss)................ (5,374) 312 3,942
INTEREST INCOME........................... 153 253 81
INTEREST EXPENSE.......................... (802) (718) (1,211)
------- -------- --------
Income (loss) before income tax
benefit............................... (6,023) (153) 2,812
INCOME TAX BENEFIT........................ -- -- 6,187
------- -------- --------
NET INCOME (LOSS)......................... $(6,023) $ (153) $ 8,999
======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic................................... $ (1.19) $ (0.03) $ 1.67
Diluted................................. $ (1.19) $ (0.03) $ 0.51
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................... 5,068 5,085 5,373
Diluted................................. 5,068 5,085 17,776
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
--------------------------- Additional
Series Series Series Series Common Paid-In Accumulated
A B BB C Stock Capital Deficit Total
------ ------ ------ ------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 3,
1996................... $ 8 $ 8 $-- $-- $51 $43,741 $(15,436) $28,372
Exercise of stock
options............... -- -- -- -- -- 18 -- 18
Sale of 749,984 shares
of Series C and
conversion of 748,334
shares of Series B to
Series BB, net of
expenses of $715...... -- (7) 7 8 -- 16,152 -- 16,160
Issuance of warrants to
a consultant.......... -- -- -- -- -- 20 -- 20
Net loss............... -- -- -- -- -- -- (6,023) (6,023)
--- --- --- --- --- ------- -------- -------
BALANCE, FEBRUARY 1,
1997................... 8 1 7 8 51 59,931 (21,459) 38,547
Issuance of warrants to
a consultant.......... -- -- -- -- -- 40 -- 40
Exercise of stock
options............... -- -- -- -- -- 35 -- 35
Exercise of warrants... -- -- -- -- 3 747 -- 750
Net loss............... -- -- -- -- -- -- (153) (153)
--- --- --- --- --- ------- -------- -------
BALANCE, JANUARY 31,
1998................... 8 1 7 8 54 60,753 (21,612) 39,219
Exercise of stock
options............... -- -- -- -- -- 73 -- 73
Net income............. -- -- -- -- -- -- 8,999 8,999
--- --- --- --- --- ------- -------- -------
BALANCE, JANUARY 30,
1999................... $ 8 $ 1 $ 7 $ 8 $54 $60,826 $(12,613) $48,291
=== === === === === ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(6,023) $ (153) $ 8,999
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization............. 3,713 5,017 6,859
Provision for deferred rent............... 294 700 1,086
Issuance of warrants to consultants....... 20 40 --
Deferred income tax benefit............... -- -- (6,337)
Changes in assets and liabilities--
(Increase) decrease in--
Receivables............................. (625) (457) (1,759)
Inventories............................. (3,740) (5,544) (13,430)
Prepaid expenses........................ 107 840 (268)
Other assets............................ (6) 33 (270)
Increase in--
Accounts payable........................ 473 1,680 7,565
Accrued liabilities..................... 3,132 1,388 2,780
Income tax payable...................... -- -- 150
------- ------- --------
Net cash provided by (used in)
operating activities.................. (2,655) 3,544 5,375
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net... (6,276) (6,420) (7,309)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line of credit, net.......... -- -- --
Net proceeds from sale of convertible
preferred stock........................... 16,160 -- --
Payments on capitalized lease obligations.. (1,002) (1,309) (1,379)
Debt issuance costs........................ -- (258) (95)
Proceeds from exercise of stock options.... 18 35 73
Proceeds from exercise of warrants......... -- 750 --
------- ------- --------
Net cash provided by (used in)
financing activities.................. 15,176 (782) (1,401)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 6,245 (3,658) (3,335)
CASH CASH EQUIVALENTS, BEGINNING OF YEAR.... 2,443 8,688 5,030
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 8,688 $ 5,030 $ 1,695
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background
Zany Brainy, Inc. (formerly Children's Concept, Inc.) was incorporated in
Pennsylvania on August 19, 1991. As of January 30, 1999, Zany Brainy, Inc.
operated 75 stores in 19 states, under the name "Zany Brainy," offering toys,
games, books and multimedia products for children.
Subsequent Event (unaudited)
In March 1999, Children's Concept, Inc. changed its name to Zany Brainy,
Inc. All references have been updated to reflect this change.
Principles of Consolidation
The consolidated financial statements include the accounts of Zany Brainy,
Inc. and its wholly owned subsidiaries, Children's Products, Inc. and
Children's Development, Inc. (collectively, the "Company"). All significant
intercompany transactions and accounts have been eliminated in consolidation.
Fiscal Year-End
The Company operates under a 52-53-week fiscal year ending the Saturday
nearest January 31. The financial statements for the years ended February 1,
1997 (fiscal 1996), January 31, 1998 (fiscal 1997), and January 30, 1999
(fiscal 1998) each include 52 weeks.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
debt instruments. The carrying values of these assets and liabilities are
considered to be representative of their respective fair values.
Business and Credit Risk Concentration
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable. The Company limits its credit risk associated with cash and cash
equivalents by placing its investments in highly liquid funds. Receivables
associated with third party credit cards are processed by financial
institutions which are monitored for financial stability. The Company is
dependent on key suppliers to provide sufficient quantities of inventory at
competitive prices. No single supplier represented 10% or more of purchases in
1998.
Use of Estimates
The presentation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts
F-7
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents are $3,489,000 and $672,000, of overnight investments in
repurchase agreements at January 31, 1998 and January 30, 1999, respectively.
At January 30, 1999, cash and cash equivalents include $196,000 of funds held
by a bank as collateral for outstanding standby letters of credit.
Inventories and Cost of Goods Sold
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method based on moving average and includes
certain buying and distribution costs relating to the processing of
merchandise. Buying and distribution costs charged to cost of goods sold were
$5,142,000, $5,752,000 and $6,833,000 during fiscal 1996, 1997 and 1998,
respectively. Buying and distribution costs remaining in inventories at January
31, 1998 and January 30, 1999 were $1,423,000 and $2,093,000, respectively.
Store occupancy costs include store rental, utilities and maintenance
expenditures and are included in cost of goods sold.
Property and Equipment
Property and equipment are stated at cost. Additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
The straight-line method of depreciation is used for financial reporting
purposes. The estimated useful lives are three to ten years for furniture and
fixtures, computers and equipment and the shorter of ten years, or the lease
term, for leasehold improvements. Certain personnel costs and out-of-pocket
costs directly associated with the construction or remodeling of stores are
capitalized and amortized over the lease term.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be reviewed
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If changes in
circumstances indicate that the carrying amount of an asset that an entity
expects to hold and use may not be recoverable, future cash flows expected to
result from the use of the asset and its disposition must be estimated. If the
undiscounted value of the future cash flows is less than the carrying amount of
the asset, impairment is recognized. A write-down of $450,000 of the carrying
value of certain racking, and lighting that are used in the Company's
distribution center was recorded in fiscal 1998 due to the plan of abandonment
of these assets in connection with the move to a new facility in fiscal 1999.
The write-down was based on the estimated unrecovered carrying value of the
assets at the planned date of abandonment and is included in selling, general
and administrating expenses. Management believes that there has been no other
impairment of the Company's long-lived assets as of January 30, 1999.
F-8
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
Store Pre-opening Costs
Pre-opening costs incurred at new store locations are charged to expense as
incurred.
Debt Issuance Costs
Debt issuance costs of $258,000 and $51,000 were incurred in fiscal 1997 and
1998, respectively, in connection with the line of credit agreement and are
amortized on a straight-line basis over the life of the related debt. These
costs are included in other assets on the accompanying consolidated balance
sheets, net of accumulated amortization of $42,000 and $186,000 at January 31,
1998 and January 30, 1999, respectively.
Deferred Rent
Rent expense on leases is recorded on a straight-line basis over the lease
period. The excess of rent expense over the actual cash paid is recorded as
deferred rent.
Revenue Recognition
Revenue is recognized at the point of sale.
Advertising Costs
Advertising costs are charged to expense the first time the advertising
takes place. Advertising expense, including grand opening advertising, was
$2,082,000, $2,301,000 and $5,036,000, net of certain vendor reimbursements, in
fiscal 1996, 1997 and 1998, respectively.
Supplemental Cash Flows Information
For fiscal 1996, 1997 and 1998, the Company paid $802,000, $718,000 and
$1,211,000, respectively, for interest expense. For fiscal 1998, the Company
paid $57,000 for income taxes. Capitalized lease obligations of $1,911,000,
$45,000 and $3,315,000 were incurred on equipment leases entered into in fiscal
1996, 1997 and 1998, respectively.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and disclosure of comprehensive income. In June 1997, the FASB
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for reporting of information
about operating segments and requires the reporting of selected information
about operating segments in interim financial statements. These statements were
adopted by the Company on February 1, 1998 and had no impact as the Company has
no other comprehensive income and operated as a single segment.
F-9
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
2. PROPOSED INITIAL PUBLIC OFFERING:
The Company is in the process of preparing a registration statement for the
sale of common stock to the public in an initial public offering (the
"Offering"). Upon the closing of the Offering, the outstanding shares of
Preferred stock will be converted into Common stock.
3. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is calculated utilizing the principles of SFAS
No. 128, "Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive
securities and is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS is computed assuming the conversion or exercise of all
dilutive securities such as preferred stock, options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options,
warrants and convertible preferred stock resulted in potential dilution of
basic EPS. The following table summarizes the differences between basic
weighted average shares outstanding and diluted weighted average shares
outstanding used to compute diluted EPS.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Basic weighted average number of shares
outstanding............................... 5,068,223 5,085,153 5,373,365
Incremental shares from assumed exercise
or conversion of:
Stock options.......................... -- -- 1,124,941
Warrants............................... -- -- 27,496
Preferred stock........................ -- -- 11,250,273
--------- --------- ----------
Diluted weighted average number of shares
outstanding............................... 5,068,223 5,085,153 17,776,075
========= ========= ==========
</TABLE>
The number of incremental shares from the assumed exercise of stock options
and warrants is calculated applying the treasury stock method. Stock options,
warrants and Preferred stock convertible into common shares were excluded from
the fiscal 1996 and 1997 calculation as they were anti-dilutive.
4. PROPERTY AND EQUIPMENT (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Furniture and fixtures.. $ 13,796 $ 18,739
Computers and
equipment.............. 9,625 12,596
Leasehold improvements.. 10,459 13,158
-------- --------
33,880 44,493
Less--Accumulated
depreciation and
amortization........... (11,884) (18,588)
-------- --------
$ 21,996 $ 25,905
======== ========
</TABLE>
F-10
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
5. ACCRUED LIABILITIES (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Payroll and related expenses...................... $2,079 $ 3,163
Other............................................. 5,196 6,892
------ -------
$7,275 $10,055
====== =======
</TABLE>
6. LINE OF CREDIT AND MASTER LEASE AGREEMENT:
In fiscal 1996, the Company had a demand line of credit with a bank. The
Company could borrow up to $9,000,000, limited to a percentage of inventories,
as defined. The line bore interest at prime and was secured by substantially
all of the assets of the Company. At February 1, 1997, there were no borrowings
outstanding on the line.
In October 1997, the Company entered into a new line of credit agreement
with a bank. The Company can borrow up to $35 million (including up to $7.5
million in the form of letters of credit) limited to a percentage of
inventories, as defined, with an option to increase to $60 million under
certain conditions. Amounts may be borrowed on the line through October 8,
2000. The line bears interest at the lender's prime commercial lending rate or,
if the Company elects, at an annual rate of LIBOR plus 2.5% and is secured by
substantially all of the assets of the Company. At January 30, 1999, there were
no borrowings outstanding on the line and the total amount available under the
line was $22,077,000, less outstanding letters of credit.
Under these lines, the highest amount outstanding was $8,039,000,
$12,207,000 and $22,872,000 in fiscal 1996, 1997 and 1998, respectively. The
average amount outstanding was $2,400,000, $1,527,000 and $6,388,000, and the
weighted average interest rate was 8.25%, 8.92% and 9.04% in fiscal 1996, 1997
and 1998, respectively. At January 31, 1998 and January 30, 1999, there were
$388,000 and $914,000, respectively, in outstanding letters of credit issued
against the line. The line requires the Company to comply with various
covenants, as defined, and restricts the payment of dividends.
In fiscal 1998, the Company entered into a master lease agreement with a
bank which provides for $5,000,000 for leasing new and used equipment. The
agreement requires that the leases be capital in nature and is subject to
certain covenants, as defined. In fiscal 1998, the Company financed $3,315,000
of equipment under the agreement. This agreement expires in March 1999.
7. INCOME TAXES:
The Company files a consolidated Federal income tax return. The Company has
adopted SFAS No. 109, "Accounting for Income Taxes." The effect of this
statement is to take principally a balance sheet approach to providing deferred
income taxes. Deferred tax balances are regularly adjusted through the income
statement to reflect the current year estimate of future tax payments.
F-11
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
Income tax benefit consists of the following components (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $ 136
State............................. -- -- 14
------ ---- -------
-- -- 150
------ ---- -------
Deferred:
Federal........................... 2,038 39 829
State............................. 210 4 --
------ ---- -------
2,248 43 829
------ ---- -------
Increase (decrease) in valuation
allowance.......................... 2,248 43 (7,166)
------ ---- -------
Income tax benefit................ $ -- $ -- $(6,187)
====== ==== =======
</TABLE>
The deferred tax effect of temporary differences giving rise to the
Company's deferred tax assets and liabilities consists of the following
components (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred rent................................... $ 615 $ 984
Inventory reserves.............................. 194 613
Other........................................... 619 503
Net operating loss carryforwards................ 7,636 5,652
AMT credit carryforwards........................ -- 159
------- ------
Gross deferred tax asset...................... 9,064 7,911
------- ------
Deferred tax liabilities:
Depreciation.................................... (1,018) (694)
Other........................................... (200) (200)
------- ------
Gross deferred tax liabilities................ (1,218) (894)
------- ------
Gross deferred tax asset, before valuation........ 7,846 7,017
Less--Valuation allowance....................... (7,846) (680)
------- ------
Net deferred tax asset........................ $ -- $6,337
======= ======
</TABLE>
Valuation allowances, primarily attributable to the Federal net operating
loss carryforward, were established in fiscal 1996 and 1997 in accordance with
the provisions of FASB Statement No. 109, "Accounting for Income Taxes". The
Company reversed $7,166,000 of the valuation allowance in fiscal 1998 based on
management's assessment that it is more likely than not that the net deferred
tax assets will be realized through future taxable earnings.
F-12
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
The reconciliation of the Federal statutory rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) at Federal
statutory rate.................... (34.0)% (34.0)% 34.0%
State taxes, net of Federal
benefit........................... (3.5) (2.7) 0.3
Other.............................. 0.2 8.1 0.5
Increase (decrease) in valuation
allowance......................... 37.3 28.6 (254.8)
----- ----- ------
-- % -- % (220.0)%
===== ===== ======
</TABLE>
The Federal net operating loss carryforward expires as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
2014............................................................ $ 501
2015............................................................ 7,636
2016............................................................ 6,391
-------
$14,528
=======
</TABLE>
8. CONVERTIBLE PREFERRED STOCK:
The components of preferred stock as of January 31, 1998 and January 30,
1999 are as follows:
<TABLE>
<CAPTION>
Common
Preferred Stock
Stock Price/ Shares Shares Conversion Liquidation
Series Share Authorized Outstanding Rate Preferences
--------- ------ ---------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
A....................... $24.00 1,000,000 806,559 4.57143 $19,357
B....................... 24.00 1,000,000 98,078 4.0 2,354
BB...................... 24.00 846,412 748,334 4.57143 17,960
C....................... 22.50 750,000 749,984 5.0 16,875
Unallocated............. -- 403,588 -- --
--------- --------- -------
4,000,000 2,402,955 $56,546
========= ========= =======
</TABLE>
The series A, B, BB and C preferred stock (collectively, the Preferred
stock) is convertible into Common stock based on a defined conversion rate and
must be converted upon the closing of a public Common stock offering, as
defined. The Preferred stock has voting rights equal to the number of Common
shares into which it is convertible, participates in dividends to the extent
they are declared on the Common stock and has preference in liquidation which
includes dividends accrued
F-13
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
but not yet paid. Upon liquidation, the series C holders would receive $11.25
per share plus accrued but unpaid dividends before any other distributions,
with the remainder paid in parity with the series A, B and BB preferred
holders.
9. COMMON STOCK OPTIONS AND WARRANTS:
The Company's 1993 Stock Incentive Plan provides for the granting of Common
stock, Common stock options and stock appreciation rights to key employees and
members of the Board of Directors. The Company's 1998 Equity Compensation Plan
provides for the granting of Common stock options, restricted stock, stock
appreciation rights and performance units to employees, Board members and
consultants. Required disclosure information regarding the 1993 Stock Incentive
Plan and the 1998 Equity Compensation Plan (collectively, the "Plans") have
been combined due to similarities in the Plans.
The Company has reserved 3,700,000 shares of its Common stock for awards
under the Plans. The Company accounts for the Plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
the options issued under the Plans and 20,000 options issued in fiscal 1995
outside the Plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss), basic EPS and
diluted EPS would have been equal to the pro forma amounts indicated below (in
thousands except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss)...... As reported........ $(6,023) $ (153) $8,999
Pro forma.......... (6,246) (626) 8,102
Basic EPS.............. As reported........ $ (1.19) $(0.03) $ 1.67
Pro forma.......... (1.23) (0.12) 1.51
Diluted EPS............ As reported........ $ (1.19) $(0.03) $ 0.51
Pro forma.......... (1.23) (0.12) 0.46
</TABLE>
The weighted average fair value of options granted in fiscal 1996, 1997 and
1998 was $0.92, $0.78 and $2.60, respectively. The fair value of each option
grant is estimated on the grant date using the Black-Scholes option pricing
model with the following assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
February 1, January 31, January 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Expected dividend rate..................... -- -- --
Expected volatility........................ -- -- 45.0%
Weighted average risk-free interest rate... 6.5% 6.4% 5.3%
Expected lives (years)..................... 4 4 4
</TABLE>
F-14
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
A volatility factor was utilized in fiscal 1998, as the financial statements
were prepared in conjunction with an initial public offering.
Because the SFAS No. 123 method of accounting is not required to be applied
to options granted prior to January 29, 1995, the resulting pro forma
compensation charge may not be representative of that to be expected in future
years.
In fiscal 1996, 1997 and 1998, the Company granted 758,101, 1,169,507 and
472,497 options, respectively, under the Plans to employees and directors to
purchase Common stock at prices ranging from $3.33 to $9.00 per share. Options
to purchase 400,000 shares of Common stock vest 100% after three years and
remaining options primarily vest over a four-year period from the date of
grant. All options were issued with exercise prices equal to the fair market
value on the grant date. The options are exercisable over a maximum of 10
years.
Information with respect to all options outstanding, including options to
purchase 130,000 shares of Common stock issued outside the Plans prior to
fiscal 1996, is as follows:
<TABLE>
<CAPTION>
Weighted
Option Price Average Price
Shares Per Share Per Share
---------- ------------ -------------
<S> <C> <C> <C>
Options outstanding, February 3, 1996... 1,047,093 $0.67-4.00 $3.79
Granted............................... 758,101 4.00 4.00
Exercised............................. (4,878) 3.33-4.00 3.66
Canceled.............................. (217,116) 3.33-4.00 3.97
---------- ---------- -----
Options outstanding, February 1, 1997... 1,583,200 0.67-4.00 3.79
Granted............................... 1,169,507 3.33-4.00 3.56
Exercised............................. (10,392) 3.33-4.00 3.46
Canceled.............................. (186,583) 3.33-4.00 3.40
Change in exercise price--
Original price...................... (1,222,685) 4.00 4.00
New price........................... 1,222,685 3.33 3.33
---------- ---------- -----
Options outstanding, January 31, 1998... 2,555,732 0.67-4.00 3.39
Granted............................... 472,497 4.00-9.00 6.26
Exercised............................. (22,048) 3.33 3.33
Canceled.............................. (153,319) 3.33-9.00 3.83
---------- ---------- -----
Options outstanding, January 30, 1999... 2,852,862 $0.67-9.00 $3.84
========== ========== =====
</TABLE>
At January 30, 1999, the weighted average contractual life of all options
outstanding was 7.8 years, there were 1,006,767 options vested at a weighted
average exercise price of $3.38 and there were 939,820 shares reserved under
the Plans which were not covered by stock options granted.
In fiscal 1996 and fiscal 1997, the Company granted warrants to purchase
15,000 shares and 32,550 shares of Common stock, respectively, to certain
consultants. The warrants have an exercise price of $4.00 per share and are
exercisable on various dates through January 2003. The agent who placed the
series A preferred purchased for $561 warrants to purchase 56,073 shares of
Common stock at a price of $6.00 per share. The warrants expire in June 1999.
F-15
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 30, 1999
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases retail, distribution and office space and equipment under
various operating leases. Most store leases typically have an average initial
term of ten years, with two five-year renewal options. Certain leases provide
for additional rent contingent upon store sales levels. Base rent expense for
fiscal 1996, 1997 and 1998 was approximately $9,654,000, $11,468,000 and
$13,927,000, respectively.
The Company has entered into several leases for store and distribution
center equipment and fixtures that have been accounted for as capital leases.
The capitalized cost of $5,034,000 and $6,961,000 and related accumulated
amortization of $1,970,000 and $2,336,000 has been included in property and
equipment at January 31, 1998 and January 30, 1999, respectively. The present
value of the minimum lease payments as of January 30, 1999 is as follows (in
thousands):
<TABLE>
<S> <C>
Total minimum lease payments...................................... $5,100
Less-- Amount representing interest............................... (558)
------
Present value of minimum lease payments........................... $4,542
======
</TABLE>
Future minimum lease payments under the Company's operating and capital
leases, including leases for stores, a distribution facility and office space
opening in fiscal 1999 which were entered into before January 30, 1999, are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Operating Capital
------ --------- -------
<S> <C> <C>
1999.................................................... $ 19,168 $2,075
2000.................................................... 21,288 1,598
2001.................................................... 21,688 1,022
2002.................................................... 22,021 405
2003.................................................... 22,400 --
2004 and thereafter..................................... 58,904 --
-------- ------
$165,469 $5,100
======== ======
</TABLE>
401(k) Plan
On October 1, 1996, the Company adopted a 401(k) plan for its employees (the
"Plan"). The Plan, as amended, allows participants to contribute up to 15% of
their compensation and permits a discretionary employer match, subject to
certain defined limitations. Employer contributions vest 20% per year. No
employer contributions were made in fiscal 1996, 1997 or 1998.
General
From time to time, the Company is named as a defendant in legal actions
arising from its normal business activities. Although the amount of any
liability that could arise with respect to currently pending actions cannot be
estimated, in the opinion of the Company, any such liability will not have a
material adverse effect on its financial position, operating results or
liquidity.
F-16
<PAGE>
[Depicted on the inside back cover page is a picture of a smiling child. The
text reads as follows: "Our Product Mission: The Best Stuff for Kids! Zany
Brainy will provide the best merchandise for children at the right price. We
seek interactive products that encourage a sense of wonder and stimulate
creativity. We believe that learning should be fun!"]
[Depicted on the outside back cover is a collage of icons representing our
major product categories and corresponding category names]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO]
Zany Brainy, Inc.
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
BT Alex. Brown
William Blair & Company
U.S. Bancorp Piper Jaffray
----------------
DLJdirect Inc.
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers,
whether or not participating in this offering, that effect transactions in
these securities may be required to deliver a prospectus. This is in addition
to the dealer's obligation to deliver a prospectus when acting as an
underwriter in this offering and when selling previously unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 27,174.50
National Association of Securities Dealers, Inc. filing fee... 10,275.00
Transfer Agent's fees and expenses............................ 5,000.00
Printing and engraving expenses............................... 175,000.00
Legal fees and expenses....................................... 300,000.00
Blue sky fees and expenses.................................... 7,500.00
Nasdaq National Market listing fee............................ 95,000
Accountants' fees and expenses................................ 300,000.00
Miscellaneous................................................. 130,050.50
-------------
Total Expenses................................................ $1,350,000.00
=============
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Pennsylvania Business Corporation Law and Zany Brainy's Amended and
Restated Bylaws limit the monetary liability of directors to Zany Brainy and to
its shareholders and provide for indemnification of Zany Brainy's officers and
directors for liabilities and expenses that they may incur in such capacities.
In general, officers and directors are indemnified with respect to actions
taken in good faith in a manner reasonably believed to be in, or not opposed
to, the best interests of Zany Brainy, and with respect to any criminal action
or proceeding, actions that the indemnitee had no reasonable cause to believe
were unlawful. In addition, Zany Brainy's Amended and Restated Bylaws provide
that Zany Brainy shall indemnify its officers and directors to the fullest
extent permitted by Pennsylvania law, including some instances in which
indemnification is otherwise discretionary under Pennsylvania law. Reference is
made to Zany Brainy's Amended and Restated Bylaws filed as Exhibit 3.2 hereto.
Zany Brainy has an insurance policy which insures the directors and officers
of Zany Brainy against certain liabilities which might be incurred in
connection with the performance of their duties.
Item 15. Recent Sales of Unregistered Securities
During the past three years, Zany Brainy has issued and sold unregistered
securities in the transactions described below.
Shares of Preferred Stock
1. Pursuant to a Purchase Agreement dated September 24, 1996 and November 27,
1996, Zany Brainy issued an aggregate of 749,984 shares of Series C
Convertible Preferred Stock to 39 accredited investors for a purchase price
of $22.50 per share, or an aggregate purchase price of $16,874,640.
II-1
<PAGE>
2. Pursuant to a Purchase Agreement dated September 24, 1996, Zany Brainy
issued an aggregate of 748,334 shares of Series BB Convertible Preferred
Stock to 35 holders of Zany Brainy's Series B Convertible Preferred Stock in
exchange for these holders' shares of Series B Convertible Preferred Stock.
Options to Purchase Common Stock
3. The Company from time to time has granted stock options to employees,
directors and consultants. The following table sets forth certain
information regarding such grants:
<TABLE>
<CAPTION>
No. of Range of
Shares Exercise Prices
--------- ---------------
<S> <C> <C>
1996............................................... 758,101 $4.00
1997............................................... 1,169,507 $3.33 to $4.00
1998............................................... 472,497 $4.00 to $9.00
1999...............................................
</TABLE>
4. The following table sets forth certain information regarding option
exercises:
<TABLE>
<CAPTION>
No. of Range of
Shares Exercise Prices
------ ---------------
<S> <C> <C>
1996.................................................. 4,878 $3.33 to $4.00
1997.................................................. 10,392 $3.33 to $4.00
1998.................................................. 22,048 $3.33
1999..................................................
</TABLE>
Zany Brainy believes that the issuance of shares and under the Purchase
Agreements described above did not involve a public offering and were exempt
from registration under Section 4(2) of the Securities Act because such
issuances were made to a limited group of persons, each of whom was believed to
have been a sophisticated investor or had a pre-existing business or personal
relationship with Zany Brainy or its management and because each such person
was purchasing for investment without a view to further distribution.
Restrictive legends were placed on stock certificates and are contained in
stock option agreements evidencing the securities described above. Shares
issued upon exercise of options were exempt from registration under Rule 3(b)
of the Securities Act and Rule 701 promulgated thereunder.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this registration statement:
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Articles of Incorporation
3.2* Amended and Restated Bylaws
5* Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
shares of common stock being registered
10.1 1993 Stock Incentive Plan
10.2 1998 Equity Compensation Plan
10.3** Form of Stock Purchase Agreement providing registration rights to
certain shareholders
10.4 Employment Agreement with Keith C. Spurgeon
10.5 Employment Agreement with Thomas G. Vellios
10.6 Employment Agreement with Robert A. Helpert
10.7 Amended and Restated Loan and Security Agreement dated October 9,
1997, as amended, between Zany Brainy, Inc. and First Union
Corporation, as successor in interest to CoreStates Bank, N.A.
21** Subsidiaries
23.1** Consent of Arthur Andersen LLP
Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
23.2* as Exhibit 5 hereto)
Power of Attorney (included on signature page to this Registration
24.1** Statement)
27** Financial Data Schedule
</TABLE>
- --------
** Previously filed.
* To be filed by amendment.
(b) Financial statement schedules have been omitted because they are
inapplicable, are not required under applicable provisions of Regulation S-X,
or the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or accompanying notes.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) 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 been settled by controlling precedent, submit to a
II-3
<PAGE>
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.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus
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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Wynnewood, Pennsylvania on May 3, 1999.
ZANY BRAINY, INC.
/s/ Keith C. Spurgeon
By:
---------------------------------
Keith C. Spurgeon
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Capacity Date
/s/ Keith C. Spurgeon Chairman of the May 3, 1999
- ----------------------------------- Board and Chief
Keith C. Spurgeon Executive Officer
(principal executive officer)
* Chief Financial May 3, 1999
- ----------------------------------- Officer (principal
Robert A. Helpert financial and
accounting officer)
*
- ----------------------------------- Director May 3, 1999
C. Donald Dorsey
* Director May 3, 1999
- -----------------------------------
Robert A. Fox
* Director May 3, 1999
- ----------------------------------
Gerald R. Gallagher
*
- ---------------------------------- Director May 3, 1999
Henry Nasella
* Director May 3, 1999
- ----------------------------------
Yves B. Sisteron
* Director May 3, 1999
- ----------------------------------
David V. Wachs
/s/ Keith C. Spurgeon
By_____________________________
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
3.1 Form of Amended and Restated Articles of Incorporation
3.2* Amended and Restated Bylaws
5* Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
shares of common stock being registered
10.1 1993 Stock Incentive Plan
10.2 1998 Equity Compensation Plan
10.3** Form of Stock Purchase Agreement providing registration rights to
certain shareholders
10.4 Employment Agreement with Keith C. Spurgeon
10.5 Employment Agreement with Thomas G. Vellios
10.6 Employment Agreement with Robert A. Helpert
10.7 Amended and Restated Loan and Security Agreement dated October 9,
1997, as amended, between Zany Brainy, Inc. and First Union
Corporation, as successor in interest to CoreStates Bank, N.A.
21** Subsidiaries
23.1** Consent of Arthur Andersen LLP
Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed
23.2* as Exhibit 5 hereto)
Power of Attorney (included on signature page to this Registration
24.1** Statement)
27** Financial Data Schedule
</TABLE>
- --------
** Previously filed.
* To be filed by amendment.
<PAGE>
__________ Shares
ZANY BRAINY, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
WILLIAM BLAIR & COMPANY
U.S. BANCORP PIPER JAFFRAY
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Zany Brainy, Inc., a Pennsylvania corporation (the "Company"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), and certain shareholders of the Company named in Schedule II
hereto (the "Selling Shareholders") severally propose to sell to the several
Underwriters, an aggregate of _______________ shares of the Common Stock, $.01
par value), of the Company (the "Firm Shares"), of which _____________ shares
are to be issued and sold by the Company and _____________ shares are to be sold
by the Selling Shareholders, each Selling Shareholder selling the amount set
forth opposite such Selling Shareholder's name in Schedule II hereto. The
Company also proposes to issue and sell to the several Underwriters not more
than an additional _______ shares of its Common Stock, $.01 par value (the
"Additional Shares") if requested by the Underwriters as provided in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "Shares". The shares of common stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Common Stock". The Company and the Selling Shareholders are
hereinafter sometimes referred to collectively as the "Sellers."
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
<PAGE>
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "Registration Statement";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"Rule 462(b) Registration Statement"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) each Selling Shareholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth opposite such Selling
Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$______ (the "Purchase Price") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares, and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company within 30 days after the date of this Agreement. You
shall give any such notice on behalf of the Underwriters and such notice shall
specify the aggregate number of Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof, which date shall be
a business day (i) no earlier than two business days after such notice has been
given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)) and (ii) no later than ten business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions
2
<PAGE>
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise), except to the
Underwriters pursuant to this Agreement, for a period of 180 days after the date
of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan, (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof, (iii) the Selling Shareholders may exercise
options to purchase Common Stock of the Company, and (iv) the Selling
Shareholders may transfer shares of Common Stock or options; provided that (A)
such transfer would be deemed a permitted transfer under Section 1(b) of the
Amended and Restated Shareholders' Agreement dated as of May 18, 1994, as
amended, (B) the Selling Shareholder delivers a notice to Donaldson, Lufkin &
Jenrette Securities Corporation within five business days of such transfer and
(C) such transferee executes and delivers to Donaldson, Lufkin & Jenrette
Securities Corporation an agreement in substantially the same form and
containing substantially the same provisions as the lock-up agreement described
in the last sentence of this Section 2. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition,
each Selling Shareholder agrees that, for a period of 180 days after the date of
the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, it will not make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each Selling Shareholder, (ii) each of the
directors and officers of the Company who is not a Selling Shareholder and (iii)
each shareholder listed on Annex I hereto to the effect that such person will
not, during the period commencing on the date such person signs such agreement
and ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in
any of the transactions described in the first sentence of this paragraph or (B)
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
Section 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Of the shares of Common Stock to be offered by the Underwriters,
shares have been reserved (the "Reserved Shares") for sale to certain
individuals, including employees, officers and directors of the Company and
other parties associated with the Company and members of their families. The
number of shares available to the general public will be reduced to the extent
those persons purchase, or confirm the purchase (either orally or in writing)
of, Reserved Shares. Any Reserved Shares not so purchased or confirmed for
purchase will be offered in the Offering.
3
<PAGE>
Section 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefore by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be, at the office of DTC or its designated custodian (the "Designated
Office"). The time and date of delivery and payment for the Firm Shares shall
be 9:00 A.M., New York City time, on ________, 1999 or such other time on the
same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation
and the Company shall agree in writing. The time and date of delivery and
payment for the Firm Shares are hereinafter referred to as the "Closing Date".
The time and date of delivery and payment for any Additional Shares to be
purchased by the Underwriters shall be 9:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 or such other time on the same or such other date as Donaldson, Lufkin
& Jenrette Securities Corporation and the Company shall agree in writing. The
time and date of delivery and payment for any Additional Shares are hereinafter
referred to as the "Option Closing Date". The documents to be delivered on the
Closing Date or any Option Closing Date on behalf of the parties hereto pursuant
to Section 9 of this Agreement shall be delivered at the offices of Latham &
Watkins, 885 Third Avenue, New York, New York, 10022 and the Shares shall be
delivered at the Designated Office, all on the Closing Date or such Option
Closing Date, as the case may be.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will use its best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time.
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(b) To furnish to you five signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
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(g) To mail and make generally available to its shareholders as soon as
practicable an earnings statement covering the twelve-month period ending July
31, 2000 that shall satisfy the provisions of Section 11(a) of the Act, and to
advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Shareholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Shareholders hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Shareholders may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.
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(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
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statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Shareholders) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, directly or indirectly through one
or more subsidiaries, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other
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order of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of the
various states), (ii) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease or
other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or their
respective property is bound, (iii) violate or conflict with any applicable law
or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any of its
subsidiaries or their respective property or (iv) result in the suspension,
termination or revocation of any Authorization (as defined below) of the Company
or any of its subsidiaries or any other impairment of the rights of the holder
of any such Authorization.
(k) There are no legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is or could be a party or to which
any of their respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company
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or any of its subsidiaries; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered by the
Company.
(p) Arthur Andersen LLP, are independent public accountants with respect to
the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(s) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement which rights have not been
waived.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
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subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(u) The Company and its subsidiaries have good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, in each case except as described in the
Prospectus.
(v) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("intellectual property") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual property
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(w) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a material adverse effect on the business, prospects, financial conditions
or results of operations of the Company and its subsidiaries, taken as a whole.
(x) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
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(y) The pro forma financial statements of the Company and its subsidiaries
and the related notes thereto set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) have been prepared on a
basis consistent with the historical financial statements of the Company and its
subsidiaries, give effect to the assumptions used in the preparation thereof on
a reasonable basis and in good faith and present fairly the historical and
proposed transactions contemplated by the Registration Statement and the
Prospectus. Such pro forma financial statements have been prepared in
accordance with the applicable requirements of Rule 11-02 of Regulation S-X
promulgated by the Commission. The other pro forma financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any supplement or amendment thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with the pro forma
financial statements.
(z) There is no (i) significant unfair labor practice complaint, grievance
or arbitration proceeding pending or threatened against the Company or any of
its subsidiaries before the National Labor Relations Board or any state or local
labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending
or threatened against the Company or any of its subsidiaries or (iii) union
representation question existing with respect to the employees of the Company
and its subsidiaries, except for such actions specified in clause (i), (ii) or
(iii) above, which, singly or in the aggregate, would not have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. To the best
of the Company's knowledge, no collective bargaining organizing activities are
taking place with respect to the Company or any of its subsidiaries.
(aa) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(bb) All material tax returns required to be filed by the Company and each
of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(cc) The software and hardware operated by the Company are capable of
providing or are being adapted to provide uninterrupted millennium functionality
to record, store, process and present calendar dates falling on or after January
1, 2000 and date-dependent data in substantially the same manner and with the
same functionality as such software records, stores, processes and presents such
calendar dates and date-dependent data as of the date hereof, except as would
not have a material adverse effect on the business, prospects, financial
condition or results of operations
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of the Company and its subsidiaries, taken as a whole. To the knowledge of the
executive officers of the Company, the ability of the Company's significant
suppliers, customers and others with which it conducts business to identify and
resolve their own Year 2000 issues will not have material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.
(dd) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
Section 7. Representations and Warranties of the Selling Shareholders.
Each Selling Shareholder represents and warrants to each Underwriter that:
(a) Such Selling Shareholder is the lawful owner of the Shares to be sold
by such Selling Shareholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by such Selling Shareholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Shareholder has, and on the Closing Date will have, full
legal right, power and authority, and all authorization and approval required by
law, to enter into this Agreement, the Custody Agreement signed by such
Selling Shareholder and _________________________, as Custodian, relating to the
deposit of the Shares to be sold by such Selling Shareholder (the "Custody
Agreement") and the Power of Attorney of such Selling Shareholder appointing
certain individuals as such Selling Shareholder's attorneys-in-fact (the
"Attorneys") to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
(the "Power of Attorney") and to sell, assign, transfer and deliver the Shares
to be sold by such Selling Shareholder in the manner provided herein and
therein.
(d) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder.
(e) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding instrument of such Selling Shareholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Shareholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Shareholder's behalf this
Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated hereby
and thereby and to deliver the Shares to be sold by such Selling Shareholder
pursuant to this Agreement.
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(g) Upon delivery of and payment for the Shares to be sold by such Selling
Shareholder pursuant to this Agreement, good and clear title to such Shares will
pass to the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Shareholder by or on
behalf of such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Shareholder, if such Selling
Shareholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any property of such Selling
Shareholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Shareholder or any property
of such Selling Shareholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Shareholders" which specifically relates to such Selling
Shareholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Shareholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling Shareholder and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by such Selling Shareholder to the Underwriters
as to the matters covered thereby.
Section 8. Indemnification. (a) The Sellers, jointly and severally, agree
to indemnify and hold harmless each Underwriter, its directors, its officers and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by
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any such untrue statement or omission or alleged untrue statement or omission
based upon information relating to any Underwriter furnished in writing to the
Company by such Underwriter through you expressly for use therein provided,
however, that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter who failed to
deliver a Prospectus (as then amended or supplemented, provided by the Company
to the several Underwriters in the requisite quantity and on a timely basis to
permit proper delivery on or prior to the Closing Date) to the person asserting
any losses, claims, damages and liabilities and judgments caused by any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, if such material misstatement or omission or
alleged material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of any Selling Shareholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (before deducting
underwriting discounts and commissions and expenses) received by such Selling
Shareholder from the Underwriters for the sale of the Shares sold by such
Selling Shareholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Shareholder and each person, if any, who controls such Selling Shareholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by
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such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of the indemnified party). In any such case,
the indemnifying party shall not, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for (i) the fees
and expenses of more than one separate firm of attorneys (in addition to any
local counsel) for all Underwriters, their officers and directors and all
persons, if any, who control any Underwriter within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, (ii) the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for the Company, its directors, its officers who sign the Registration
Statement and all persons, if any, who control the Company within the meaning of
either such Section and (iii) the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all Selling
Shareholders and all persons, if any, who control any Selling Shareholder within
the meaning of either such Section, and all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Underwriters, their officers and directors and such control persons of any
Underwriters, such firm shall be designated in writing by Donaldson, Lufkin &
Jenrette Securities Corporation. In the case of any such separate firm for the
Company and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. In the case of any such
separate firm for the Selling Shareholders and such control persons of any
Selling Shareholders, such firm shall be designated in writing by the Attorneys.
The indemnifying party shall indemnify and hold harmless the indemnified party
from and against any and all losses, claims, damages, liabilities and judgments
by reason of any settlement of any action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered into
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand
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and the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
benefits received by the Sellers on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (after deducting underwriting discounts and
commissions, but before deducting expenses) received by the Sellers, and the
total underwriting discounts and commissions received by the Underwriters, bear
to the total price to the public of the Shares, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Sellers on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholders on
the one hand or the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Each Selling Shareholder hereby designates Zany Brainy, Inc., 308 East
Lancaster Avenue, Wynnewood, PA 19096, as its authorized agent, upon which
process may be served in any action which may be instituted in any state or
federal court in the State of New York by any Underwriter, any director or
officer of any Underwriter or any person controlling any Underwriter asserting a
claim for indemnification or contribution under or pursuant to this Section 8,
and each Selling Shareholder will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Shareholder, at the address for
notices specified in Section 12 hereof.
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Section 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in this
Agreement shall be true and correct on the Closing Date with the same force and
effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., New York City time, on the
date of this Agreement; and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated by
the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Keith Spurgeon and Robert A. Helpert, in their
capacities as the Chief Executive Officer and Chief Financial Officer of the
Company, confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Shareholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Shareholder to such effect and to the effect that such Selling
Shareholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Shareholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Morgan, Lewis
& Bockius LLP, counsel for the Company to the effect that:
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(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as described in the Prospectus and
to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly qualified and is
in good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and delivered by
the Company;
(vii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus;
(viii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;
(ix) the statements under the captions "Certain Transactions",
"Management", "Use of Proceeds", "Description of Capital Stock" and "Shares
Eligible for Future Sale" in the Prospectus and Items 14 and 15 of Part II
of the Registration Statement, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal
matters, documents and proceedings;
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(x) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (B) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, (C) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (D) result
in the suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the rights of
the holder of any such Authorization;
(xi) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any
of its subsidiaries is or could be a party or to which any of their
respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required;
(xii) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(xiii) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities
of the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement which rights
have not been waived; and
(xiv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
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statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The opinion of Morgan, Lewis & Bockius, LLP described in Section 9(f) above
shall be rendered to you at the request of the Company and shall so state
therein.
(g) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Daniel
Kaufman, counsel for the Company, to the effect that:
(i) neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound;
(ii) neither the Company nor any of its subsidiaries has violated any
Environmental Law, any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or any provisions of the Foreign Corrupt
Practices Act or the rules and regulations promulgated thereunder, except
for such violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a whole;
and
(iii) each of the Company and its subsidiaries has such Authorizations
of, and has made all filings with and notices to, all governmental or
regulatory authorities and self-regulatory organizations and all courts and
other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure
to have any such Authorization or to make any such filing or notice would
not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole; each such Authorization is
valid and in full force and effect and each of the Company and its
subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies
having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of time
or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where
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such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(h) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Morgan,
Lewis & Bockius LLP, counsel for the Selling Shareholders to the effect that:
(i) this Agreement has been duly authorized, executed and delivered
by or on behalf of each Selling Shareholder;
(ii) each Selling Shareholder is the lawful owner of the Shares to be
sold by such Selling Shareholder pursuant to this Agreement and has good
and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever;
(iii) each Selling Shareholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney of
such Selling Shareholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Shareholder in the manner provided herein
and therein;
(iv) the Custody Agreement of each Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms;
(v) the Power of Attorney of each Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding instrument of such Selling Shareholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Shareholder has, among other things, authorized the Attorneys, or
any one of them, to execute and deliver on such Selling Shareholder's
behalf this Agreement and any other document they, or any one of them, may
deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold by
such Selling Shareholder pursuant to this Agreement;
(vi) upon delivery of and payment for the Shares to be sold by each
Selling Shareholder pursuant to this Agreement, good and clear title to
such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
(vii) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Shareholder by
such Selling Shareholder, the compliance by such Selling Shareholder with
all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (A) require any
consent, approval, authorization or other order of, or qualification with,
any court or
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governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the organizational documents of such Selling Shareholder, if such
Selling Shareholder is not an individual, or any indenture, loan agreement,
mortgage, lease or other agreement or instrument to which such Selling
Shareholder is a party or by which any property of such Selling Shareholder
is bound or (C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental body
or agency having jurisdiction over such Selling Shareholder or any property
of such Selling Shareholder.
The opinion of Morgan, Lewis & Bockius, LLP described in Section 9(h) above
shall be rendered to you at the request of the Selling Shareholders and shall so
state therein. In giving such opinions with respect to the matters covered by
Section 9(h), Morgan, Lewis & Bockius LLP may rely on the opinions of counsel
for the various Selling Shareholders, which counsel are reasonably acceptable to
the Underwriters.
(i) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Latham & Watkins counsel for the Underwriters, as to such
matters as you may request.
In giving such opinions with respect to the matters covered by Section
9(f)(xiv), Morgan, Lewis & Bockius and Latham & Watkins may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
(j) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Arthur Andersen, LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(k) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(l) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(m) The Company and the Selling Shareholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Shareholders, as the case may be, on or prior to the Closing Date.
(n) You shall have received on the Closing Date, a certificate of each
Selling Shareholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Shareholder is not a
U.S. Person, which certificate may be in the form of
23
<PAGE>
a properly completed and executed United States Treasury Department Form W-8 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
Section 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number
24
<PAGE>
of Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If on the Closing Date any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased by all
Underwriters and arrangements satisfactory to you, the Company and the Selling
Shareholders for purchase of such Firm Shares are not made within 48 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders. In any such
case which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.
Section 11. Agreements of the Selling Shareholders. Each Selling
Shareholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in connection
with the transfer of the Shares to be sold by such Selling Shareholder to the
Underwriters.
(b) To do and perform all things to be done and performed by such Selling
Shareholder under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares to be sold by such Selling
Shareholder pursuant to this Agreement.
Section 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Zany
Brainy, Inc. 308 East Lancaster Avenue, Wynnewood, PA 19096, (ii) if to the
Selling Shareholders, to [NAME OF ATTORNEY-IN-FACT], c/o [ADDRESS OF ATTORNEY-
IN-FACT] and (iii) if to any Underwriter or to you, to you c/o Donaldson,
Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York
10172, Attention: Syndicate Department, or in any case to such other address as
the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling
25
<PAGE>
such Selling Shareholder, (ii) acceptance of the Shares and payment for them
hereunder and (iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
26
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
ZANY BRAINY, INC.
By:__________________________________
Title:
THE SELLING SHAREHOLDERS
NAMED IN SCHEDULE II
HERETO, ACTING
SEVERALLY
By:__________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
WILLIAM BLAIR & COMPANY
U.S. BANCORP PIPER JAFFRAY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:__________________________________
27
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Underwriters Number of Firm Shares
- ------------ to be Purchased
---------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
BT Alex. Brown Incorporated
William Blair & Company
U.S. Bancorp Piper Jaffray
Total
</TABLE>
28
<PAGE>
SCHEDULE II
-----------
Selling Shareholders
--------------------
<TABLE>
<CAPTION>
Number of Firm [Number of Additional
Name Shares Being Sold Shares Being Sold]
- ---- ----------------- -----------------
<S> <C> <C>
Total
</TABLE>
29
<PAGE>
Annex I
[Insert names of shareholders of the Company who will be required to sign lock
ups]
30
<PAGE>
RESTATED
ARTICLES OF INCORPORATION
OF
ZANY BRAINY, INC.
1. The name of the corporation (hereinafter called the "Corporation") is
Zany Brainy, Inc. This corporation is incorporated under the provisions of the
Business Corporation Law of 1988 (the "BCL").
2. The address of the Corporation's registered office in the Commonwealth
of Pennsylvania is 308 East Lancaster Avenue, Wynnewood, PA 19096.
3.A. Authorized Amount.
-----------------
The aggregate number of shares, classes or series of shares and par
value of shares which the Corporation shall have authority to issue:
(i) One hundred million (100,000,000) shares of Common Stock, par
value $.01 per share; and
(ii) Five million (5,000,000) shares of Preferred Stock, par value
$.01 per share.
B. Authority of Board to Fix Terms of Preferred Stock.
--------------------------------------------------
The Board of Directors is hereby expressly authorized at any time and
from time to time to provide for the issuance of all or any shares of the
Preferred Stock in one or more classes or series of shares of Preferred Stock,
with full, limited, multiple, fractional or no voting rights and such
designations, preferences, limitations and special rights as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and to the fullest extent as
may now or hereafter be permitted by the BCL, including, without limiting the
generality of the foregoing, the authority to provide that any such class or
series may be (i) subject to redemption at such time or times and at such price
or prices; (ii) entitled to receive dividends (which may be cumulative or non-
cumulative) at such rates, on such conditions, and at such times, and payable in
preference to, or in such relation to, the dividends payable on any other class
or classes or any other series; (iii) entitled to such rights upon the
dissolution of, or upon any distribution of the assets of, the corporation; or
(iv)
<PAGE>
convertible into, or exchangeable for, shares of any other class or classes or
series or series' of stock, or other securities or property, of the corporation
at such price or prices or at such rates of exchange and with such adjustments,
all as may be stated in such resolution or resolutions. Unless otherwise
provided in such resolution or resolutions, shares of Preferred Stock of any
class or series which shall be issued and thereafter acquired by the corporation
through purchase, redemption, exchange, conversion or otherwise shall return to
the status of authorized but unissued shares of Preferred Stock. The Board of
Directors is also authorized to increase the number of shares of any class or
series, subsequent to the issuance of that class or series, subject to the
limitation on the total number of shares of Preferred Stock which the
corporation has authority to issue hereunder, or decrease the number of shares
of any class or series subsequent to the issuance of that class or series
provided that such decrease is not below the number of shares of such class or
series then outstanding.
4. Sections 2541 through 2548 and Section 2551 through 2556 of the
Pennsylvania Business Corporation Law of 1988, as may be amended, shall not be
applicable to the Corporation.
2
<PAGE>
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 10.2
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 10.4
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated August 28, 1996 and
effective as of June 3, 1996, between Children's Concept, Inc. (the "Company")
and Keith Spurgeon (the "Employee").
WHEREAS, the Employee desires to be employed by the Company upon the
terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. Employment. As of the date hereof, the Company hereby
----------
employs the Employee, and the Employee accepts such employment and agrees to
perform his duties and responsibilities hereunder, in accordance with the terms
and conditions hereinafter set forth.
1.1. Duties and Responsibilities.
---------------------------
(a) During the term of this Agreement, the Employee shall serve
as President and Chief Executive Officer and he shall perform all duties
and accept all responsibilities reasonably incidental to such position and
such responsibilities reasonably related to such position as may be
assigned to him by the Company's Board of Directors, and he shall cooperate
fully with the Board of Directors and other executive officers of the
Company, including, without limitation, overall responsibility for the
sales, marketing and financial performance of the Company. The Employee
shall report directly to the Company's Board of Directors.
(b) The Employee represents to the Company that he is not subject
or a party to any employment agreement, non-competition covenant,
understanding or restriction which would prohibit the Employee from
executing this Agreement and performing fully his duties and
responsibilities hereunder, or which would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now
or in the future be assigned to the Employee by the
<PAGE>
Company or the scope of assistance to which he may now or in the future
provide to affiliates of the Company.
(c) The Employee shall at all times comply with policies and
procedures adopted by the Company for its employees, not inconsistent with
the terms of this agreement, including, without limitation, any procedures
and policies adopted by the Company regarding conflicts of interest.
(d) The duties and responsibilities and reporting relationship
set forth herein shall not be substantially changed without the mutual
agreement of the parties.
1.2. Extent of Service. The Employee agrees to use his best efforts
-----------------
to carry out his duties and responsibilities under Section 1.1 hereof and to
devote all his full time, attention and energy thereto. Except as provided in
Section 4 hereof, the foregoing shall not be construed as preventing Employee
from making investments in other businesses or enterprises, provided that
Employee agrees not to serve as a director, officer or advisor of, or to work
either on a part-time or independent contracting basis for, any other business
or enterprise during his employment with the Company without the prior written
approval of the Chairman of the Board of Directors of the Company.
1.3. Compensation. For all of the services rendered by the Employee
------------
hereunder, for the first twelve months of employment, the Company shall pay
Employee a salary of $250,000, less withholding required by law or agreed to by
Employee, payable in installments at such times as the Company customarily pays
its other senior officers (but in any event no less often than monthly). The
Company agrees that the Employee's salary and performance will thereafter be
reviewed at least annually by the Company on the same basis as other senior
level executives to determine if an increase is appropriate, which increase
shall be in the sole discretion of the Company. Except as otherwise provided
herein, and except for the Company's tax withholding obligations required by
applicable law, the Employee alone and
2
<PAGE>
not the Company shall be responsible for the payment of all federal, state and
local taxes in respect of the payments to be made and benefits to be provided
under this Agreement or otherwise.
1.4. Benefits. During the term of employment the Employee shall
--------
be provided such benefits and be permitted to participate in fringe benefit
plans. Such fringe benefit plans may be amended or terminated from time to time
by the Company in its sole discretion.
1.5. Incentive Compensation. In addition to the compensation set
----------------------
forth in Section 1.3 hereof, the Employee shall be entitled to participate in
the Company's Stock Option Program. Immediately upon his employment, Employee
shall receive a stock option grant of 400,000 shares of common stock at a grant
price not to exceed $4.00 per share, such price to be determined by the Board of
Directors in its sole discretion. Such grant is and shall be subject to and
governed by all of the terms and conditions of the Stock Option Program,
including, without limitation, certain vesting and transfer restrictions.
1.6. Automobile Allowance. The Employee shall receive, in addition
--------------------
to his annual salary, a payment at the annual rate of $7,500, paid in monthly
installments, as an automobile allowance, less withholding required by law or
agreed to by Employee.
1.7. Vacation. The Employee shall be entitled to up to four(4)weeks
--------
of vacation per year, to be taken in accordance with the Company's vacation
policy as it may be established or amended by the Company from time to time.
1.8. Relocation Assistance. The Employee shall receive the
---------------------
following net relocation assistance payments after deduction of federal, state
or local taxes required by law:
3
<PAGE>
(a) Reimbursement for reasonable and necessary temporary
housing expenses up to a maximum of $2,000 in any month, for a maximum of
six (6) months, which payments shall cease upon termination of employment
or the establishment of a permanent housing arrangement;
(b) Reimbursement for all reasonable relocation expenses,
including, without limitation, (i) reasonable airline transportation in
coach class between Employee's residence in Australia and Philadelphia,
Pennsylvania for the Employee (two round trips) and members of the
Employee's immediate family (one round trip plus one one-way fare) who are
also relocating to the Philadelphia, Pennsylvania area and (ii) reasonable
settlement costs incurred in connection with the purchase of a new home in
the Philadelphia, Pennsylvania area, including, without limitation, (A)
mortgage fees up to 300 basis points and (B) reasonable attorney's fees up
to $1,000;
(c) Notwithstanding the other provisions of this Section 1.8,
the Employee agrees that (i) before seeking reimbursement from the Company
for expenses incurred hereunder, the Employee will attempt in good faith to
obtain reimbursement for all relocation expenses from the Employee's
previous employer to the full extent provided under the Employee's
employment agreement with such previous employer and that (ii) the Company
shall only be obligated to reimburse the Employee for expenses incurred
pursuant to this Section 1.8 to the extent not reimbursed by the Employee's
previous employer.
(d) $25,000 to cover additional incurred and non-accountable
relocation expenses;
(e) If and to the extent that any of the payments described in
subsections (a) or (b) of this Section 1.8 (and no other subsections) are
includible in Employee's income and are not deductible by Employee for
purposes of applicable federal, state or local income or employment taxes,
the Company shall pay Employee an additional amount such that the net
amount retained by Employee, after any
4
<PAGE>
required withholding by the Company and payment by the Employee of any
additional liability for federal, state and/or local income and/or
employment taxes directly attributable to the payments described in
subsections (a) or (b) of this Section 1.8 (and no other subsections),
shall be equal to the aggregate amount of the payments described in
subsections (a) and (b) of this Section 1.8 (and no other subsections).
2. Expenses. The Company shall reimburse the Employee on a
--------
timely basis for all ordinary and necessary out-of-pocket business expenses
incurred in connection with the discharge of his duties and responsibilities
hereunder, in line with Company policy and in accordance with the Company's
expense approval procedures then in effect upon presentation to the Company of
an itemized account and written proof of such expenses.
3. Confidential Information. The Employee recognizes and
------------------------
acknowledges that by reason of his employment by and service with the Company he
will have access to confidential information of the Company and its affiliates,
including, without limitation, information and knowledge pertaining to research
activities, products and services offered, inventions, innovations, designs,
ideas, plans, trade secrets, proprietary information, advertising, sales methods
and systems, sales and profit figures, customer lists, and relationships between
the Company and its customers, suppliers and others who have had or will have
business dealings with the Company ("Confidential Information"). Employee
acknowledges that such Confidential Information is a valuable and unique asset
and covenants that he will not, either during or after his employment with the
Company, disclose any such Confidential Information to any person for any reason
whatsoever (except as his duties as an officer of the Company may require)
without the prior written authorization of the Chairman of the Company's Board
of Directors, unless such information is in the public domain through no fault
of Employee or except as may be required by law.
5
<PAGE>
4. Non-Competition.
---------------
4.1. During his employment by the Company and for a period of two
(2) years after that employment terminates, the Employee shall not, directly or
indirectly, engage in (as principal, partner, director, officer, agent,
employee, consultant, owner, independent contractor or otherwise, with or
without compensation) or hold a financial interest in any retailing business
that constitutes a competing business operating in the North American continent
as defined below.
4.2. As used in this Section 4, a "competing business" shall be (i)
any business that, at the time of the determination, primarily engages in, or
plans to primarily engage in, the sale of any combination of the following
children's merchandise: multimedia/educational merchandise, books,
- ----------
educationally-oriented or specialty market games and toys, audiotapes,
videotapes, computer software products and arts and crafts supplies (the
"Company's Merchandise Assortment") or (ii) any retailing business that, at the
time of the determination, dedicates more than 7,500 square feet of its retail
selling space to any combination of the Company's Merchandise Assortment in any
one store. The 7,500 square foot calculation in subparagraph (ii) of this
Section 4.2 shall exclude mass merchant products of a type not sold by the
Company at the time of the determination. The phrase "primarily engages in" used
in subparagraph (i) of this Section 4.2 shall mean that sixty-six and two-thirds
percent (66.67%) of the merchandise sold by such business is substantially
similar to that sold by the Company.
4.3. The definition of "competing business" contained in Section
4.2(ii) shall not apply if either (i) the Employee is terminated without cause
or (ii) there is a significant and involuntary reduction in the authority,
duties or responsibilities of the Employee hereunder.
4.4. The restrictions contained in this Section 4 shall not apply to
the ownership of five percent (5%) or less of the shares of any class of equity
securities of a company whose securities are traded on a national securities
exchange or The Nasdaq Stock Market.
6
<PAGE>
5. No Solicitation. The Employee agrees that during the period
---------------
commencing on the first day of his employment with the Company and ending two
(2) years after the Employee last performs services for the Company (whether or
not such services are rendered pursuant to this Agreement), he will not, either
directly or indirectly, solicit the employment of any person who was employed by
the Company on a full or part-time basis at the time the Employee last performed
services for the Company unless such person (i) was involuntarily discharged by
the Company or such affiliate; or (ii) voluntarily terminated his or her
relationship with the Company or such affiliate prior to the Employee's
termination of employment.
6. Equitable Relief.
----------------
6.1. Employee acknowledges that the restrictions contained in
Sections 3, 4 and 5 hereof are reasonable and necessary to protect the
legitimate interests of the Company, that the Company would not have entered
into this Agreement in the absence of such restrictions, and that any material
violation of any provision of those Sections will result in irreparable injury
to the Company. The Employee further represents and acknowledges that (i) he
has been advised by the Company to consult his own legal counsel in respect to
this Agreement; and (ii) that he has, prior to execution of this Agreement,
reviewed thoroughly this Agreement with his counsel.
6.2. The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 3, 4 or 5 hereof,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that any of the provisions
of Sections 3, 4 or 5 hereof should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.
7
<PAGE>
6.3. Subject to Section 14, the parties irrevocably and
unconditionally (i) agree that any suit, action or other legal proceeding
arising out of this Agreement, including, without limitation, any action
commenced by the Company for preliminary and permanent injunctive relief and
other equitable relief, may be brought in any court of competent jurisdiction in
Montgomery County, Pennsylvania; (ii) consent to the non-exclusive jurisdiction
of any such court in any such suit, action or proceeding; and (iii) waive any
objection which such party may have to the laying of venue of any such suit,
action or proceeding in any such court. The parties also irrevocably and
unconditionally consent to the service of any process, pleadings, notices or
other papers in a manner permitted by the notice provisions of Section 11
hereof.
6.4. The Employee agrees that, during the term of this Agreement,
and after the termination hereof for the applicable periods set forth in
Sections 3, 4 and 5, the Employee shall provide the Company a list (the "List")
of any business or enterprise (i) which the Employee may directly or indirectly
own, manage, operate, finance, join, control or participate in the ownership,
management, operation, financing, control or control of; or (ii) with which the
Employee may be connected with as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise, or in connection with
which the Employee may use or permit his name to be used. The List shall be
provided to the Company within four (4) business days of any event under clauses
(i) and (ii) above; provided, however, that with respect to any event relating
to Employee's employment with any business or enterprise under clause (ii), the
List shall be provided to the Company within four (4) business days of the
earlier to occur of: (A) the execution of an employment agreement with such
business or enterprise, (B) the commencement of employment with such business or
enterprise and (C) the acceptance, whether oral or written, of a position of
employment with such business or enterprise. The List shall include the name,
principal business address and telephone number of each business or enterprise
and the name, address and telephone number of the Chairman of the Board or
President of each such business or enterprise, or in the event the business or
enterprise does not have a Chairman or President, the name,
8
<PAGE>
address and telephone number of the employee or partner at each such business or
enterprise that has decision making authority. The Employee shall provide the
Company, within the same time periods set forth above, with an updated List as a
result of any change in the Employee's status with any business or enterprise
under clauses (i) and (ii) above, including the oral acceptance of any position
described in clauses (i) and (ii) above. Upon the Company's reasonable request,
the Employee shall provide a copy of Sections 3, 4 and 5 of this Agreement to
each such business or enterprise as the Company shall direct within two (2)
business days of such direction and provide the Company with evidence,
reasonably satisfactory to the Company, that the Employee has provided each such
business or enterprise with such information. The Company may also provide such
business or enterprise a copy of Sections 3, 4, or 5 at any time in the
Company's sole discretion. Notwithstanding the foregoing, the provisions of this
Section 6.4 shall not apply in respect of Sections 4 and 5 of this Agreement
after expiration of the time periods set forth therein or in the event that the
Company breaches its obligation under this Agreement.
7. Termination. This Agreement and the Employee's employment
-----------
may be terminated at the will of either party at any time and for any reason
with or without cause, except that the Employee agrees to give the Company at
least thirty (30) days written notice of termination prior to the last date on
which he performs services for the Company.
7.1. In the event that the Company terminates the Employee's
employment for reasons other than cause or a Change of Control of the Company,
as those terms are defined herein, the Employee shall be entitled, as provided
in subparagraphs (a) and (b) below, (i) to receive his total salary installment
payments (base salary, bonus and incentive compensation earned as of such
termination date, subject to the terms and conditions set forth in the Company's
annual incentive plan) at the salary rate in effect at the time of the
termination of his employment, and (ii) to continue to participate in all
insured benefit plans for a period not to exceed six months, on the same terms
on which he was participating prior to the date of the termination of his
employment (collectively, the "Termination Benefits"):
9
<PAGE>
(a) If such termination occurs within eighteen (18) months of
the effective date hereof (on or before November 30, 1997), the Employee
will receive the Termination Benefits for a period equal to (i) twenty-four
(24) months minus (ii) the number of months that the Employee has been
employed by the Company. For the purposes solely of this subsection (a),
the Employee shall be deemed to have been employed for the entire month in
which such termination occurs.
(b) If such termination occurs after eighteen (18) months of
the date hereof (after November 30, 1997), the Employee will receive the
Termination Benefits for a period of six (6) months after the date of the
termination of his employment.
(c) "Cause" as used herein shall mean the failure of the
Employee to perform or observe any material terms or provisions of this
Agreement after notice and a reasonable opportunity to correct any problem
or to 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 serious disparagement of the
Company, its products, management or employees.
7.2. In the event that subsequent to a Change of Control of the
Company, the Employee is involuntarily terminated or there is a significant
reduction in the authority, duties or responsibilities of the Employee as
provided in this Agreement or the compensation or benefits due hereunder, the
Employee shall receive the Termination Benefits for a period of twelve (12)
months regardless of the time period for which the Employee would have received
the Termination Benefits pursuant to Section 7.1.
7.3. The Employee may terminate his employment with the Company
within one (1) year after a Change of Control unless following a Change of
Control the successor organization offers to continue this Agreement for two (2)
years following such Change of Control or offers the Employee a two (2) year
contract incorporating substantially all of the terms of this Agreement
10
<PAGE>
and maintaining, at least, his then current salary and benefits. In the event
that the Employee terminates his employment in accordance with this section, he
shall be entitled to payments and benefits in accordance with Section 7.2.
7.4. A Change of Control for purposes of Sections 7.2 and 7.3 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.
7.5. During the period commencing six months after the date of
termination of the Employee, any liability of the Company for Termination
Benefits pursuant to Section 7.1 or Section 7.2, as the case may be, shall be
reduced by and to the extent of any earnings or benefits received or accrued for
the benefit of Employee as a result of Employee's employment, either
independently or by another employer, during the period,
11
<PAGE>
commencing six months after such termination, for which the Company is required
to pay or provide such Termination Benefits to the Employee.
8. Disability. In the event of the disability of the Employee,
----------
within the meaning of subsection 22(e)(3) of the Internal Revenue Code of 1986,
as amended, and is unable to work and remains continuously so Totally Disabled
for a period of one hundred and eighty (180) days, the Employee's employment, at
the Company's option, may be terminated by notice in writing to that effect.
Such termination shall take effect the last day of the month following the date
such notice is given. Employee's compensation and other benefits shall continue
during the term of the disability through the effective date of termination as
set forth above.
9. Survival. Notwithstanding the termination of this Agreement
--------
pursuant to Section 7 or otherwise, the Employee's obligations under Sections 3,
4 and 5 hereof shall survive and remain in full force and effect for the periods
therein provided, and the provisions for equitable relief against Employee in
Section 6 hereof shall continue in force.
10. Governing Law. This Agreement shall be governed by and
-------------
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of laws thereof.
11. Notices. All notices and other communications required or
-------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand-delivered, mailed by
registered or certified mail (seven days after deposited if sent to or from
Australia), faxed (with confirmation received) or sent by an internationally
recognized courier service, as follows (provided that notice of change of
address shall be deemed given only when received):
12
<PAGE>
If to the Company, to:
Chairman of Board of Directors
Children's Concept, Inc.
308 E. Lancaster Avenue
Wynnewood, PA 19096
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: Stephen M. Goodman, Esquire
If to Employee, to:
Keith Spurgeon
260 Ithan Creek Road
Villanova, PA 19085
or to such other names and addresses as the Company or the Employee, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.
12. Contents of Agreement.
----------------------
12.1. This Agreement supersedes all prior agreements and sets forth
the entire understanding between the parties hereto with respect to the subject
matter hereof except that this Agreement may not be changed, modified, extended
or terminated except upon written amendment executed by the Employee and by the
Chairman of the Board of Directors or the Company (or a duly authorized
representative of the Board of Directors).
12.2. Employee acknowledges that from time to time the Company or its
affiliates may establish, maintain and distribute employee manuals or handbooks
or personnel policy manuals, and officers or other representatives of the
Company may make written or oral statements relating to personnel policies and
procedures. Such manuals, handbooks and statements are intended only for
13
<PAGE>
general guidance. No policies, procedures or statements of any nature by or on
behalf of the Company (whether written or oral, and whether or not contained in
any employee manual or handbook, including the Company's Associate Handbook, as
the same may exist from time to time, or personnel policy manual), and no acts
or practices of any nature, shall be construed to modify this Agreement or to
create express or implied obligations of any nature to the Employee.
12.3. All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of the
Employee hereunder are of a personal nature and shall not be assignable or
delegable in whole or in part by the Employee, and the Company may not transfer
or convey its rights hereunder to any third party other than an affiliate of the
Company without the prior express written consent of the Employee.
13. Severability. If any provision of this Agreement or
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder of this Agreement, and the
application of such provision to such person or circumstances in any
jurisdiction, shall not be affected thereby, and to this end the provisions of
this Agreement shall be severable.
14. Arbitration. In the event of any dispute or claim relating to
-----------
or arising out of this Agreement, such disputes shall be fully, finally and
exclusively resolved by binding arbitration conducted by the American
Arbitration Association in Philadelphia, Pennsylvania.
15. Remedies Cumulative; No Waiver. No remedy conferred upon the
------------------------------
Company by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.
No delay or omission by the Company in exercising any right, remedy or power
hereunder or existing at law or in equity shall
14
<PAGE>
be construed as a waiver thereof, and any such right, remedy or power may be
exercised by the Company from time to time and as often as may be deemed
expedient or necessary by the Company in its sole discretion.
16. Insurance and Indemnity. The Company shall, to the extent
-----------------------
permitted by law, indemnify the Employee. The Company shall also provide the
Employee with coverage as a named insured under any directors and officers
liability insurance policy maintained for the Company's directors and officers.
This obligation to provide insurance and indemnify the Employee shall survive
expiration or termination of this Agreement with respect to proceedings or
threatened proceedings based on acts or omissions of the Employee occurring
during the Employee's employment with the Company or with any affiliated
company. Such obligations shall be binding upon the Company's successors and
assigns and shall inure to the benefit of the Employee's heirs and personal
representatives.
17. Miscellaneous. All section headings are for convenience only.
-------------
This Agreement may be executed in several counterparts, each of which is an
original.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Employment Agreement as of the date first above written.
Attest: CHILDREN'S CONCEPT, INC.
______________________________ By:___________________________
Robert A. Helpert, David Schlessinger,
Secretary Chairman of the Board
Witness: EMPLOYEE
______________________________ ______________________________
Keith Spurgeon
15
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated July 31, 1996 and
effective as of November 13, 1995, between Children's Concept, Inc. (the
"Company") and Thomas G. Vellios (the "Employee").
WHEREAS, the Employee desires to be employed by the Company upon the
terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. Employment. As of the date hereof, the Company hereby
----------
employs the Employee, and the Employee accepts such employment and agrees to
perform his duties and responsibilities hereunder, in accordance with the terms
and conditions hereinafter set forth.
1.1. Duties and Responsibilities.
---------------------------
(a) During the term of this Agreement, the Employee shall
serve as Executive Vice President of Merchandise and Marketing with overall
responsibility for Merchandising and Marketing of the Company and he shall
perform all duties and accept all responsibilities reasonably incidental to
such position and such responsibilities reasonably related to such position
as may be assigned to him by the Company's Chief Executive Officer, and he
shall cooperate fully with the Board of Directors and other executive
officers of the Company. The Employee shall report directly to the Chief
Executive Officer.
(b) The Employee represents to the Company that he is not
subject or a party to any employment agreement, non-competition covenant,
understanding or restriction which would prohibit the Employee from
executing this Agreement and performing fully his duties and
responsibilities hereunder, or which would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now
or in the future be assigned to the Employee by the
<PAGE>
Company or the scope of assistance to which he may now or in the future
provide to affiliates of the Company.
(c) The Employee shall at all times comply with policies and
procedures adopted by the Company for its employees, not inconsistent with
the terms of this agreement, including, without limitation, any procedures
and policies adopted by the Company regarding conflicts of interest.
(d) The duties and responsibilities and reporting relationship
set forth herein shall not be substantially changed without the mutual
agreement of the parties.
1.2. Extent of Service. The Employee agrees to use his best efforts
-----------------
to carry out his duties and responsibilities under Section 1.1 hereof and to
devote all his full time, attention and energy thereto. Except as provided in
Section 4 hereof, the foregoing shall not be construed as preventing Employee
from making investments in other businesses or enterprises, provided that
Employee agrees not to serve as a director, officer or advisor of, or to work
either on a part-time or independent contracting basis for, any other business
or enterprise during his employment with the Company without the prior written
approval of the Chief Executive Officer of the Company.
1.3. Compensation. For all of the services rendered by the
------------
Employee hereunder, for the first twelve months of employment, the Company shall
pay Employee a salary of $250,000, less withholding required by law or agreed to
by Employee, payable in installments at such times as the Company customarily
pays its other senior officers (but in any event no less often than monthly).
The Company agrees that the Employee's salary and performance will thereafter be
reviewed at least annually by the Company on the same basis as other senior
level executives to determine if an increase is appropriate, which increase
shall be in the sole discretion of the Company. Except as otherwise provided
herein, the Employee alone and not the Company shall be responsible for the
payment of all federal, state and local taxes
-2-
<PAGE>
in respect of the payments to be made and benefits to be provided under this
Agreement or otherwise.
1.4. Benefits. During the term of employment the Employee shall
--------
be provided such benefits and be permitted to participate in fringe benefit
plans. Such fringe benefit plans may be amended or terminated from time to time
by the Company in its sole discretion.
1.5. Incentive Compensation. In addition to the compensation set
----------------------
forth in Section 1.3 hereof, the Employee shall be entitled to participate in
the Company's Stock Option Program. Immediately upon his employment, Employee
shall receive a stock option grant of 200,000 shares of common stock at the
grant price of $4.00 per share, which grant is and shall be subject to and
governed by all of the terms and conditions of the Stock Option Program,
including, without limitation, certain vesting and transfer restrictions.
1.6. Automobile Allowance. The Employee shall receive, in
--------------------
addition to his annual salary, a payment at the annual rate of $7,500, paid in
monthly installments, as an automobile allowance, less withholding required by
law or agreed to by Employee.
1.7. Vacation. The Employee shall be entitled to three (3) weeks
--------
of vacation per year, to be taken in accordance with the Company's vacation
policy as it may be established or amended by the Company from time to time.
1.8. Relocation Assistance. The Employee shall receive the
---------------------
following net relocation assistance payments after deduction of federal, state
or local taxes required by law:
(a) Reimbursement for reasonable and necessary temporary housing
expenses up to a maximum of $2,000 in any month, for a maximum of twelve
months, which payments shall cease upon termination of employment or the
establishment of a permanent housing arrangement;
-3-
<PAGE>
(b) Reimbursement for all reasonable relocation expenses,
including, without limitation, reasonable transportation expenses between
Employee's residence in Connecticut and Philadelphia, Pennsylvania for the
Employee and his spouse, real estate commission and other reasonable
expenses incurred in connection with the sale of Employee's home in
Connecticut, reasonable settlement costs incurred in connection with the
purchase of a new home in the Philadelphia, Pennsylvania area;
(c) $25,000 to cover additional incurred and non-accountable
relocation expenses;
(d) If and to the extent that any of the payments described in
subsections (a), (b) or (c) of this Section 1.8 are includible in
Employee's income and are not deductible by Employee for purposes of
applicable federal, state or local income or employment taxes, the Company
shall pay Employee an additional amount such that the net amount retained
by Employee, after any required withholding by the Company and payment by
the Employee of any additional liability for federal, state and/or local
income and/or employment taxes directly attributable to the payments
described in subsections (a), (b) or (c) of this Section 1.8, shall be
equal to the aggregate amount of the payments described in subsections (a),
(b) and (c) of this Section 1.8.
2. Expenses. The Company shall reimburse the Employee on a
--------
timely basis for all ordinary and necessary out-of-pocket business expenses
incurred in connection with the discharge of his duties and responsibilities
hereunder, in line with Company policy and in accordance with the Company's
expense approval procedures then in effect upon presentation to the Company of
an itemized account and written proof of such expenses.
3. Confidential Information. The Employee recognizes and
------------------------
acknowledges that by reason of his employment by and service with the Company he
will have access to confidential information of the Company and its affiliates,
including, without
-4-
<PAGE>
limitation, information and knowledge pertaining to research activities,
products and services offered, inventions, innovations, designs, ideas, plans,
trade secrets, proprietary information, advertising, sales methods and systems,
sales and profit figures, customer lists, and relationships between the Company
and its customers, suppliers and others who have had or will have business
dealings with the Company ("Confidential Information"). Employee acknowledges
that such Confidential Information is a valuable and unique asset and covenants
that he will not, either during or after his employment with the Company,
disclose any such Confidential Information to any person for any reason
whatsoever (except as his duties as an officer of the Company may require)
without the prior written authorization of the Company's Chief Executive
Officer, unless such information is in the public domain through no fault of
Employee or except as may be required by law.
4. Non-Competition.
---------------
4.1. During his employment by the Company and for a period of two
(2) years after that employment terminates, the Employee shall not, directly or
indirectly, engage in (as principal, partner, director, officer, agent,
employee, consultant, owner, independent contractor or otherwise, with or
without compensation) or hold a financial interest in any retailing business
that constitutes a competing business operating in the North American continent
as defined below.
4.2. As used in this Section 4, a "competing business" shall be (i)
any business that, at the time of the determination, primarily engages in, or
plans to primarily engage in, the sale of any combination of the following
children's merchandise: multimedia/educational merchandise, books,
- ----------
educationally-oriented or specialty market games and toys, audiotapes,
videotapes, computer software products and arts and crafts supplies (the
"Company's Merchandise Assortment") and has more than 7,500 square feet of
retail selling space in any one store or (ii) any retailing business that, at
the time of the determination, dedicates more than 7,500 square feet of its
retail selling space to any combination of the Company's Merchandise Assortment
in any one store. The 7,500 square foot
-5-
<PAGE>
calculation in subparagraph (ii) of this Section 4.2 shall exclude mass merchant
products of a type not sold by the Company at the time of the determination. The
phrase "primarily engages in" used in subparagraph (i) of this Section 4.2 shall
mean that sixty-six and two-thirds percent (66.67%) of the merchandise sold by
such business is substantially similar to that sold by the Company.
4.3. The definition of "competing business" contained in Section
4.2(ii) shall not apply if either (i) the Employee is terminated without cause
or (ii) there is a significant and involuntary reduction in the authority,
duties or responsibilities of the Employee hereunder.
4.4. The restrictions contained in this Section 4 shall not apply to
the ownership of five percent (5%) or less of the shares of any class of equity
securities of a company whose securities are traded on a national securities
exchange or The Nasdaq Stock Market.
5. No Solicitation. The Employee agrees that during the period
---------------
commencing on the first day of his employment with the Company and ending two
(2) years after the Employee last performs services for the Company (whether or
not such services are rendered pursuant to this Agreement), he will not, either
directly or indirectly, solicit the employment of any person who was employed by
the Company on a full or part-time basis at the time the Employee last performed
services for the Company unless such person (i) was involuntarily discharged by
the Company or such affiliate; or (ii) voluntarily terminated his or her
relationship with the Company or such affiliate prior to the Employee's
termination of employment.
6. Equitable Relief.
----------------
6.1. Employee acknowledges that the restrictions contained in
Sections 3, 4 and 5 hereof are reasonable and necessary to protect the
legitimate interests of the Company, that the Company would not have entered
into this Agreement in the absence of such restrictions, and that any violation
of any provision of those Sections will result in irreparable injury to
-6-
<PAGE>
the Company. The Employee further represents and acknowledges that (i) he has
been advised by the Company to consult his own legal counsel in respect to this
Agreement; and (ii) that he has, prior to execution of this Agreement, reviewed
thoroughly this Agreement with his counsel.
6.2. The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 3, 4 or 5 hereof,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that any of the provisions
of Sections 3, 4 or 5 hereof should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.
6.3. The Employee irrevocably and unconditionally (i) agrees that
any suit, action or other legal proceeding arising out of this Agreement,
including, without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in Montgomery County,
Pennsylvania; (ii) consents to the non-exclusive jurisdiction of any such court
in any such suit, action or proceeding; and (iii) waives any objection which
Employee may have to the laying of venue of any such suit, action or proceeding
in any such court. Employee also irrevocably and unconditionally consents to
the service of any process, pleadings, notices or other papers in a manner
permitted by the notice provisions of Section 11 hereof.
6.4. The Employee agrees that he will provide, and that the Company
may similarly provide, a copy of Sections 3, 4 and 5 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, control or control of; or (ii) with which he may be
connected with as an officer, director, employee, partner,
-7-
<PAGE>
principal, agent, representative, consultant or otherwise, or in connection with
which he may use or permit his name to be used; provided, however, that this
provision shall not apply in respect of Sections 4 and 5 of this Agreement after
expiration of the time periods set forth therein or in the event that the
Company breaches its obligation under this Agreement.
7. Termination. This Agreement and the Employee's employment
-----------
may be terminated at the will of either party at any time and for any reason
with or without cause, except that the Employee agrees to give the Company at
least thirty (30) days written notice of termination prior to the last date on
which he performs services for the Company.
7.1. In the event that the Company terminates the Employee's
employment for reasons other than cause or a Change of Control of the Company as
those terms are defined herein, the Employee shall be entitled to receive his
total salary installment payments (base salary, bonus and incentive compensation
earned as of such termination date, subject to the terms and conditions set
forth in the Company's annual incentive plan) at the salary rate in effect at
the time of the termination of his employment, and to continue to participate in
all insured benefit plans, on the same terms on which he was participating prior
to the date of the termination of his employment (collectively, the "Termination
Benefits") as follows:
(a) If such termination occurs within twelve (12) months of the
date hereof (on or before November 12, 1996), the Employee will receive the
Termination Benefits for a period of twelve (12) months after the date of
the termination of his employment.
(b) If such termination occurs after twelve (12) months but
within eighteen months (18) of the date hereof (after November 12, 1996 but
on or prior to May 11, 1997), the Employee will receive the Termination
Benefits for a period of nine (9) months after the date of the termination
of his employment.
-8-
<PAGE>
(c) If such termination occurs after eighteen (18) months of the
date hereof (after May 11, 1997), the Employee will receive the Termination
Benefits for a period of six (6) months after the date of the termination
of his employment.
(d) "Cause" as used herein shall mean the failure of the
Employee to perform or observe any material terms or provisions of this
Agreement after notice and an opportunity to correct any problem or to
comply with any of the lawful directives of the Chief Executive Officer or
the Board of Directors of the Company, dishonesty, conviction of a crime
involving moral turpitude, substance abuse, misappropriation of funds, or
serious disparagement of the Company, its products, management or
employees.
7.2. In the event that subsequent to a Change of Control of the
Company, the Employee is involuntarily terminated or there is a significant
reduction in the authority, duties or responsibilities of the Employee or the
compensation or benefits due hereunder, the Employee shall receive the
Termination Benefits for a period of twelve (12) months regardless of the time
period for which the Employee would have received the Termination Benefits
pursuant to Section 7.1.
7.3. The Employee may terminate his employment with the Company
within one (1) year after a Change of Control unless following a Change of
Control the successor organization offers to continue this Agreement for two (2)
years following such Change of Control or offers the Employee a two (2) year
contract incorporating substantially all of the terms of this Agreement and
maintaining, at least, his then current salary and benefits and providing stock
options or other equity on the same basis as it offers to other senior
executives (including, without limitation, other Executive Vice Presidents and
Chief Operating Officer) of such successor organization. In the event that the
Employee terminates his employment in accordance with this section, he shall be
entitled to payments and benefits in accordance with Section 7.2.
-9-
<PAGE>
7.4. A Change of Control for purposes of Sections 7.2 and 7.3 shall
be deemed to have occurred in the event 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).
7.5. During the period commencing six months after the date of
termination of the Employee, any liability of the Company for Termination
Benefits pursuant to Section 7.1 or Section 7.2, as the case may be, shall be
reduced by and to the extent of any earnings or benefits received or accrued for
the benefit of Employee as a result of Employee's employment, either
independently or by another employer, during the period, commencing six months
after such termination, for which the Company is required to pay or provide such
Termination Benefits to Employee.
8. Disability. In the event of the disability of the Employee,
----------
within the meaning of subsection 22(e)(3) of the Internal Revenue Code of 1986,
as amended, and is unable to work and remains continuously so Totally Disabled
for a period of one hundred and eighty (180) days, the Employee's employment, at
the Company's option, may be terminated by notice in writing to that effect.
Such termination shall take effect the last day of the month following the date
such notice is given. Employee's compensation and other benefits shall continue
during the term of
-10-
<PAGE>
the disability through the effective date of termination as set forth above.
9. Survival. Notwithstanding the termination of this Agreement
--------
pursuant to Section 7 or otherwise, the Employee's obligations under Sections 3,
4 and 5 hereof shall survive and remain in full force and effect for the periods
therein provided, and the provisions for equitable relief against Employee in
Section 6 hereof shall continue in force.
10. Governing Law. This Agreement shall be governed by and
-------------
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of laws thereof.
11. Notices. All notices and other communications required or
-------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand-delivered or mailed
by registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
If to the Company, to:
Chief Executive Officer
Children's Concept, Inc.
308 E. Lancaster Avenue
Wynnewood, PA 19096
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: Stephen M. Goodman, Esquire
If to Employee, to:
Thomas G. Vellios
163 Turn of River Road
Stamford, CT 06905
-11-
<PAGE>
or to such other names and addresses as the Company or the Employee, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.
12. Contents of Agreement.
----------------------
12.1. This Agreement supersedes all prior agreements and sets forth
the entire understanding between the parties hereto with respect to the subject
matter hereof except that this Agreement may not be changed, modified, extended
or terminated except upon written amendment executed by the Employee and by the
Chief Executive Officer of the Company.
12.2. Employee acknowledges that from time to time the Company or its
affiliates may establish, maintain and distribute employee manuals or handbooks
or personnel policy manuals, and officers or other representatives of the
Company may make written or oral statements relating to personnel policies and
procedures. Such manuals, handbooks and statements are intended only for general
guidance. No policies, procedures or statements of any nature by or on behalf
of the Company (whether written or oral, and whether or not contained in any
employee manual or handbook or personnel policy manual), and no acts or
practices of any nature, shall be construed to modify this Agreement or to
create express or implied obligations of any nature to the Employee.
12.3. All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of the
Employee hereunder are of a personal nature and shall not be assignable or
delegable in whole or in part by the Employee, and the Company may not transfer
or convey its rights hereunder to any third party other than an affiliate of the
Company without the prior express written consent of the Employee.
13. Severability. If any provision of this Agreement or
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder
-12-
<PAGE>
of this Agreement, and the application of such provision to such person or
circumstances in any jurisdiction, shall not be affected thereby, and to this
end the provisions of this Agreement shall be severable.
14. Arbitration. In the event of any dispute or claim relating to
-----------
or arising out of this Agreement, such disputes shall be fully, finally and
exclusively resolved by binding arbitration conducted by the American
Arbitration Association in Philadelphia, Pennsylvania.
15. Remedies Cumulative; No Waiver. No remedy conferred upon the
------------------------------
Company by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.
No delay or omission by the Company in exercising any right, remedy or power
hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by the Company
from time to time and as often as may be deemed expedient or necessary by the
Company in its sole discretion.
16. Insurance and Indemnity. The Company shall, to the extent
-----------------------
permitted by law, indemnify the Employee. The Company shall also provide the
Employee with coverage as a named insured under any directors and officers
liability insurance policy maintained for the Company's directors and officers.
This obligation to provide insurance and indemnify the Employee shall survive
expiration or termination of this Agreement with respect to proceedings or
threatened proceedings based on acts or omissions of the Employee occurring
during the Employee's employment with the Company or with any affiliated
company. Such obligations shall be binding upon the Company's successors and
assigns and shall inure to the benefit of the Employee's heirs and personal
representatives.
17. Miscellaneous. All section headings are for convenience only.
-------------
This Agreement may be executed in several counterparts, each of which is an
original.
-13-
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Employment Agreement as of the date first above written.
Attest: CHILDREN'S CONCEPT, INC.
______________________________ By ___________________________
Name: Name:
Title: Title:
Witness: EMPLOYEE
______________________________ ______________________________
Thomas G. Vellios
-14-
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (the "Agreement") dated July 31, 1996 and
effective as of May 22, 1995, between Children's Concept, Inc. (the "Company")
and Robert A. Helpert (the "Employee").
WHEREAS, Employee desires to be employed by the Company upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. Employment. As of the date hereof, the Company hereby
employs the Employee, and Employee accepts such employment and agrees to perform
his duties and responsibilities hereunder, in accordance with the terms and
conditions hereinafter set forth.
1.1. Duties and Responsibilities.
(a) During the term of this Agreement, the Employee shall
serve as Chief Financial Officer and Chief Administrative Officer and shall
perform all duties and accept all responsibilities reasonably related to
such position as may be assigned to him by the Company's Chief Executive
Officer, and he shall cooperate fully with the Board of Directors and other
executive officers of the Company. The Employee shall report directly to
the Chief Executive Officer.
(b) The Employee represents to the Company that he is not
subject or a party to any employment agreement, non-competition covenant,
understanding or restriction which would prohibit the Employee from
executing this Agreement and performing fully his duties and
responsibilities hereunder, or which would in any manner, directly or
indirectly, limit or affect the duties and responsibilities which may now
or in the future be assigned to the Employee by the Company or the scope of
assistance to which he may now or in the future provide to affiliates of
the Company.
<PAGE>
(c) The Employee shall at all times comply with policies and
procedures adopted by the Company for its employees, not inconsistent with
the terms of this Agreement, including without limitation any procedures
and policies adopted by the Company regarding conflicts of interest.
(d) The duties and responsibilities and reporting
relationship set forth herein shall not be substantially changed without
the mutual agreement of the parties.
1.2. Extent of Service. The Employee agrees to use his best
-----------------
efforts to carry out his duties and responsibilities under Section 1.1 hereof
and to devote all his full time, attention and energy thereto. Except as
provided in Section 5 hereof, the foregoing shall not be construed as preventing
Employee from making investments in other businesses or enterprises, provided
that Employee agrees not to serve as a director, officer or advisor of, or to
work either on a part time or independent contracting basis for, any other
business or enterprise during his employment with the Company without the prior
written approval of the Chief Executive Officer of the Company.
1.3. Compensation. For all of the services rendered by the Employee
hereunder, the Company shall pay Employee an annual salary at the rate of
$200,000, less withholding required by law or agreed to by Employee, payable in
installments at such times as the Company customarily pays its other senior
officers (but in any event no less often than monthly). If Employee's employment
is not earlier terminated, he shall receive a bonus payment of $25,000 after six
months of employment and an additional bonus payment of $25,000 after twelve
months of employment, less withholding required by law or agreed to by
Employee. If Employee's employment is not earlier terminated, his annual salary
after twelve months of employment shall be increased to a rate of $225,000, and
he shall be entitled to receive a bonus payment of $25,000, or such other bonus
as may be mutually agreed upon by the Company and the Employee, less withholding
required by law or agreed to by the Employee. One-half of this $25,000 bonus
will be paid after 18 months of employment, and the
2
<PAGE>
remainder will be paid after 24 months of employment. The Company agrees that
the Employee's salary and performance will thereafter be reviewed at least
annually by the Company on the same basis as other senior level executives to
determine if an increase is appropriate, which increase shall be in the sole
discretion of the Company. Except as otherwise provided herein, the Employee
alone and not the Company shall be responsible for the payment of all federal,
state and local taxes in respect of the payments to be made and benefits to be
provided under this Agreement or otherwise.
1.4. Benefits. During the term of employment, the Employee shall
be provided such benefits and be permitted to participate in fringe benefit
plans, if any, or no less favorable a basis as other senior officers of the
Company. Such fringe benefit plans may be amended or terminated from time to
time by the Company in its sole discretion. The Company will reimburse Employee
for COBRA payments made to his previous employer for the first three months of
employment.
1.5. Incentive Compensation. In addition to the compensation set
forth in Section 1.3 hereof, the Employee shall be entitled to participate in
the Company's Stock Option Program. Immediately upon his employment, Employee
shall receive a stock option grant of 140,000 shares of common stock at the
grant price of $4.00 per share, which grant is and shall be subject to and
governed by all of the terms and conditions of the Stock Option Program,
including, without limitation, certain vesting and transfer restrictions.
1.6. Automobile Allowance. The Employee shall receive, in
addition to his annual salary, a payment at the annual rate of $7,500, paid in
monthly installments, as an automobile allowance, less withholding required by
law or agreed to by Employee.
1.7. Vacation. The Employee shall be entitled to three (3) weeks
of vacation per year, to be taken in accordance with the Company's vacation
policy as it may be established or amended by the Company from time to time.
3
<PAGE>
1.8. Relocation Assistance. The Employee shall receive the
following net relocation assistance payments after deduction of federal, state
or local taxes required by law:
(a) Reimbursement for reasonable and necessary temporary
housing expenses up to a maximum of $2,000 in any month, for a maximum of
twelve months, which payments shall cease upon termination of employment or
the establishment of a permanent housing arrangement;
(b) Reimbursement for reasonable air transportation expenses
between Albany, NY and Philadelphia, PA for the Employee and his spouse up
to a maximum reimbursement of $10,000;
(c) Reimbursement for real estate commission and other
reasonable expenses incurred in connection with the sale of Employee's home
in Albany, NY in the approximate amount of $5,000;
(d) Reimbursement for reasonable settlement costs incurred in
connection with the purchase of a new home in the Philadelphia, PA area in
the approximate amount of $5,000; and
(e) Reimbursement for reasonable and necessary moving
expenses incurred by the Employee in moving his household from Albany, NY
to the Philadelphia, PA area.
(f) If and to the extent the Company reasonably believes that
any of the payments described in subsections (a), (b), (c), (d) or (e) of
this Section 1.8 are includible in Employee's income and are not deductible
by Employee for purposes of applicable federal, state or local income or
employment taxes, the Company shall pay Employee an additional amount such
that the net amount retained by Employee, after any required withholding by
the Company and payment by Employee of any additional liability for
federal, state and/or local income and/or employment taxes directly
attributable to the payments described in subsections (a), (b), (c), (d) or
(e) of this Section 1.8, shall be equal to
4
<PAGE>
the aggregate amount of the payments described in subsections (a), (b),
(c), (d) and (e) of this Section 1.8.
2. Expenses. The Company shall reimburse the Employee on a
--------
timely basis for all ordinary and necessary out-of-pocket business expenses
incurred in connection with the discharge of his duties and responsibilities
hereunder, in line with Company policy and in accordance with the Company's
expense approval procedures then in effect and upon presentation to the Company
of an itemized account and written proof of such expenses.
3. Confidential Information. The Employee recognizes and
------------------------
acknowledges that by reason of his employment by and service with the Company he
will have access to confidential information of the Company and its affiliates,
including, without limitation, information and knowledge pertaining to research
activities, products and services offered, inventions, innovations, designs,
ideas, plans, trade secrets, proprietary information, advertising, sales methods
and systems, sales and profit figures, customer lists, and relationships between
the Company and its customers, suppliers and others who have had or will have
business dealings with the Company ("Confidential Information"). Employee
acknowledges that such Confidential Information is a valuable and unique asset
and covenants that he will not, either during or after his employment with the
Company, disclose any such Confidential Information to any person for any reason
whatsoever (except as his duties as an officer of the Company may require)
without the prior written authorization of the Company's Chief Executive
Officer, unless such information is in the public domain through no fault of
Employee or except as may be required by law.
4. Non-Competition.
---------------
4.1. During his employment by the Company and for a period of two
(2) years after that employment terminates, the Employee shall not, directly or
indirectly, engage in (as principal, partner, director, officer, agent,
employee, consultant, owner, independent contractor or otherwise, with or
without compensation) or hold a financial interest in any
5
<PAGE>
retailing business that constitutes a competing business operating in the North
American continent as defined below.
4.2. As used in this Section 4, a "competing business" shall be (i)
any business that, at the time of the determination, primarily engages in, or
plans to primarily engage in, the sale of any combination of the following
children's merchandise: multimedia/educational merchandise, books,
- ----------
educationally-oriented or specialty market games and toys, audiotapes,
videotapes, computer software products and arts and crafts supplies (the
"Company's Merchandise Assortment") and has more than 7,500 square feet of
retail selling space in any one store or (ii) any retailing business that, at
the time of the determination, dedicates more than 7,500 square feet of its
retail selling space to any combination of the Company's Merchandise Assortment
in any one store. The 7,500 square foot calculation in subparagraph (ii) of
this Section 4.2 shall exclude mass merchant products of a type not sold by the
Company at the time of the determination. The phrase "primarily engages in"
used in subparagraph (i) of this Section 4.2 shall mean that sixty-six and two-
thirds percent (66.67%) of the merchandise sold by such business is
substantially similar to that sold by the Company.
4.3. The definition of "competing business" contained in Section
4.2(ii) shall not apply if either (i) the Employee is terminated without cause
or (ii) there is a significant and involuntary reduction in the authority,
duties or responsibilities of the Employee hereunder.
4.4. The restrictions contained in this Section 4 shall not apply to
the ownership of five percent (5%) or less of the shares of any class of equity
securities of a company whose securities are traded on a national securities
exchange or the Nasdaq Stock Market.
5. No Solicitation. The Employee agrees that during the period
---------------
commencing on the first day of his employment with the Company and ending two
(2) years after the Employee last performs services for the Company (whether or
not such services are rendered pursuant to this Agreement), he will not, either
6
<PAGE>
directly or indirectly, solicit the employment of any person who was employed by
the Company on a full or part-time basis at the time the Employee last performed
services for the Company unless such person (i) was involuntarily discharged by
the Company or such affiliate, or (ii) voluntarily terminated his or her
relationship with the Company or such affiliate prior to the Employee's
termination of employment.
6. Equitable Relief.
----------------
6.1. The Employee acknowledges that the restrictions contained in
Sections 3, 4 and 5 hereof are reasonable and necessary to protect the
legitimate interests of the Company, that the Company would not have entered
into this Agreement in the absence of such restrictions, and that any violation
of any provision of those Sections will result in irreparable injury to the
Company. The Employee further represents and acknowledges that (i) he has been
advised by the Company to consult his own legal counsel in respect to this
Agreement; and (ii) that he has, prior to execution of this Agreement, reviewed
thoroughly this Agreement with his counsel.
6.2. The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 3, 4, or 5 hereof,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company may be entitled. In the event that any of the provisions
of Sections 3, 4, or 5 hereof should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.
6.3. The Employee irrevocably and unconditionally (i) agrees that
any suit, action or other legal proceeding arising out of this Agreement,
including, without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of
7
<PAGE>
competent jurisdiction in Montgomery County, Pennsylvania; (ii) consents to the
non-exclusive jurisdiction of any such court in any such suit, action or
proceeding; and (iii) waives any objection which Employee may have to the laying
of venue of any such suit, action or proceeding in any such court. Employee also
irrevocably and unconditionally consents to the service of any process,
pleadings, notices or other papers in a manner permitted by the notice
provisions of Section 11 hereof.
6.4. The Employee agrees that he will provide, and that the Company
may similarly provide, a copy of Sections 3, 4, and 5 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, control or control of; or (ii) with which he may be
connected with as an officer, director, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which he may use
or permit his name to be used; provided, however, that this provision shall not
apply in respect of Sections 4 and 5 of this Agreement after expiration of the
time periods set forth therein or in the event that the Company breaches its
obligation under this Agreement.
7. Termination. This Agreement and the Employee's employment
-----------
may be terminated at the will of either party at any time and for any reason
with or without cause, except that the Employee agrees to give the Company at
least thirty (30) days written notice of termination prior to the last date on
which he performs services for the Company.
7.1. In the event that the Company terminates the Employee's
employment for reasons other than cause or a Change of Control of the Company as
those terms are defined herein, the Employee shall be entitled to receive his
total salary installment payments (base salary, bonus and incentive compensation
earned as of such termination date, subject to the terms and conditions set
forth in the Company's annual incentive
8
<PAGE>
plan) at the salary rate in effect at the time of the termination of his
employment, and to continue to participate in all insured benefit plans, on the
same terms on which he was participating prior to the date of the termination of
his employment (collectively, the "Termination Benefits") as follows:
(a) If such termination occurs within twelve (12) months of the
date hereof (on or before May 22, 1996), the Employee will receive the
Termination Benefits for a period of twelve (12) months after the date of
the termination of his employment.
(b) If such termination occurs after twelve (12) months but
within eighteen months (18) of the date hereof (after November 12, 1996 but
on or prior to May 11, 1997), the Employee will receive the Termination
Benefits for a period of nine (9) months after the date of the termination
of his employment.
(c) If such termination occurs after eighteen (18) months of the
date hereof (after May 11, 1997), the Employee will receive the Termination
Benefits for a period of six (6) months after the date of the termination
of his employment.
(d) "Cause" as used herein shall mean the failure of the
Employee to perform or observe any material terms or provisions of this
Agreement after notice and an opportunity to correct any problem or to
comply with any of the lawful directives of the Chief Executive Officer or
the Board of Directors of the Company, dishonesty, conviction of a crime
involving moral turpitude, substance abuse, misappropriation of funds, or
serious disparagement of the Company, its products, management or
employees.
7.2. In the event that subsequent to a Change of Control of the
Company, the Employee is involuntarily terminated or there is a significant
reduction in the authority, duties or responsibilities of the Employee or the
compensation or benefits due hereunder, the Employee shall receive the
Termination Benefits for a period of twelve (12) months regardless of the
9
<PAGE>
time period for which the Employee would have received the Termination Benefits
pursuant to Section 7.1.
7.3. The Employee may terminate his employment with the Company
within one (1) year after a Change of Control unless following a Change of
Control the successor organization offers to continue this Agreement for two (2)
years following such Change of Control or offers the Employee a two (2) year
contract incorporating substantially all of the terms of this Agreement and
maintaining, at least, his then current salary and benefits and providing stock
options or other equity on the same basis as it offers to other senior
executives (including, without limitation, other Executive Vice Presidents and
Chief Operating Officer) of such successor organization. In the event that the
Employee terminates his employment in accordance with this section, he shall be
entitled to payments and benefits in accordance with Section 7.2.
7.4. A Change of Control for purposes of Sections 7.2 and 7.3 shall
be deemed to have occurred in the event 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).
7.5. During the period commencing six months after the date of
termination of the Employee, any liability of the Company for Termination
Benefits pursuant to Section 7.1 or
10
<PAGE>
Section 7.2, as the case may be, shall be reduced by and to the extent of any
earnings or benefits received or accrued for the benefit of Employee as a result
of Employee's employment, either independently or by another employer, during
the period, commencing six months after such termination, for which the Company
is required to pay or provide such Termination Benefits to Employee.
8. Disability. In the event of the disability of the Employee,
----------
within the meaning of subsection 22(e)(3) of the Internal Revenue Code of 1986,
as amended, and is unable to work and remains continuously so Totally Disabled
for a period of one hundred and eighty (180) days, the Employee's employment, at
the Company's option, may be terminated by notice in writing to that effect.
Such termination shall take effect the last day of the month following the date
such notice is given. Employee's compensation and other benefits shall continue
during the term of the disability through the effective date of termination as
set forth above.
9. Survival. Notwithstanding the termination of this Agreement
--------
pursuant to Section 7 or otherwise, the Employee's obligations under Sections 3,
4 and 5 hereof shall survive and remain in full force and effect for the periods
therein provided, and the provisions for equitable relief against Employee in
Section 6 hereof shall continue in force.
10. Governing Law. This Agreement shall be governed by and
-------------
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of laws thereof.
11. Notices. All notices and other communications required or
-------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand-delivered or mailed
by registered or certified mail, as follows (provided that notice of change of
address shall be deemed given only when received):
11
<PAGE>
If to the Company, to:
David Schlessinger
Children's Concept, Inc.
308 E. Lancaster Avenue
Wynnewood, PA 19096
With a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attention: Stephen M. Goodman, Esquire
If to Employee, to:
Robert A. Helpert
91 Western Avenue
Delmar, NY 12054
or to such other names and addresses as the Company or the Employee, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.
12. Contents of Agreement.
----------------------
12.1. This Agreement supersedes all prior agreements and sets forth
the entire understanding between the parties hereto with respect to the subject
matter hereof except that this Agreement may not be changed, modified, extended
or terminated except upon written amendment executed by the Employee and by the
Chief Executive Officer of the Company.
12.2. Employee acknowledges that from time to time the Company or its
affiliates may establish, maintain and distribute employee manuals or handbooks
or personnel policy manuals, and officers or other representatives of the
Company may make written or oral statements relating to personnel policies and
procedures. Such manuals, handbooks and statements are intended only for general
guidance. No policies, procedures or statements of any
12
<PAGE>
nature by or on behalf of the Company (whether written or oral, and whether or
not contained in any employee manual or handbook or personnel policy manual),
and no acts or practices of any nature, shall be construed to modify this
Agreement or to create express or implied obligations of any nature to the
Employee.
12.3. All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of the
Employee hereunder are of a personal nature and shall not be assignable or
delegable in whole or in part by the Employee, and the Company may not transfer
or convey its rights hereunder to any third party other than an affiliate of the
Company without the prior express written consent of the Employee.
13. Severability. If any provision of this Agreement or
------------
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder of this Agreement, and the
application of such provision to such person or circumstances in any
jurisdiction, shall not be affected thereby, and to this end the provisions of
this Agreement shall be severable.
14. Arbitration. In the event of any dispute or claim relating to
-----------
or arising out of this Agreement, such disputes shall be fully, finally and
exclusively resolved by binding arbitration conducted by the American
Arbitration Association in Philadelphia, Pennsylvania.
13
<PAGE>
15. Remedies Cumulative; No Waiver. No remedy conferred upon the
------------------------------
Company by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.
No delay or omission by the Company in exercising any right, remedy or power
hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by the Company
from time to time and as often as may be deemed expedient or necessary by the
Company in its sole discretion.
16. Insurance and Indemnity. The Company shall, to the extent
-----------------------
permitted by law, indemnify the Employee. The Company shall also provide the
Employee with coverage as a named insured under any directors and officers
liability insurance policy maintained for the Company's directors and officers.
This obligation to provide insurance and indemnify the Employee shall survive
expiration or termination of this Agreement with respect to proceedings or
threatened proceedings based on acts or omissions of the Employee occurring
during the Employee's employment with the Company or with any affiliated
company. Such obligations shall be binding upon the Company's successors and
assigns and shall inure to the benefit of the Employee's heirs and personal
representatives.
17. Miscellaneous. All section headings are for convenience
-------------
only. This Agreement may be executed in several counterparts, each of which is
an original.
14
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Employment Agreement as of the date first above written.
Attest: CHILDREN'S CONCEPT, INC.
______________________________ By ___________________________
Name: Name:
Title: Title:
Witness: EMPLOYEE
______________________________ ______________________________
Robert A. Helpert
15
<PAGE>
[10/8/97]
Amended and Restated
Loan and Security Agreement
by and among
CoreStates Bank, N.A.
as Lender
Congress Financial Corporation
as Agent
and
Children's Concept, Inc.
doing business as Zany Brainy
as Borrower
Dated: October 9, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS.............................................................. 1
SECTION 2. ACKNOWLEDGEMENT AND RESTATEMENT.......................................... 13
2.1 Existing Obligations........................................................ 13
2.2 Acknowledgement of Security Interest........................................ 13
2.3 Existing Agreements......................................................... 13
2.4 Restatement................................................................. 14
SECTION 3. CREDIT FACILITIES........................................................ 14
3.1 Loans....................................................................... 14
3.2 Letter of Credit Accommodations............................................. 16
3.3 Availability Reserves....................................................... 18
3.4 Commitment.................................................................. 19
SECTION 4. INTEREST AND FEES........................................................ 21
4.1 Interest.................................................................... 21
4.2 Closing Fee................................................................. 22
4.3 Servicing Fee............................................................... 22
4.4 Unused Line Fee............................................................. 23
4.6 Changes in Laws and Increased Costs of Loans................................ 23
SECTION 5. CONDITIONS PRECEDENT..................................................... 24
5.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations... 24
5.2 Conditions Precedent to All Loans and Letter of Credit Accommodations....... 26
SECTION 6. SECURITY INTEREST........................................................ 26
SECTION 7. COLLECTION AND ADMINISTRATION............................................ 28
7.1 Borrower's Loan Account..................................................... 28
7.2 Statements.................................................................. 28
7.3 Collection of Accounts...................................................... 28
7.4 Payments.................................................................... 30
7.5 Authorization to Make Loans................................................. 31
7.6 Use of Proceeds............................................................. 31
7.7 Sharing of Payments, Etc.................................................... 31
7.8 Settlement Procedures....................................................... 32
SECTION 8. COLLATERAL REPORTING AND COVENANTS....................................... 34
8.1 Collateral Reporting........................................................ 34
8.2 Accounts Covenants.......................................................... 35
8.3 Inventory Covenants......................................................... 36
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
8.4 Power of Attorney........................................................... 37
8.5 Right to Cure............................................................... 38
8.6 Access to Premises.......................................................... 38
SECTION 9. REPRESENTATIONS AND WARRANTIES........................................... 39
9.1 Corporate Existence, Power and Authority; Subsidiaries...................... 39
9.2 Financial Statements; No Material Adverse Change............................ 39
9.3 Chief Executive Office; Collateral Locations................................ 39
9.4 Priority of Liens; Title to Properties...................................... 40
9.5 Tax Returns................................................................. 40
9.6 Litigation.................................................................. 40
9.7 Compliance with Other Agreements and Applicable Laws........................ 40
9.8 Environmental Compliance.................................................... 41
9.9 Credit Card Agreements...................................................... 42
9.10 Employee Benefits.......................................................... 43
9.11 Bank Accounts.............................................................. 43
9.12 Accuracy and Completeness of Information................................... 43
9.13 Survival of Warranties; Cumulative......................................... 44
SECTION 10. AFFIRMATIVE AND NEGATIVE COVENANTS....................................... 44
10.1 Maintenance of Existence................................................... 44
10.2 New Collateral Locations................................................... 44
10.3 Compliance with Laws, Regulations, Etc..................................... 44
10.4 Payment of Taxes and Claims................................................ 45
10.5 Insurance.................................................................. 45
10.6 Financial Statements and Other Information................................. 46
10.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc.................... 47
10.8 Encumbrances............................................................... 48
10.9 Indebtedness............................................................... 49
10.10 Loans, Investments, Guarantees, Etc....................................... 49
10.11 Dividends and Redemptions................................................. 50
10.12 Transactions with Affiliates.............................................. 50
10.13 Credit Card Agreements.................................................... 50
10.14 Adjusted Tangible Net Worth............................................... 51
10.15 Compliance with ERISA..................................................... 51
10.16 Additional Bank Accounts.................................................. 52
10.17 Costs and Expenses........................................................ 52
10.18 Further Assurances........................................................ 52
SECTION 11. EVENTS OF DEFAULT AND REMEDIES........................................... 53
11.1 Events of Default.......................................................... 53
11.2 Remedies................................................................... 54
SECTION 12. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW.............................................. 56
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
12.1 Confession of Judgment..................................................... 56
12.2 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver...... 57
12.3 Waiver of Notices.......................................................... 58
12.4 Amendments and Waivers..................................................... 58
12.5 Waiver of Counterclaims.................................................... 58
12.6 Indemnification............................................................ 58
SECTION 13. THE AGENT................................................................ 59
13.1 Appointment, Powers and Immunities......................................... 59
13.2 Reliance by Agent.......................................................... 59
13.3 Events of Default.......................................................... 60
13.4 Rights as a Lender......................................................... 60
13.5 Indemnification............................................................ 61
13.6 Non-Reliance on Agent and Other Lender..................................... 61
13.7 Failure to Act............................................................. 61
13.8 Resignation of Agent....................................................... 62
13.9 Consents and Releases of Collateral under Financing Agreements............. 62
13.10 Collateral Matters......................................................... 62
SECTION 14. TERM OF AGREEMENT; MISCELLANEOUS......................................... 63
14.1 Term...................................................................... 63
14.2 Notices.................................................................... 65
14.3 Partial Invalidity......................................................... 65
14.4 Successors................................................................. 65
14.5 Assignments and Participations............................................. 66
14.6 Entire Agreement........................................................... 68
</TABLE>
<PAGE>
INDEX TO
EXHIBITS AND SCHEDULES
----------------------
Exhibit A Information Certificate
Schedule 1.29 List of Existing Agreements
Schedule 1.30 Existing Letters of Credit
Schedule 1.50 Permitted Holders
Schedule 7.3 Bank Accounts
Schedule 9.4 Existing Liens
Schedule 9.7 Permits
Schedule 9.8 Environmental Matters
Schedule 9.9 Credit Card Agreements
Schedule 10.9 Existing Indebtedness
Schedule 10.10 Existing Loans, Investments, Guarantees
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------------------
This Amended and Restated Loan and Security Agreement dated as of October 9,
1997 is entered into by and among Corestates Bank, N.A., a national banking
association ("Lender"), Congress Financial Corporation, in its capacity as
administrative agent and collateral agent for Lender (in such capacity "Agent")
and Children's Concept, Inc., doing business as Zany Brainy, a Pennsylvania
corporation ("Borrower").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower and Lender have entered into certain financing
arrangements pursuant to which Lender has made loans and advances and provided
other financial accommodations to Borrower as set forth in the Existing
Agreements (as hereinafter defined);
WHEREAS, Borrower has requested that Agent act as agent for Lender in
connection with its financing arrangements with Borrower pursuant to which Agent
may make loans and advances and provide other financial accommodations on behalf
of Lender to Borrower;
WHEREAS, Borrower has requested that Lender extend, modify and restate the
existing financing arrangements of Lender with Borrower;
NOW, THEREFORE, in consideration of the mutual conditions and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
-----------
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrower, Agent and Lender pursuant to
the definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 12.4 or cured in a
manner satisfactory to Agent, if such Event of Default is capable of being cured
as determined by Agent. Any accounting term used herein unless otherwise
defined in this
<PAGE>
Agreement shall have the meanings customarily given to such term in accordance
with GAAP. For purposes of this Agreement, the following terms shall have the
respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance, and including, without limitation, Credit Card Receivables.
1.2 "Adjusted Eurodollar Rate" shall mean, with respect to each Interest
Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if
necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by
dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage
equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof,
"Reserve Percentage" shall mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority for determining the
reserve requirement which is or would be applicable to deposits of United States
dollars in a non-United States or an international banking office of Reference
Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with
the proceeds of such deposit, whether or not the Reference Bank actually holds
or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
1.3 "Adjusted Tangible Net Worth" shall mean as to any Person, at any time,
in accordance with GAAP (except as otherwise specifically set forth below), on a
consolidated basis for such Person and its Subsidiaries (if any), the amount
equal to: (a) the difference between: (i) the aggregate net book value of all
assets (excluding the value of patents, trademarks, trade names, copyrights,
licenses, goodwill, leasehold improvements, prepaid assets and other intangible
assets) of such Person and its Subsidiaries, calculating the book value of
inventory for this purpose principally on a first-in-first-out basis, at the
lower of cost or market using weighted average cost, after deducting from such
book values all appropriate reserves in accordance with GAAP (including all
reserves for doubtful receivables, obsolescence, depreciation and amortization)
and (ii) the aggregate amount of the indebtedness and other liabilities of such
Person and its Subsidiaries (including tax and other proper accruals) plus (b)
----
indebtedness of such Person and its Subsidiaries which is subordinate in right
of payment to the full and final payment of all of the Obligations on terms and
conditions acceptable to Agent.
1.4 "Agent" shall mean Congress Financial Corporation in its capacity as
administrative agent and collateral agent for Lender pursuant to the terms
hereof and any replacement or successor agent hereunder.
1.5 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Agent may from time to time establish and revise in good faith
reducing the amount of Loans and Letter of Credit Accommodations that would
otherwise be available to Borrower under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks
2
<PAGE>
that, as determined by Agent in good faith, do or may affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, or (ii) the security interests and other rights in the Collateral of
Agent held for the benefit of Lender (including the enforceability, perfection
and priority thereof); or (iii) the assets, business or prospects of Borrower or
any Obligor (b) to reflect Agent's good faith belief that any collateral report
or financial information furnished by or on behalf of Borrower or any Obligor to
Agent is or may have been incomplete, inaccurate or misleading in any material
respect; (c) in respect of any state of facts which Agent determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default; (d) to reflect outstanding Letter of
Credit Accommodations as provided in Section 3.2 hereof; or (e) as otherwise
provided in Section 3.3 hereof.
1.6 "Blocked Accounts" shall have the meaning set forth in Section 7.3
hereof.
1.7 "Business Day" shall mean any day other than a Saturday, Sunday, or
other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the Commonwealth of Pennsylvania, and a day
on which the Reference Bank and Agent are open for the transaction of business,
except that if a determination of a Business Day shall relate to any Eurodollar
Rate Loans, the term Business Day shall also exclude any day on which banks are
closed for dealings in dollar deposits in the London interbank market or other
applicable Eurodollar Rate market.
1.8 "Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's capital stock at any time outstanding, and any and all rights,
warrants or options exchangeable for or convertible into such capital stock (but
excluding any debt security that is exchangeable for or convertible into such
capital stock).
1.9 "Change of Control" shall mean the occurrence of any of the following:
(a) all or substantially all of Borrower's assets are sold, in one or in a
series of transactions to any "person" or "group" (as such terms are used in
Sections 14(d)(2) and 13(d)(3), respectively, of the Securities Exchange Act)
other than to Permitted Holders; (b) an event or series of events (whether a
stock purchase, amalgamation, merger, consolidation or other business
combination or otherwise) by which any person or group (other than a Permitted
Holder) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act) directly or indirectly of fifty (50%) percent or more
of the combined voting power of the then outstanding securities of Borrower
ordinarily (and apart from rights accruing under certain circumstances) having
the right to vote in election of directors or (c) after the date of this
Agreement, the replacement of a majority of the Board of Directors of Borrower
over a two (2) year period commencing from the date of this Agreement from the
directors who constituted the Board of Directors at the beginning of such period
other than directors whose nominations for election by the stockholders of
Borrower was approved by such Board of Directors.
3
<PAGE>
1.10 "Code" shall mean the Internal Revenue Code of 1986, as the same now
exists or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.11 "Collateral" shall have the meaning set forth in Section 6 hereof.
1.12 "Commitment" shall have the meaning set forth in Section 3.4 hereof.
1.13 "Consolidated Net Income" shall mean, with respect to any Person, for
any period, the aggregate of the net income (loss) of such Person and its
Subsidiaries, on a consolidated basis, for such period (excluding to the extent
included therein any extraordinary gains) after deducting all charges which
should be deducted before arriving at the net income (loss) for such period and
after deducting the Provision for Taxes for such period, all as determined in
accordance with GAAP; provided, that, (a) the net income of any Person that is
-------- ----
not a wholly-owned Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid or payable to such Person or a wholly-owned Subsidiary of
such Person; (b) except to the extent included pursuant to the foregoing clause,
the net income of any Person accrued prior to the date it becomes a wholly-owned
Subsidiary of such Person or is merged into or consolidated with such Person or
any of its wholly-owned Subsidiaries or that Person's assets are acquired by
such Person or by any of its wholly-owned Subsidiaries shall be excluded; (c)
the effect of any change in accounting principles adopted by such Person or its
Subsidiaries after the date hereof shall be excluded, except, that, as to
------ ----
Borrower, the effect of such changes shall not be excluded if Borrower and Agent
shall agree in writing to amendments to the terms contained herein with respect
to Consolidated Net Income which are acceptable to both Borrower and Agent; (d)
net income shall exclude interest accruing, but not paid on indebtedness owing
to a Subsidiary or parent corporation of such Person, which is subordinated in
right of payment to the payment in full of the Obligations, on terms and
conditions acceptable to Agent; and (e) the net income (if positive) of any
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Subsidiary to such Person or to any other Subsidiary of
such Person is not at the time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Subsidiary shall be excluded. For
the purposes of this definition, (i) net income excludes any gain (but not loss)
together with any related Provision for Taxes for such gain (but not loss)
realized upon the sale or other disposition of any assets that are not sold in
the ordinary course of business (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or of any Capital Stock of such
Person or a Subsidiary of such Person and any net income realized as a result of
changes in accounting principles or the application thereof to such Person, and
(ii) the term "Provision for Taxes" shall mean an amount equal to all taxes
imposed on or measured by net income, whether Federal, State, Provincial, county
or local, and whether foreign or domestic, that are paid or payable by any
Person in respect of any period in accordance with GAAP.
4
<PAGE>
1.14 "Cost" shall mean, as to the Inventory as of any date, the cost of
such Inventory as of such date, determined on a first-in-first-out basis at the
lower of cost or market in accordance with GAAP.
1.15 "Credit Card Acknowledgments" shall mean, individually and
collectively, the agreements by Credit Card Issuers or Credit Card Processors
who are parties to Credit Card Agreements in favor of Lender and Agent
acknowledging the first priority security interest of Agent, for itself and the
benefit of Lender, in the monies due and to become due to Borrower (including,
without limitation, credits and reserves) under the Credit Card Agreements, and
agreeing to transfer all such amounts to the Blocked Accounts, as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
1.16 "Credit Card Agreements" shall mean all agreements now or hereafter
entered into by Borrower with any Credit Card Issuer or any Credit Card
Processor, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, including, but not
limited to, the agreements set forth on Schedule 9.9 hereto.
1.17 "Credit Card Issuer" shall mean any Person (other than Borrower) who
issues or whose members issue credit cards, including, without limitation,
MasterCard or VISA bank credit or debit cards or other bank credit or debit
cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa
International and American Express, Discover, Diners Club, Carte Blanche and
other non-bank credit or debit cards, including, without limitation, credit or
debit cards issued by or through American Express Travel Related Services
Company, Inc. and Novus Services, Inc.
1.18 "Credit Card Processor" shall mean any servicing or processing agent
or any factor or financial intermediary who facilitates, services, processes or
manages the credit authorization, billing transfer and/or payment procedures
with respect to any of Borrower's sales transactions involving credit card or
debit card purchases by customers using credit cards or debit cards issued by
any Credit Card Issuer (including, but not limited to, National Data Payment
Systems, Inc.).
1.19 "Credit Card Receivables" shall mean collectively, (a) all present and
future rights of Borrower to payment from any Credit Card Issuer, Credit Card
Processor or other third party arising from sales of goods or rendition of
services to customers who have purchased such goods or services using a credit
or debit card and (b) all present and future rights of Borrower to payment from
any Credit Card Issuer, Credit Card Processor or other third party in connection
with the sale or transfer of Accounts arising pursuant to the sale of goods or
rendition of services to customers who have purchased such goods or services
using a credit card or a debit card, including, but not limited to, all amounts
at any time due or to become due from any Credit Card Issuer or Credit Card
Processor under the Credit Card Agreements or otherwise.
5
<PAGE>
1.20 "EBITDA" shall mean, as to any Person, with respect to any period, an
amount equal to: (a) the Consolidated Net Income of such Person and its
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP, plus (b) depreciation, amortization and other non-cash charges of
----
such Person and its Subsidiaries for such period (to the extent deducted in the
computation of Consolidated Net Income), all in accordance with GAAP (excluding
any non-cash charge that requires an accrual or reserve for cash charges for any
future period and all non-cash charges incurred in connection with the valuation
of inventory on a last-in-first-out basis), plus (c) Interest Expense (as
----
defined below) for such period (to the extent deducted in the computation of
Consolidated Net Income), plus (d) charges for Federal, State, local and foreign
----
income taxes of such Person and its Subsidiaries for such period (to the extent
deducted in the computation of Consolidated Net Income), all in accordance with
GAAP. For purposes of this definition, the term "Interest Expense" shall mean,
for any period, as to any Person and its Subsidiaries, as determined in
accordance with GAAP, total interest expense, whether paid or accrued (including
the interest component of capital lease obligations for such period), including,
without limitation, all bank fees, commissions, discounts and other fees and
charges owed with respect to letters of credit, but excluding (i) amortization
of discount and amortization of deferred financing fees and closing costs paid
in cash in connection with the transactions contemplated hereby, (ii) interest
paid in property other than cash and (iii) any other interest expense not
payable in cash.
1.21 "Eligible Inventory" shall mean Inventory consisting of finished goods
held for resale in the ordinary course of the business of Borrower that are
acceptable to Agent based on the criteria set forth below. In general, Eligible
Inventory shall not include (a) packaging and shipping materials; (b) supplies
used or consumed in Borrower's business; (c) Inventory at premises other than
those owned and controlled by Borrower, except for (i) Inventory at retail store
------ ---
locations of Borrower which are leased by it if either (A) Agent shall have
received a Landlord Agreement (as defined below) duly authorized, executed and
delivered by the owner and lessor of such premises or (B) if Agent has not
received such Landlord Agreement, then Agent shall have established an
Availability Reserve in respect of amounts due or to become due to the owner and
lessor of such retail store location (without limiting any other rights and
remedies of Agent under this Agreement or under the other Financing Agreements
with respect to the establishment of Availability Reserves or otherwise);
provided, that, Borrower shall use its best efforts to obtain the Landlord
- -------- ----
Agreement with respect to each of such locations and (ii) Inventory at other
locations of Borrower which are leased by it, if Agent shall have received an
agreement in writing from the owner and lessor of such premises in form and
substance satisfactory to Agent acknowledging the first priority security
interest in the Inventory of Agent, for itself and the benefit of Lender,
waiving security interests and claims by such person against the Inventory and
permitting Agent access to, and the right to remain on, the premises so as to
exercise the rights and remedies of Agent, for itself and the benefit of Lender,
and otherwise deal with the Collateral (a "Landlord Agreement"); (d) Inventory
subject to a security interest or lien in favor of any person other than Agent,
for itself and the benefit of Lender, except those permitted in this Agreement;
(e) bill and hold goods; (f) unserviceable, obsolete or slow moving Inventory
(except that so long as the amount of slow moving Inventory shall not increase
after
6
<PAGE>
the date hereof disproportionately to increases in sales by Borrower and
increases in the total amount of Inventory, as determined by Agent in good
faith, such slow moving Inventory shall be considered Eligible Inventory to the
extent it otherwise satisfies the criteria set forth herein); (g) Inventory
which is not subject to the first priority, valid and perfected security
interest of Agent, for itself and the benefit of Lender; (h) damaged and/or
defective Inventory; (i) Inventory to be returned to vendors (except, that,
------ ----
Eligible Inventory may include Inventory to be returned to vendors of up to the
aggregate amount of $500,000 thereof, so long as it is in the same condition and
state as when first received by Borrower from such vendor); (j) Inventory
subject to deposits made by customers for sales of Inventory that has not been
delivered; (k) Inventory held after the applicable expiration date thereof; (l)
samples and (m) Inventory purchased or sold on consignment. General criteria
for Eligible Inventory may be established and revised from time to time by Agent
in good faith. Any Inventory which is not Eligible Inventory shall nevertheless
be part of the Collateral.
1.22 "Environmental Laws" shall mean all foreign, Federal, State and local
laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations, judicial or
administrative decisions, injunctions or agreements between Borrower and any
governmental authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, ground water, drinking water, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource), or
to human health or safety, (b) relating to the exposure to, or the use, storage,
recycling, treatment, generation, manufacture, processing, distribution,
transportation, handling, labeling, production, release or disposal, or
threatened release, of Hazardous Materials, or (c) relating to all laws with
regard to recordkeeping, notification, disclosure and reporting requirements
respecting Hazardous Materials. The term "Environmental Laws" includes (i) the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, the Federal Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal
Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto), the Federal Solid
Waste Disposal Act and the Federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water
Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any
common law or equitable doctrine that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.
1.23 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
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1.24 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.
1.25 "ERISA Affiliate" shall mean any person required to be aggregated with
Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.
1.26 "Eurodollar Rate" shall mean with respect to the Interest Period for a
Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Agent) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement
of such Interest Period in amounts substantially equal to the principal amount
of the Eurodollar Rate Loans requested by and available to Borrower in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrower.
1.27 "Eurodollar Rate Loans" shall mean any Loans or portion thereof on
which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.
1.28 "Excess Availability" shall mean the amount, as determined by Agent,
calculated at any time, equal to: (a) the lesser of (i) the amount of the Loans
available to Borrower as of such time based on the applicable lending formula
multiplied by the Value of Eligible Inventory, as determined by Agent, and
subject to the sublimits and Availability Reserves from time to time established
by Agent hereunder and (ii) the Maximum Credit, minus (b) the sum of: (i) the
-----
amount of all then outstanding and unpaid Obligations, plus (ii) the aggregate
amount of all trade payables of Borrower which are more than thirty (30) days
past due as of such time, plus (iii) the amount of checks issued by Borrower to
pay trade payables, but not yet sent and the book overdraft of Borrower.
1.29 "Existing Agreements" shall mean, collectively, the agreements,
documents and instruments by Borrower with, to or in favor of Lender set forth
on Schedule 1.29 hereto.
1.30 "Existing Letters of Credit" shall mean, collectively, the letters of
credit issued prior to the date hereof by Lender for the account of Borrower set
forth on Schedule 1.30 hereto.
1.31 "Event of Default" shall mean the occurrence or existence of any event
or condition described in Section 11.1 hereof.
1.32 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this
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Agreement, as the same now exist or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
1.33 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Sections 10.14 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Agent prior to
the date hereof.
1.34 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Agent in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.35 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.36 "Interest Period" shall mean for any Eurodollar Rate Loan, a period of
approximately one (1), two (2), or three (3) months duration as Borrower may
elect, the exact duration to be determined in accordance with the customary
practice in the applicable Eurodollar Rate market; provided, that, Borrower may
-------- ----
not elect an Interest Period which will end after the last day of the then-
current term of this Agreement.
1.37 "Interest Rate" shall mean, as to Prime Rate Loans, the Prime Rate per
annum and, as to Eurodollar Rate Loans, a rate of two and one-half (2 1/2%)
percent per annum in excess of the Adjusted Eurodollar Rate (based on the
Eurodollar Rate applicable for the Interest Period selected by Borrower as in
effect three (3) Business Days after the date of receipt by Agent of the request
of Borrower for such Eurodollar Rate Loans in accordance with the terms hereof,
whether such rate is higher or lower than any rate previously quoted to
Borrower); provided, that, the Interest Rate shall be increased to the rate of
-------- ----
two (2%) percent per annum in excess of the Prime Rate as to Prime Rate Loans
and the rate of four and one-half (4 1/2%) percent per annum in excess of the
Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Agent's option, without
notice, (a) for the period on and after (i) the date of termination hereof and
until such time as all Obligations are indefeasibly paid in full
(notwithstanding entry of any judgment against Borrower), or (ii) the date of
the occurrence of any Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an Event of Default, and for
so long as such Event of Default or other event is continuing as determined by
Agent and (b) on the Loans at any time outstanding in excess of the amounts
available to Borrower under Section 3.1
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(whether or not such excess(es), arise or are made with or without Agent's
knowledge or consent and whether made before or after an Event of Default).
1.38 "Letter of Credit Accommodations" shall mean the letters of credit,
merchandise purchase or other guaranties which are from time to time either (a)
issued or opened by Issuer and arranged by Agent for the account of Borrower or
any Obligor or (b) with respect to which Agent has agreed to indemnify the
issuer or guaranteed to the issuer the performance by Borrower of its
obligations to such issuer (including, without limitation, the Existing Letters
of Credit).
1.39 "Material Adverse Effect" shall mean a material adverse effect on (a)
the condition (financial or otherwise), business, performance, operations or
properties of Borrower; (b) the legality, validity or enforceability of this
Agreement or any of the other Financing Agreements; (c) the legality, validity,
enforceability, perfection or priority of the security interests and liens of
Agent or Lender upon the Collateral or any other property which is security for
the Obligations; (d) the Collateral or any other property which is security for
the Obligations, or the value of the Collateral or such other property; (e) the
ability of Borrower to repay the Obligations or of Borrower or any Obligor to
perform its obligations under this Agreement or any of the other Financing
Agreements; or (f) the ability of Agent to enforce the Obligations or realize
upon the Collateral or otherwise with respect to the rights and remedies of
Agent and Lender under this Agreement or any of the other Financing Agreements.
1.40 "Loans" shall mean the loans now or hereafter made by Agent to or for
the benefit of Borrower on a revolving basis (involving advances, repayments and
readvances) as set forth in Section 3.1(a) hereof.
1.41 "Maximum Credit" shall mean $20,000,000, subject to increases up to
$60,000,000 as provided in Section 3.5 hereof.
1.42 "Net Off Peak Recovery Cost Percentage" shall mean the fraction,
expressed as a percentage, (a) the numerator of which is the amount equal to the
median recovery on the aggregate amount of the Inventory at such time on a
"going out of business sale" basis (assuming such sale is conducted other than
during the peak period from November 1 to December 31 of any year) as set forth
in the most recent acceptable appraisal of Inventory received by Agent in
accordance with Section 8.3, net of operating expenses, liquidation expenses and
commissions, and (b) the denominator of which is the original Cost of the
aggregate amount of the Inventory subject to appraisal.
1.43 "Net Peak Recovery Cost Percentage" shall mean the fraction, expressed
as a percentage, (a) the numerator of which is the amount equal to the median
recovery on the aggregate amount of the Inventory at such time on a "going out
of business sale" basis (assuming such sale is during the peak period from
November 1 to December 31 of any year) as set forth in the most recent
acceptable appraisal of Inventory received by Agent in accordance with Section
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8.3, net of operating expenses, liquidation expenses and commissions, and (b)
the denominator of which is the original cost of the aggregate amount of the
Inventory subject to appraisal.
1.44 "Net Recovery Retail Percentage" shall mean the fraction, expressed as
a percentage, (a) the numerator of which is the amount equal to the median
recovery on the aggregate amount of the Inventory at such time on a "going out
of business sale" basis (assuming such sale is conducted other than during the
peak period from November 1 to December 31 of any year) as set forth in the most
recent acceptable appraisal of Inventory received by Agent in accordance with
Section 8.3, net of operating expenses, liquidation expenses and commissions,
and (b) the denominator of which is the original Retail Value of the aggregate
amount of the Inventory subject to appraisal.
1.45 "Obligations" shall mean any and all Loans, Letter of Credit
Accommodations and all other obligations, liabilities and indebtedness of every
kind, nature and description owing by Borrower to Agent and/or Lender and/or any
of their affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, arising under this Agreement, any of the other Financing
Agreements or by operation of law in connection therewith, whether now existing
or hereafter arising, whether arising before, during or after the initial or any
renewal term of this Agreement or after the commencement of any case with
respect to Borrower under the United States Bankruptcy Code or any similar
statute (including, without limitation, the payment of interest and other
amounts which would accrue and become due but for the commencement of such case,
whether or not such amounts are allowed or allowable in whole or in part in such
case), whether direct or indirect, absolute or contingent, joint or several, due
or not due, primary or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Agent or Lender.
1.46 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.47 "Participant" shall have the meaning set forth in Section 14.5 hereof.
1.48 "Payment Account" shall have the meaning set forth in Section 7.3
hereof.
1.49 "Permits" shall have the meaning set forth in Section 9.7 hereof.
1.50 "Permitted Holders" shall mean the persons listed on Schedule 1.50
hereto.
1.51 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including, without limitation, any corporation which
elects subchapter S status under the Code), limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
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1.52 "Prime Rate" shall mean the rate from time to time publicly announced
by Lender Bank, N.A., or its successors, at its office in Philadelphia,
Pennsylvania, as its prime rate, whether or not such announced rate is the best
rate available at such bank.
1.53 "Prime Rate Loans" shall mean any Loans or portion thereof on which
interest is payable based on the Prime Rate in accordance with the terms hereof.
1.54 "Qualified Public Offering" shall mean any bona fide, firm commitment,
---- ----
underwritten offering by Borrower of its Capital Stock to the public pursuant to
an effective registration statement under the Securities Act, as then in effect,
or any comparable statement under any similar federal statute then in force, the
net cash proceeds of which received by Borrower are not less $20,000,000, after
deducting underwriting discounts and commissions, and all offering expenses and
other expenses related thereto.
1.55 "Real Property" shall mean all now owned and hereafter acquired real
property of Borrower, including leasehold interests, together with all
buildings, structures, and other improvements located thereon and all licenses,
easements and appurtenances relating thereto, wherever located.
1.56 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to the
foregoing maintained with or by any other person).
1.57 "Reference Bank" shall mean CoreStates Bank, N.A. or such other bank
as Agent may designate from time to time.
1.58 "Renewal Date" shall have the meaning set forth in Section 14.1
hereof.
1.59 "Retail Value" shall mean, as to the Inventory as of any date, the
then current retail sales price of such Inventory as of such date, net of
markdowns from the original retail sales price or ticketed sales price with
respect thereto.
1.60 "Securities Act" shall mean the Securities Act of 1933, as the same
now exists or may hereafter from time to time be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.61 "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as the same now exists or may hereafter from time to time be amended,
modified, recodified or
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supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.
1.62 "Subsidiary" shall mean, as to any Person, any corporation or other
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned or controlled by
such Person, one or more of the other subsidiaries of such Person or any
combination thereof.
1.63 "Value" shall mean, as determined by Agent in good faith, with respect
to Inventory, the lower of (a) Cost or (b) market value.
SECTION 2. ACKNOWLEDGEMENT AND RESTATEMENT
-------------------------------
2.1 Existing Obligations. Borrower hereby acknowledges, confirms and
--------------------
agrees that Borrower is indebted to Lender for Loans to Borrower under the
Existing Agreements, as of the close of business on October 8, 1997, in the
aggregate principal amount of $3,150,000 and the aggregate amount of
$1,495,913.40 in respect of Letter of Credit Accommodations, together with all
interest accrued and accruing thereon (to the extent applicable), and all costs,
expenses and other charges relating thereto, all of which are unconditionally
owing by Borrower to Lender, without offset, defense or counterclaim of any
kind, nature or description whatsoever.
2.2 Acknowledgement of Security Interest. Borrower hereby acknowledges,
------------------------------------
confirms and agrees that (a) Agent, for itself and the benefit of Lender, has
and shall continue to have a security interest in and lien upon the Collateral
heretofore granted to Agent as assignee of Lender, as well as any Collateral
granted hereunder or under the other Financing Agreements or otherwise granted
to or held by Agent or Lender, and (b) the liens and security interests of Agent
in the Collateral shall be deemed to be continuously granted and perfected from
the earliest date of the granting and perfection of such liens and security
interests, whether directly to Agent, for itself and the benefit of Lender, or
to Agent, for itself and the benefit of Lender, as assignee of Lender or
otherwise.
2.3 Existing Agreements. Borrower hereby acknowledges, confirms and agrees
-------------------
that: (a) the Existing Agreements have been duly executed and delivered by
Borrower and are in full force and effect as of the date hereof; (b) the
agreements and obligations of Borrower contained in the Existing Agreements
constitute the legal, valid and binding obligations of Borrower enforceable
against it in accordance with its terms and Borrower has no valid defense to the
enforcement of such obligations; and (c) Agent and Lender are entitled to all of
the rights, remedies and benefits provided for in or arising pursuant to the
Existing Agreements.
2.4 Restatement.
-----------
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(a) Except as otherwise stated in Section 2.2 hereof and this Section
2.4, as of the date hereof, the terms, conditions, agreements, covenants,
representations and warranties set forth in the Existing Agreements are hereby
amended and restated in their entirety, and as so amended and restated, replaced
and superseded, by the terms, conditions, agreements, covenants, representations
and warranties set forth in this Agreement, except that nothing herein or in the
------ ----
other Financing Agreements shall impair or adversely affect the continuation of
the liability of Borrower for the Obligations heretofore incurred and the
security interests, liens and other interests in the Collateral heretofore
granted, pledged and/or assigned by Borrower to Agent, for itself and the
benefit of Lender (whether directly to Agent, for itself and the benefit of
Lender, or to Agent, for itself and the ratable benefit of Lender, as assignee
of Lender or otherwise).
(b) The amendment and restatement contained herein shall not, in any
manner, be construed to constitute payment of, or impair, limit, cancel or
extinguish, or constitute a novation in respect of any of the obligations,
liabilities and indebtedness of Borrower evidenced by or arising under the
Existing Agreements, and the liens and security interests securing such other
obligations, liabilities and indebtedness, which shall not in any manner be
impaired, limited, terminated, waived or released.
(c) All loans, advances and other financial accommodations under the
Existing Agreements and all other Obligations of Borrower to Lender outstanding
and unpaid as of the date hereof pursuant to the Existing Agreements or
otherwise shall be deemed Obligations of Borrower pursuant to the terms hereof,
and shall constitute and be deemed Loans to Borrower hereunder to the same
extent and in the same amount as such Obligations were deemed to be under the
Existing Agreements.
SECTION 3. CREDIT FACILITIES
-----------------
3.1 Loans.
-----
(a) Subject to, and upon the terms and conditions contained herein,
Lender agrees to fund the Loans in amounts requested by Borrower up to the
amount equal to:
(i) the lesser of the Maximum Credit (as then in effect) or
(A) during the period commencing on December 1 of each calendar
year through and including June 30 of the following calendar
year (other than the period commencing on June 1, 1998
through and including June 30, 1998), the lesser of: (1)
fifty-five (55%) percent multiplied by the Value of the
Eligible Inventory or (2) eighty-five (85%) percent of the
Net Off Peak Recovery Cost Percentage multiplied by the Cost
of Eligible Inventory, or
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(B) during the period commencing on June 1, 1998 through and
including June 30, 1998, the lesser of: (1) fifty-five (55%)
percent multiplied by the Value of the Eligible Inventory or
(2) eighty-five (85%) percent of the Net Off Peak Recovery
Cost Percentage multiplied by the Cost of Eligible
Inventory, except, that, such percentage shall be ninety-
------ ----
five (95%) percent of the Net Off Peak Recovery Cost
Percentage if each of the following conditions is satisfied:
(aa) no Event of Default, or act, condition or event which
with notice or passage of time would constitute an Event of
Default shall exist or have occurred, (bb) as of April 30,
1998, the Tangible Net Worth of Borrower shall be not less
than $16,500,000, and (cc) as of April 30, 1998, the EBITDA
of Borrower for the immediately preceding twelve (12) month
period shall be not less than $3,300,000,
(C) during the period commencing on July 1 of each calendar year
through and including July 31 of such calendar year, the
least of: (1) fifty-five (55%) percent multiplied by the
Value of Eligible Inventory, (2) one hundred (100%) percent
of the Net Off Peak Recovery Cost Percentage multiplied by
the Cost of Eligible Inventory or (3) seventy-five (75%)
percent of the Net Peak Recovery Cost Percentage multiplied
by the Cost of Eligible Inventory, and
(D) during the period commencing on August 1 of each calendar
year through and including November 30 of such calendar
year, the lesser of: (1) sixty (60%) percent multiplied by
the Value of Eligible Inventory or (2) eighty (80%) percent
of the Net Peak Recovery Cost Percentage multiplied by the
Cost of Eligible Inventory; minus
-----
(ii) the Availability Reserves.
(b) Without limiting any of the rights of Agent or Lender pursuant to
Section 3.1(d) below or otherwise, on each date when any reduction to any of the
lending formulas set forth in Section 3.1(a) above becomes effective, regardless
of the amounts of Eligible Inventory, Borrower agrees absolutely and
unconditionally to automatically and without demand make a payment to Agent, for
the benefit of Lender, in respect of the Loans, in an amount equal to the
excess, if any, of the aggregate unpaid principal amount of the Loans over the
amounts available to Borrower pursuant to the lending formula as so reduced.
Each such payment in respect of the Loans pursuant to this Section 3.1(b) shall
be without premium or penalty, except to the extent that the outstanding balance
of the Loans after such payment may result in any fee under Section 14.1(c)
hereof. All interest accrued on the principal amount of the Loans paid pursuant
to this
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Section 3.1(b) may be charged to the loan account of Borrower, at Agent's
option, on the date of such payment.
(c) Except in Agent's discretion, the aggregate amount of the Loans
and the Letter of Credit Accommodations outstanding at any time shall not exceed
the Maximum Credit (as then in effect). In the event that the outstanding
amount of the Loans, or the aggregate amount of the outstanding Loans and Letter
of Credit Accommodations, exceed the amounts available under the lending
formulas, the sublimits for Letter of Credit Accommoda tions set forth in
Section 3.2(d) or the Maximum Credit, as applicable, such event shall not limit,
waive or otherwise affect any rights of Agent or Lender in that circumstance or
on any future occasions and Borrower shall, upon demand by Agent, which may be
made at any time or from time to time, immediately repay to Agent, for the
benefit of Lender, the entire amount of any such excess(es) for which payment is
demanded.
3.2 Letter of Credit Accommodations.
-------------------------------
(a) Subject to, and upon the terms and conditions contained herein,
at the request of Borrower, Agent agrees, for the risk of Lender, to provide or
arrange for Letter of Credit Accommodations for the account of Borrower
containing terms and conditions acceptable to Agent and the issuer thereof. Any
payments made by Agent or Lender to any issuer thereof and/or related parties in
connection with the Letter of Credit Accommodations shall constitute additional
Loans to Borrower pursuant to this Section 3.
(b) In addition to any charges, fees or expenses charged by Issuer in
connection with the Letter of Credit Accommodations, Borrower shall pay to
Agent, for the benefit of Lender, a letter of credit fee at a rate equal to one
and one-half (1 1/2%) percent per annum on the daily outstanding balance of the
Letter of Credit Accommodations (other than the Existing Letters of Credit) for
the immediately preceding month (or part thereof), payable in arrears as of the
first day of each succeeding month, except that Borrower shall pay to Agent such
letter of credit fee, at Agent's option, without notice, at a rate equal to
three and one-half (3 1/2%) percent per annum for (i) the period on and after
the date of termination hereof until Agent, for the benefit of Lender, has
received full and final payment of all Obligations (notwithstanding entry of a
judgment against Borrower) and (ii) the period on and after the date of the
occurrence of any Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default and for so long
as such Event of Default is continuing as determined by Agent. Such letter of
credit fee shall be calculated on the basis of a three hundred sixty (360) day
year and actual days elapsed and the obligation of Borrower to pay such fee
shall survive the termination or non-renewal of this Agreement.
(c) No Letter of Credit Accommodations shall be available unless on
the date of the proposed issuance of any Letter of Credit Accommodations, the
Loans available to Borrower (subject to the Maximum Credit and any Availability
Reserves) are equal to or greater than (i) if the proposed Letter of Credit
Accommodation is for the purpose of purchasing Eligible
16
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Inventory, the sum of (A) the percentage equal to one hundred (100%) percent
minus the then applicable percentage set forth in Section 3.1(a)(i)(A) above
multiplied by the Value of such Eligible Inventory, plus (B) freight, taxes,
duty and other amounts that Agent estimates must be paid in connection with such
Inventory upon arrival and for delivery to one of Borrower's locations for
Eligible Inventory; and (ii) if the proposed Letter of Credit Accommodation is
for any other purpose an amount equal to one hundred (100%) percent of the face
amount thereof and all other commitments and obligations made or incurred by
Agent or Lender with respect thereto. Effective on the issuance of each Letter
of Credit Accommodations, an Availability Reserve shall be established in the
applicable amount set forth in this Section 3.2(c)(i) or Section 3.2(c)(ii).
(d) Except in Agent's discretion, the amount of all outstanding
Letter of Credit Accommodations for all other purposes and all other commitments
and obligations made or incurred by Agent or Lender in connection therewith,
shall not at any time exceed $7,500,000. At any time an Event of Default exists
or has occurred and is continuing, upon Agent's request, Borrower will either
furnish cash collateral to secure the reimbursement obligations to the issuer in
connection with any Letter of Credit Accommodations or furnish cash collateral
to Agent, for itself and the benefit of Lender, for the Letter of Credit
Accommodations, and in either case, the Loans otherwise available to Borrower
shall not be reduced as provided in Section 3.2(c) to the extent of such cash
collateral.
(e) Borrower shall indemnify and hold Agent and Lender harmless from
and against any and all losses, claims, damages, liabilities, costs and expenses
which Agent or Lender may suffer or incur in connection with any Letter of
Credit Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with respect
to any Letter of Credit Accommodation, except for any losses, claims, damages,
liabilities, costs and expenses as a result of the gross negligence or wilful
misconduct of Lender as determined pursuant to a final non-appealable order of a
court of competent jurisdiction. Borrower assumes all risks with respect to the
acts or omissions of the drawer under or beneficiary of any Letter of Credit
Accommodation and for such purposes the drawer or beneficiary shall be deemed
Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrower hereby releases and holds Agent and Lender
harmless from and against any acts, waivers, errors, delays or omissions,
whether caused by Borrower, by any issuer or correspondent or otherwise with
respect to or relating to any Letter of Credit Accommodation, except for any
losses, claims, damages, liabilities, costs and expenses as a result of the
gross negligence or wilful misconduct of Lender as determined pursuant to final
non-appealable order of a court of competent jurisdiction. The provisions of
this Section 3.2(e) shall survive the payment of Obligations and the termination
or non-renewal of this Agreement.
17
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(f) Nothing contained herein shall be deemed or construed to grant
Borrower any right or authority to pledge the credit of Agent or Lender in any
manner. Agent and Lender shall have no liability of any kind with respect to
any Letter of Credit Accommodation provided by an issuer other than Agent unless
Agent has duly executed and delivered to such issuer the application or a
guarantee or indemnification in writing with respect to such Letter of Credit
Accommodation. Borrower shall be bound by any interpretation made in good faith
by Agent, any other issuer or correspondent under or in connection with any
Letter of Credit Accommodation or any documents, drafts or acceptances
thereunder, notwithstanding that such interpretation may be inconsistent with
any instructions of Borrower.
(i) At any time an Event of Default exists or has occurred and is
continuing, Agent shall have the sole and exclusive right and authority to, and
Borrower shall not (A) approve or resolve any questions of non-compliance of
documents, (B) give any instructions as to acceptance or rejection of any
documents or goods or (C) execute any and all applications for steamship or
airway guaranties, indemnities or delivery orders.
(ii) At any time prior to an Event of Default, Agent shall have the
right and authority, with the consent of Borrower (except that such consent
shall not be required if in Agent's good faith determination it is necessary or
desirable to avoid any liability of Agent or Lender), and at any time on or
after an Event of Default exists or has occurred and is continuing, Agent shall
have the sole and exclusive right and authority to, without the consent of
Borrower, (A) grant any extensions of the maturity of, time of payment for, or
time of presentation of, any drafts, acceptances, or documents, and (B) agree to
any amendments, renewals, extensions, modifications, changes or cancellations of
any of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral.
(iii) Agent may take such actions referred to above either in
its own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations granted or undertaken
by Borrower to any issuer or correspondent in any application for any Letter of
Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Agent, for the benefit of Lender.
Any duties or obligations undertaken by Agent to any issuer or correspondent in
any application for any Letter of Credit Accommodation, or any other agreement
by Agent in favor of any issuer or correspondent relating to any Letter
of Credit Accommodation, shall be deemed to have been undertaken by Borrower to
Agent, for the benefit of Lender, and to apply in all respects to Borrower.
3.3 Availability Reserves. All Loans otherwise available to Borrower
---------------------
pursuant to the lending formulas and subject to the Maximum Credit and other
applicable limits hereunder, shall be subject to Agent's continuing right to
establish and revise Availability Reserves. Without
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limiting any other rights or remedies of Agent and Lender under this Agreement
or any of the other Financing Agreements with respect to the establishment of
Availability Reserves or otherwise, Agent may establish and revise Availability
Reserves to reflect: (a) inventory shrinkage; (b) reserves in respect of
markdowns, "kick-outs" (arising from the sale of items of Inventory which are
not reflected in the perpetual inventory records maintained by Borrower) and
cost variances (pursuant to discrepancies between the purchase order price of
Inventory and the actual cost thereof); (c) the aggregate amount of deposits, if
any, received by Borrower from its retail customers in respect of unfilled
orders for merchandise; (d) amounts due or to become due in respect of sales,
use and/or withholding taxes; (e) any rental payments, service charges or other
amounts due to lessors of real or personal property to the extent Inventory or
Records are located in or on property or such Records are needed to monitor or
otherwise deal with the Collateral or (f) amounts owing by Borrower to Credit
Card Issuers or Credit Card Processors in connection with the Credit Card
Agreements.
3.4 Maximum Credit.
--------------
(a) At any time and from time to time after the date hereof, upon not
less than thirty (30) days, and not more than forty-five (45) days, prior
written notice to Agent, (i) prior to July 1, 1998, Borrower may request that
the Maximum Credit increase from $20,000,000 to up to $35,000,000 and (ii) after
July 1, 1998, Borrower may request that the Maximum Credit increase from the
amount of the Maximum Credit then in effect up to an amount equal to
$60,000,000, provided, that, as to any request whether pursuant to clause (i) or
-------- ----
clause (ii) above, (A) each such increase shall be in an amount not less than
$7,500,000, (B) Borrower shall not make more than four (4) such requests and (C)
any such request from Borrower shall be irrevocable.
(b) Within thirty (30) days of receipt by Agent of any written
request by Borrower for an increase in the Maximum Credit in accordance with
Section 3.5(a) above prior to July 1, 1998, Agent shall give Borrower written
notice of the increase in the Maximum Credit to the amount so requested by
Borrower (which increase shall be effective on the date of such notice by Agent
to Borrower), provided, that, (i) in each case, each of the following conditions
-------- ----
is satisfied, as determined by Agent: (A) Agent shall have received such
request by no later than July 1, 1998, (B) as of the effective date of such
increase, no Event of Default or act, condition or event which with notice or
passage of time or both would constitute an Event of Default shall exist or have
occurred and (C) Agent shall have received, for the benefit of Lender, payment
from Borrower in cash or other immediately available funds of the line increase
fee in respect of such increase as provided in Section 4.5 below, (ii) the
giving of such notice by Agent to Borrower of the increase in the Maximum Credit
shall not be deemed a waiver of any Event of Default which may exist or have
occurred on or before the date of such notice or of any of Agent's or Lender's
rights or remedies with respect thereto, (iii) Agent shall not be required to
give such notice to Borrower of the increase in the Maximum Credit unless in the
determination of Agent, each of the conditions set forth above are satisfied,
and (iv) as of the effective date of any such increase in the Maximum Credit,
each reference to the term Maximum Credit herein and in any of the other
Financing Agreements shall be deemed amended to mean the amount of
19
<PAGE>
the Maximum Credit specified in the most recent written notice from Agent to
Borrower of the increase in the Maximum Credit.
(c) Within thirty (30) days of receipt by Agent of any written
request by Borrower for an increase in the Maximum Credit in accordance with
Section 3.5(a)(ii) above after July 1, 1998, Agent shall give Borrower written
notice of the increase in the Maximum Credit to the amount so requested by
Borrower (which increase shall be effective on the date of such notice by Agent
to Borrower), provided, that, (i) each of the following conditions is satisfied
-------- ----
as determined by Agent: (A) as of the effective date of such increase, no Event
of Default, or act, condition or event, which with notice or passage of time or
both would constitute an Event of Default shall exist or have occurred, (B)
Agent shall have received the audited consolidated financial statements of
Borrower and its Subsidiaries, together with the unqualified opinion of
independent certified public accounts with respect thereto, in accordance with
the terms of Section 10.6(a) hereof for the fiscal year ended immediately prior
to the date of the receipt by Agent of the written request for such increase
from Borrower, (C) the Consolidated Net Income of Borrower and its Subsidiaries
for such fiscal year calculated based on such audited consolidated financial
statements shall be not less than $500,000, (D) as of the date of such increase
and after giving effect thereto, Excess Availability shall be not less than
$5,000,000, (E) the inventory accounting and computer systems and controls shall
in all respects be reasonably satisfactory to Agent, (F) Agent shall have
received, for the benefit of Lender, payment from Borrower in cash or other
immediately available funds of the line increase fee in respect of such increase
as provided in Section 4.5 below, and (G) Agent shall have received an amendment
to this Agreement, in form and substance reasonably satisfactory to Agent,
changing the amount of the Adjusted Tangible Net Worth of Borrower which
Borrower is required to maintain pursuant to Section 10.14 hereof, to such
amount as Agent shall reasonably determine, duly authorized, executed and
delivered by Borrower, (ii) the giving of such notice by Agent to Borrower of
the increase in the Maximum Credit shall not be deemed a waiver of any Event of
Default which may exist or have occurred on or before the date of such notice or
of any of Agent's or Lender's rights or remedies with respect thereto, (iii)
Agent shall not be required to give such notice to Borrower of the increase in
the Maximum Credit unless in the determination of Agent, each of the conditions
set forth above are satisfied, and (iv) as of the effective date of any such
increase in the Maximum Credit, each reference to the term Maximum Credit herein
and in any of the other Financing Agreements shall be deemed amended to mean the
amount of the Maximum Credit specified in the most recent notice from Agent to
Borrower of the increase in the Maximum Credit.
SECTION 4. INTEREST AND FEES
-----------------
4.1 Interest.
--------
(a) Borrower shall pay to Agent, for the benefit of Lender, interest
on the outstanding principal amount of the non-contingent Obligations at the
Interest Rate. All interest
20
<PAGE>
accruing hereunder on and after the date of any Event of Default or termination
or non-renewal hereof shall be payable on demand.
(b) Borrower may from time to time request that Prime Rate Loans be
converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Agent of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
provided, that, as of such date each of the following conditions is satisfied as
- -------- ----
determined by Lender: (i) no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of Default
exists or has occurred and is continuing, (ii) Borrower shall have complied with
such customary procedures as are established by Agent and specified by Agent to
Borrower from time to time for requests by Borrower for Eurodollar Rate Loans,
(iii) no more than five (5) Interest Periods may be in effect at any one time,
(v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not
less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof,
(iv) the maximum amount of the Eurodollar Rate Loans at any time requested by
Borrower shall not exceed the amount equal to ninety-five (95%) percent of the
lowest principal amount of the Loans which it is anticipated will be outstanding
during the applicable Interest Period, in each case as determined by Agent (but
with no obligation of Agent and Lender to make such Loans) and (vii) Agent shall
have determined that the Interest Period or Adjusted Eurodollar Rate is
available to Agent through the Reference Bank and can be readily determined as
of the date of the request for such Eurodollar Rate Loan by Borrower. Any
request by Borrower to convert Prime Rate Loans to Eurodollar Rate Loans or to
continue any existing Eurodollar Rate Loans shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Agent, Lender and
Reference Bank shall not be required to purchase United States Dollar deposits
in the London interbank market or other applicable Eurodollar Rate market to
fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to
apply as if Agent, Lender and Reference Bank had purchased such deposits to fund
the Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically convert to Prime
Rate Loans upon the last day of the applicable Interest Period, unless Agent has
received and approved a request to continue such Eurodollar Rate Loan at least
three (3) Business Days prior to such last day in accordance with the terms
hereof. Any Eurodollar Rate Loans shall, at Agent's option, upon notice by Agent
to Borrower, convert to Prime Rate Loans in the event that (i) this Agreement
shall terminate, or (ii) the aggregate principal amount of the Prime Rate Loans
which have previously been converted to Eurodollar Rate Loans or existing
Eurodollar Rate Loans continued, as the case may be, at the beginning of an
Interest Period shall at any time during such Interest Period exceed either (A)
the aggregate principal amount of the Loans then outstanding, or (B) the Loans
then available to Borrower under Section 3 hereof. Borrower shall pay to Agent,
for the benefit of Lender, upon demand by Agent (or Agent may, at its option,
charge any
21
<PAGE>
loan account of Borrower) any amounts required to compensate Agent, Lender, the
Reference Bank or any Participant for any loss (including loss of anticipated
profits), cost or expense incurred by such person, as a result of the conversion
of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of the foregoing
prior to the end of the applicable Interest Period.
(d) Interest shall be payable by Borrower to Agent monthly in arrears
not later than the first day of each calendar month and shall be calculated on
the basis of a three hundred sixty (360) day year and actual days elapsed. The
interest rate on non-contingent Obligations (other than Eurodollar Rate Loans)
shall increase or decrease by an amount equal to each increase or decrease in
the Prime Rate effective on the first day of the month after any change in such
Prime Rate is announced based on the Prime Rate in effect on the last day of the
month in which any such change occurs. In no event shall charges constituting
interest payable by Borrower to Agent exceed the maximum amount or the rate
permitted under any applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto.
4.2 Closing Fee. Borrower shall pay to Agent, for the benefit of Lender,
-----------
as a closing fee the amount of $66,000, which shall be fully earned as of the
date hereof and $33,000 of which shall be payable on the date hereof and $33,000
of which shall be payable on the first anniversary of the date hereof, provided,
--------
that, such amount shall become immediately due and payable, without notice or
- ----
demand, at Agent's option, upon the occurrence of an Event of Default or upon
the termination or non-renewal hereof.
4.3 Servicing Fee. Borrower shall pay to Agent, for its own account,
-------------
quarterly a servicing fee in an amount equal to $10,000 for each fiscal quarter
of Borrower (or part thereof) while this Agreement is in effect and for so long
thereafter as any of the Obligations are outstanding, which fee shall be fully
earned as of and payable in advance on the date hereof and on the first day of
each fiscal quarter after the date hereof.
4.4 Unused Line Fee. Borrower shall pay to Agent, for the benefit of
---------------
Lender, monthly an unused line fee at a rate equal to three-eighths of one
(3/8%) percent per annum calculated upon the amount by which (a) the amount
equal to eighty (80%) percent of the Maximum Credit as in effect on the last day
of the immediately preceding month exceeds (b) the average daily principal
balance of the outstanding Loans and Letter of Credit Accommodations during the
immediately preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are outstanding, which fee
shall be payable on the first day of each month in arrears.
22
<PAGE>
4.5 Line Increase Fee. In consideration of each increase in the Maximum
-----------------
Credit as provided for in Section 3.5 hereof, Borrower shall, on the effective
date of any increase in the Maximum Credit, pay to Agent, for the benefit of
Lender, a line increase fee in the amount equal to one-third (1/3%) percent of
the amount of each such increase in the Maximum Credit, which fee shall be fully
earned and payable as of the date of such increase.
4.6 Changes in Laws and Increased Costs of Loans.
--------------------------------------------
(a) Notwithstanding anything to the contrary contained herein, all
Eurodollar Rate Loans shall, upon notice by Agent to Borrower, convert to Prime
Rate Loans in the event that (i) any change in applicable law or regulation (or
the interpretation or administration thereof) shall either (A) make it unlawful
for Lender, Reference Bank or any Participant to make or maintain Eurodollar
Rate Loans or to comply with the terms hereof in connection with the Eurodollar
Rate Loans, or (B) shall result in the increase in the costs to Lender,
Reference Bank or any Participant of making or maintaining any Eurodollar Rate
Loans by an amount deemed by Agent to be material, or (C) reduce the amounts
received or receivable by Agent for the benefit of Lender in respect thereof, by
an amount deemed by Agent to be material or (ii) the cost to Lender, Reference
Bank or any Participant of making or maintaining any Eurodollar Rate Loans shall
otherwise increase by an amount deemed by Agent to be material. Borrower shall
pay to Agent, for the benefit of Lender, upon demand by Agent (or Agent may, at
its option, charge any loan account of Borrower) any amounts required to
compensate Lender, the Reference Bank or any Participant for any loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of the foregoing, including, without limitation, any such loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain the Eurodollar Rate
Loans or any portion thereof. A certificate of Agent setting forth the basis
for the determination of such amount necessary to compensate Agent as aforesaid
shall be delivered to Borrower and shall be conclusive, absent manifest error.
(b) If any payments or prepayments in respect of the Eurodollar Rate
Loans are received by Agent other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
7.3 or any other payments made with the proceeds of Collateral, Borrower shall
pay to Agent upon demand by Agent (or Agent may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any Participant for any additional loss (including loss of anticipated
profits), cost or expense incurred by such person as a result of such prepayment
or payment, including, without limitation, any loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired by
such person to make or maintain such Eurodollar Rate Loans or any portion
thereof.
SECTION 5. CONDITIONS PRECEDENT
--------------------
23
<PAGE>
5.1 Conditions Precedent to Initial Loans and Letter of Credit
----------------------------------------------------------
Accommodations. Each of the following is a condition precedent to Lender (or
- --------------
Agent on behalf of Lender) making the initial Loans and providing the initial
Letter of Credit Accommodations hereunder:
(a) Agent shall have received evidence, in form and substance
satisfactory to Agent, that Agent has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
(b) all requisite corporate action and proceedings in connection with
this Agreement and the other Financing Agreements shall be satisfactory in form
and substance to Agent, and Agent shall have received all information and copies
of all documents, including, without limitation, records of requisite corporate
action and proceedings which Agent may have requested in connection therewith,
such documents where requested by Agent or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Agent's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Agent to
enforce the Obligations or realize upon the Collateral;
(d) Agent shall have completed a field review of the Records and such
other information with respect to the Collateral as Agent may require to
determine the amount of Loans available to Borrower including, without
limitation, current agings of receivables, current perpetual inventory records
and/or roll-forwards of Inventory through the date of closing, together with
such supporting documentation as may be necessary or appropriate, and other
documents and information that will enable Agent to accurately identify and
verify the Collateral, the results of which shall be satisfactory to Agent, not
more than three (3) Business Days prior to the date hereof;
(e) Agent shall have received, in form and substance satisfactory to
Agent, all consents, waivers, acknowledgments and other agreements from third
persons which Agent may deem necessary or desirable in order to permit, protect
and perfect its security interests in and liens upon the Collateral or to
effectuate the provisions or purposes of this Agreement and the other Financing
Agreements, including, without limitation, acknowledgements by lessors,
mortgagees and warehousemen of Agent's security interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral and agreements permitting Agent's access to, and the
right to remain on, the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
24
<PAGE>
(f) Borrower shall have established the Blocked Accounts and Agent
shall have received, in form and substance satisfactory to Agent, all agreements
with the depository banks and Borrower with respect to such Blocked Accounts as
Agent may require pursuant to Section 7.3 hereof, duly authorized, executed and
delivered by such depository banks and Borrower;
(g) Agent shall have received evidence, in form and substance
satisfactory to Agent, that Borrower has (i) directed the banks at which
Borrower maintains deposit accounts for the initial receipt of cash, checks and
other items from Borrower's retail store locations to transfer all immediately
available funds deposited in such bank only to the Blocked Accounts as required
pursuant to Section 7.3 hereof or as otherwise directed by Agent and (ii)
notified such banks of the security interests of Agent in such funds and the
other Collateral;
(h) Agent shall have received Credit Card Acknowledgements in each
case, duly authorized, executed and delivered by the Credit Card Issuers and
Credit Card Processors;
(i) Agent shall have received evidence of insurance and loss payee
endorsements required hereunder and under the other Financing Agreements, in
form and substance satisfactory to Agent, and certificates of insurance policies
and/or endorsements naming Agent and each Lender as loss payee;
(j) Agent shall have received, in form and substance satisfactory to
Agent, the opinion letter of counsel(s) to Borrower with respect to the
Financing Agreements and the security interests and liens of Agent with respect
to the Collateral and such other matters as Agent may request;
(k) the other Financing Agreements and all instruments and documents
hereunder and thereunder shall have been duly executed and delivered to Agent,
in form and substance satisfactory to Agent.
5.2 Conditions Precedent to All Loans and Letter of Credit Accommodations.
---------------------------------------------------------------------
Each of the following is an additional condition precedent to Lender (or Agent
on behalf of Lender) making Loans and/or providing Letter of Credit
Accommodations to Borrower, including the initial Loans and Letter of Credit
Accommodations and any future Loans and Letter of Credit Accommodations:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan or providing each such
Letter of Credit Accommodation and after giving effect thereto; and
(b) no Event of Default and no act, condition or event or condition
which, with notice or passage of time or both, would constitute an Event of
Default, shall exist or have
25
<PAGE>
occurred and be continuing on and as of the date of the making of such Loan or
providing each such Letter of Credit Accommodation and after giving effect
thereto.
SECTION 6. SECURITY INTEREST
-----------------
6.1 To secure payment and performance of all Obligations, Borrower hereby
grants to Agent, for itself and the benefit of Lender, a continuing security
interest in, a lien upon, and a right of set off against, and hereby assigns to
Agent, for itself and the benefit of Lender, and also confirms, reaffirms and
restates its prior grant to Agent, for itself and the benefit of Lender, as
assignee of Lender under the Assignment Agreement, of a continuing security
interest in, a lien upon, and a right of setoff against, in each case, as
security, the following property and interests in property of Borrower, whether
now owned or hereafter acquired or existing, and wherever located (collectively,
the "Collateral"):
(a) Accounts;
(b) all present and future contract rights, general intangibles (including,
but not limited to, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, prescription files, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
securities and other investment property, credit card sales drafts, credit card
sales slips or charge slips or receipts and other forms of store receipts,
letters of credit, bankers' acceptances and guaranties;
(c) all present and future monies, securities, credit balances, deposits,
deposit accounts and other property of Borrower now or hereafter held or
received by or in transit to Agent, Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation, (i) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (ii) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (iii) goods described in invoices, documents, credit
card sales drafts, credit card sales slips or charge slips or receipts and other
forms of store receipts, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Collateral, including, without
limitation, returned, repossessed and reclaimed goods, and (iv) deposits by and
property of account debtors or other persons securing the obligations of account
debtors;
(d) Inventory;
26
<PAGE>
(e) Equipment (except as otherwise provided below);
(f) Records; and
(g) all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and all claims against third parties for
loss or damage to or destruction of any or all of the foregoing.
6.2 Notwithstanding anything to the contrary contained in Section 6.1
above, the types or items of Collateral described in such Section shall not
include any Equipment which is, or at the time of Borrower's acquisition thereof
shall be, subject to a purchase money mortgage or other purchase money lien or
security interest (including capitalized or finance leases) permitted under
Section 10.8 hereof if: (a) the valid grant of a security interest or lien to
Agent in such item of Equipment is prohibited by the terms of the agreement
between Borrower and the holder of such purchase money mortgage or other
purchase money lien or security interest or under applicable law and such
prohibition has not been or is not waived, or the consent of the holder of the
purchase money mortgage or other purchase money lien or security interest has
not been or is not otherwise obtained, or under applicable law such prohibition
cannot be waived and (b) the purchase money mortgage or other purchase money
lien or security interest on such item of Equipment is or shall become valid and
perfected.
SECTION 7. COLLECTION AND ADMINISTRATION
-----------------------------
7.1 Borrower's Loan Account. Agent shall maintain one or more loan
-----------------------
account(s) on its books in which shall be recorded (a) all Loans, Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including, without limitation, fees,
charges, costs, expenses and interest. All entries in the loan account(s) shall
be made in accordance with Agent's customary practices as in effect from time to
time.
7.2 Statements. Agent shall render to Borrower each month a statement
----------
setting forth the balance in the Borrower's loan account(s) maintained by Agent
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Agent but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Agent receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Agent.
Until such time as Agent shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Agent by Borrower.
27
<PAGE>
7.3 Collection of Accounts.
----------------------
(a) Borrower shall establish and maintain, at its expense, deposit
account arrangements and merchant payment arrangements with the banks set forth
on Schedule 7.3 hereto and after prior written notice to Agent, subject to
Section 10.16, such other banks as Borrower may hereafter select as are
acceptable to Agent. The banks set forth on Schedule 7.3 constitute all of the
banks with whom Borrower has deposit account arrangements and merchant payment
arrangements as of the date hereof and identifies each of the deposit accounts
at such banks to a retail store location of Borrower or otherwise describes the
nature of the use of such deposit account by Borrower.
(i) Borrower shall deposit all proceeds from sales of Inventory in
every form, including, without limitation, cash, checks, credit card sales
drafts, credit card sales or charge slips or receipts and other forms of daily
store receipts, from each retail store location of Borrower on each business day
into the deposit accounts of Borrower used solely for such purpose and
identified to each retail store location as set forth on Schedule 7.3. All such
funds deposited into the separate deposit accounts shall be sent by wire
transfer on a daily basis and all other proceeds of Collateral shall be sent by
wire transfer, to the Blocked Accounts as provided in Section 7.3(a)(ii) below.
Borrower shall irrevocably authorize and direct in writing, in form and
substance satisfactory to Agent, each of the banks into which proceeds from
sales of Inventory from each retail store location of Borrower are at any time
deposited as provided above to send all funds deposited in such account by wire
transfer on a daily basis to the Blocked Accounts. Such authorization and
direction shall not be rescinded, revoked or modified without the prior written
consent of Agent.
(ii) Borrower shall establish and maintain, at its expense, deposit
accounts with such banks as are acceptable to Agent (the "Blocked Accounts")
into which Borrower shall promptly either cause all amounts on deposit in its
deposit accounts used by each retail store location to be sent as provided in
Section 7.3(a)(i) above or shall itself deposit or cause to be deposited all
proceeds from sales of Inventory, all amounts payable to Borrower from Credit
Card Issuers and Credit Card Processors and all other proceeds of Collateral.
The banks at which the Blocked Accounts are established shall enter into an
agreement, in form and substance satisfactory to Agent, providing that all items
received or deposited in the Blocked Accounts are the property of Agent and
Lender, that the depository bank has no lien upon, or right of setoff against,
the Blocked Accounts, the items received for deposit therein, or the funds from
time to time on deposit therein and that the depository bank will wire, or
otherwise transfer, in immediately available funds, on a daily basis, all funds
received or deposited into the Blocked Accounts to such bank account of Agent,
as Agent may from time to time designate for such purpose ("Payment Account").
Borrower agrees that all amounts deposited in such Blocked Accounts or other
funds received and collected by Agent, whether as proceeds of inventory or other
Collateral or otherwise shall be the property of Agent.
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(b) For purposes of calculating the amount of the Loans available to
Borrower such payments will be applied (conditional upon final collection) to
the Obligations on the Business Day of receipt by Agent of immediately available
funds in the Payment Account provided such payments and notice thereof are
received in accordance with Agent's usual and customary practices as in effect
from time to time and within sufficient time to credit Borrower's loan account
on such day, and if not, then on the next Business Day. For purposes of
calculating interest on the Obligations, such payments or other funds received
will be applied (conditional upon final collection) to the Obligations one (1)
Business Day following the date of receipt of immediately available funds by
Agent in the Payment Account provided such payments or other funds and notice
thereof are received in accordance with Agent's usual and customary practices as
in effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next Business Day.
(c) Borrower and all of its affiliates, Subsidiaries, shareholders,
directors, employees or agents shall, acting as trustee for Agent, receive, as
the property of Agent, any cash, checks, credit card sales drafts, credit card
sales or charge slips or receipts, notes, drafts, any other forms of store
receipts or any other payment relating to and/or proceeds of Accounts or other
Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Blocked Accounts, or remit the same or cause the same to be
remitted, in kind, to Agent, provided, that, if at any time the Excess
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Availability shall be less than $1,000,000, Borrower shall promptly upon Agent's
request cause the portion thereof representing sales and/or use taxes payable in
connection with such sales or otherwise to be deposited into a separate bank
account or accounts established for such purpose. In no event shall any such
cash, checks, credit card sales drafts, credit card sales or charge slips or
receipts, notes, drafts or other payments be commingled with Borrower's own
funds. Borrower agrees to reimburse Agent on demand for any amounts owed or
paid to any bank at which a Blocked Account is established or any other bank or
person involved in the transfer of funds to or from the Blocked Accounts arising
out of Agent's payments to or indemnification of such bank or person. The
obligation of Borrower to reimburse Agent for such amounts pursuant to this
Section 7.3 shall survive the termination or non-renewal of this Agreement.
7.4 Payments. All Obligations shall be payable to the Payment Account as
--------
provided in Section 7.3 or such other place as Agent may designate from time to
time. Agent may apply payments received or collected from Borrower or for the
account of Borrower (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Agent determines. At
Agent's option, all principal, interest, fees, costs, expenses and other charges
provided for in this Agreement or the other Financing Agreements may be charged
directly to the loan account(s) of Borrower. Borrower shall make all payments
to Agent, for the benefit of Lender, on the Obligations free and clear of, and
without deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, withholding,
restrictions or conditions of any kind. If after receipt of any payment of, or
proceeds of
29
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Collateral applied to the payment of, any of the Obligations, Agent or Lender is
required to surrender or return such payment or proceeds to any Person for any
reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Agent. Borrower shall be liable to pay to Agent, for the benefit of Lender, and
does hereby indemnify and hold Agent and Lender harmless for the amount of any
payments or proceeds surrendered or returned. This Section 7.4 shall remain
effective notwithstanding any contrary action which may be taken by Agent in
reliance upon such payment or proceeds. This Section 7.4 shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
7.5 Authorization to Make Loans. Agent is authorized to make the Loans
---------------------------
and provide the Letter of Credit Accommodations, for the account and risk of
Lender, based upon telephonic or other instructions received from anyone
purporting to be an officer of Borrower or other authorized person or, at the
discretion of Agent, if such Loans are necessary to satisfy any Obligations.
All requests for Loans or Letter of Credit Accommodations hereunder shall
specify the date on which the requested advance is to be made or Letter of
Credit Accommodations established (which day shall be a Business Day) and the
amount of the requested Loan. Requests received after 11:00 a.m. New York time
on any day shall be deemed to have been made as of the opening of business on
the immediately following Business Day. All Loans and Letter of Credit
Accommodations under this Agreement shall be conclusively presumed to have been
made to, and at the request of and for the benefit of, Borrower when deposited
to the credit of Borrower or otherwise disbursed or established in accordance
with the instructions of Borrower or in accordance with the terms and conditions
of this Agreement.
7.6 Use of Proceeds. The Loans or Letter of Credit Accommodations provided
---------------
by Agent to Borrower pursuant to the provisions hereof shall be used by Borrower
only for general operating, working capital and other proper corporate purposes
of Borrower not otherwise prohibited by the terms hereof (including, but not
limited to, the expenses of opening additional retail store locations). None of
the proceeds will be used, directly or indirectly, for the purpose of purchasing
or carrying any margin security or for the purposes of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any margin
security or for any other purpose which might cause any of the Loans to be
considered a "purpose credit" within the meaning of Regulation G of the Board of
Governors of the Federal Reserve System, as amended.
7.7 Sharing of Payments, Etc. Borrower agrees that, in addition to (and
------------------------
without limitation of) any right of setoff, banker's lien or counterclaim Agent
or Lender may otherwise have, Lender shall be entitled, at its option (but
subject, as among Agent and Lender, to the provisions of Section 13.3(b)
hereof), to offset balances held by it for the account of Borrower at any of its
offices, in dollars or in any other currency, against any principal of or
interest on any Loans owed to Lender or any other amount payable to Lender
hereunder, that is not paid when due (regardless of whether such balances are
then due to Borrower), in which case it shall
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promptly notify Borrower and Agent thereof; provided, that, Lender's failure to
-------- ----
give such notice shall not affect the validity thereof.
7.8 Settlement Procedures. In order to administer the Loans and Letter of
---------------------
Credit Accommodations in an efficient manner and to minimize the transfer of
funds between Agent and Lender, Agent shall, subject to the terms of this
Section 7.8, make available, on behalf of Lender, the full amount of the Loans
requested or charged to Borrower's loan account(s) or otherwise to be advanced
by Lender pursuant to the terms hereof, without any requirement of prior notice
to Lender of the proposed Loans. Agent and Lender shall settle between them at
such times and in such manner as Agent and Lender may agree. The obligation of
Lender to transfer funds to Agent and effect such settlement shall be
irrevocable and unconditional and without recourse to or warranty by Agent. In
lieu of settlements, Agent may at any time require Lender to provide Agent with
immediately available funds for each Loan, prior to Agent's disbursement of such
Loan to Borrower.
SECTION 8. COLLATERAL REPORTING AND COVENANTS
----------------------------------
8.1 Collateral Reporting. Borrower shall provide Agent with the following
--------------------
documents in a form satisfactory to Agent: (a) on a monthly basis or more
frequently as Agent may request, (i) perpetual inventory reports, (ii) inventory
reports by category, (iii) agings of accounts payable, (iv) a reconciliation of
the perpetual inventory report to the general ledger of Borrower, (v) reports of
the Cost and Retail Value of the Inventory (net of markdowns) and (vi) in the
event there is any consigned Inventory, reports of amounts of consigned
Inventory held by Borrower by category and consignor, (b) on a quarterly basis
or more frequently as Agent may request reports by retail store location of
sales and operating profits for each such retail store location; (c) upon
Agent's request, (i) reports of sales for each category of Inventory, (ii)
reports on sales and use tax collections, deposits and payments, including
monthly sales and use tax accruals, (iii) reports of aggregate Inventory
purchases (including all costs related thereto, such as freight, duty and taxes)
and identifying items of Inventory in transit to Borrower related to the
applicable documentary letter of credit and/or bill of lading number, (iv)
copies of remittance advices and reports, and copies of deposit slips and bank
statements, (v) copies of shipping and delivery documents, and (vi) copies of
purchase orders, invoices and delivery documents for Inventory and Equipment
acquired by Borrower; and (d) upon Agent's request, the monthly statements
received by Borrower from any Credit Card Issuers or Credit Card Processors,
together with such additional information with respect thereto as shall be
sufficient to enable Agent to monitor the transactions pursuant to the Credit
Card Agreements; (e) such other reports as to the Collateral as Agent shall
request from time to time. If any of Borrower's records or reports of the
Collateral are prepared or maintained by an accounting service, contractor,
shipper or other agent, Borrower hereby irrevocably authorizes such service,
contractor, shipper or agent to deliver such records, reports, and related
documents to Agent and to follow Agent's instructions with respect to further
services at any time that an Event of Default exists or has occurred and is
continuing.
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8.2 Accounts Covenants.
------------------
(a) No credit, discount, allowance or extension or agreement for any
of the foregoing shall be granted to any account debtor, Credit Card Issuer or
Credit Card Processor except in the ordinary course of Borrower's business in
accordance with the current practices of Borrower as in effect on the date
hereof. So long as no Event of Default exists or has occurred and is
continuing, Borrower shall settle, adjust or compromise any claim, offset,
counterclaim or dispute with any account debtor, Credit Card Issuer, Credit Card
Processor. At any time that an Event of Default exists or has occurred and is
continuing, Agent shall, at its option, have the exclusive right to settle,
adjust or compromise any claim, offset, counterclaim or dispute with account
debtors, Credit Card Issuers or Credit Card Processors or grant any credits,
discounts or allowances.
(b) Borrower shall notify Agent promptly of: (i) any notice of a
material default by Borrower under any of the Credit Card Agreements or of any
default which might result in the Credit Card Issuer or Credit Card Processor
ceasing to make payments or suspending payments to Borrower, (ii) any notice
from any Credit Card Issuer or Credit Card Processor that such person is ceasing
or suspending, or will cease or suspend, any present or future payments due or
to become due to Borrower from such person, or that such person is terminating
or will terminate any of the Credit Card Agreements, and (iii) the failure of
Borrower to comply with any material terms of the Credit Card Agreements or any
terms thereof which might result in the Credit Card Issuer or Credit Card
Processor ceasing or suspending payments to Borrower.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Agent or schedule thereof delivered to Agent shall be true
and complete, (ii) no payments shall be made thereon except payments delivered
to Agent, for the benefit of Lender, pursuant to the terms of this Agreement,
(iii) no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor, Credit Card Issuer or Credit
Card Processor, except as reported to Agent in accordance with this Agreement
and except for credits, discounts, allowances or extensions made or given in the
ordinary course of Borrower's business in accordance with practices and policies
previously disclosed to Agent and (iv) none of the transactions giving rise
thereto will violate any applicable State or Federal Laws or regulations, all
documentation relating thereto will be legally sufficient under such laws and
regulations and all such documentation will be legally enforceable in accordance
with its terms.
(d) Agent may, at any time or times that an Event of Default exists
or has occurred and is continuing, (i) notify any or all account debtors, Credit
Card Issuers and Credit Card Processors that the Accounts have been assigned to
Agent and that Agent has a security interest therein and Agent may direct any or
all account debtors, Credit Card Issuers and Credit Card Processors to make
payments of Accounts directly to Agent, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for
32
<PAGE>
payment thereof without affecting any of the Obligations, (iii) demand, collect
or enforce payment of any Accounts or such other obligations, but without any
duty to do so, and Agent shall not be liable for its failure to collect or
enforce the payment thereof nor for the negligence of its agents or attorneys
with respect thereto and (iv) take whatever other action Agent may deem
necessary or desirable for the protection of its interests. At any time that an
Event of Default exists or has occurred and is continuing, at Agent's request,
all invoices and statements sent to any account debtor, Credit Card Issuer or
Credit Card Processor shall state that the Accounts due from such account
debtor, Credit Card Issuer or Credit Card Processor and such other obligations
have been assigned to Agent and are payable directly and only to Agent and
Borrower shall deliver to Agent such originals of documents evidencing the sale
and delivery of goods or the performance of services giving rise to any Accounts
as Agent may require.
(e) Agent shall have the right at any time or times, in Agent's name
or in the name of a nominee of Agent, to verify the validity, amount or any
other matter relating to any Account or other Collateral, by mail, telephone,
facsimile transmission or otherwise.
(f) Borrower shall deliver or cause to be delivered to Agent, with
appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Agent may otherwise
agree.
8.3 Inventory Covenants. With respect to the Inventory: (a) Borrower shall
-------------------
at all times maintain inventory records reasonably satisfactory to Agent,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Agent may request on or after an Event of Default, and promptly
following such physical inventory shall supply Agent with a report in the form
and with such specificity as may be reasonably satisfactory to Agent concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Agent, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Agent's request, Borrower
shall, at its expense, no more than once in any six (6) month period, but at any
time or times as Agent may request at Agent's expense, or at any time or times
as Agent may request at Borrower's expense on or after an Event of Default,
deliver or cause to be delivered to Agent written reports or appraisals as to
the Inventory in form, scope and methodology acceptable to Agent and by an
appraiser acceptable to Agent, addressed to Agent or upon which Agent is
expressly permitted to rely; (e) upon Agent's request, Borrower shall, at its
expense, conduct through Washington Inventory Services, Inc., RGIS Inventory
Specialists, Inc. or another inventory counting service acceptable to Agent, a
physical count of the Inventory at each retail store location or other location
of such Inventory in form, scope and methodology acceptable to Agent no less
than one time in any twelve (12) month period, but at any time or times as Agent
may request on or after an Event of Default, the results of which shall be
reported
33
<PAGE>
directly by such inventory counting service to Agent and Borrower shall promptly
deliver confirmation in a form satisfactory to Agent that appropriate
adjustments have been made to the inventory records of Borrower to reconcile the
inventory count to Borrower's inventory records; (f) Borrower shall produce,
use, store and maintain the Inventory, with all reasonable care and caution and
in accordance with applicable standards of any insurance and in conformity with
applicable laws (including, but not limited to, the requirements of the Federal
Fair Labor Standards Act of 1938, as amended and all rules, regulations and
orders related thereto); (g) Borrower assumes all responsibility and liability
arising from or relating to the production, use, sale or other disposition of
the Inventory; (h) Borrower shall not sell Inventory to any customer on
approval, or any other basis which entitles the customer to return or may
obligate Borrower to repurchase such Inventory except for the right of return
given to retail customers of Borrower in the ordinary course of the business of
Borrower in accordance with the then current return policy of Borrower; (i)
Borrower shall keep the Inventory in good and marketable condition; and (j)
Borrower shall not acquire or accept any Inventory on consignment or approval,
except to the extent such Inventory is reported to Agent in accordance with the
terms hereof.
8.4 Power of Attorney. Borrower hereby irrevocably designates and
-----------------
appoints Agent (and all persons designated by Agent) as Borrower's true and
lawful attorney-in-fact, and authorizes Agent, in Borrower's or Agent's name,
to: (a) at any time an Event of Default or event which with notice or passage of
time or both would constitute an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms,
for such amount and at such time or times as the Agent deems advisable, (v)
settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Account, (vii) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar document against an account debtor,
(viii) notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Agent, and open and dispose of all
mail addressed to Borrower, and (ix) do all acts and things which are necessary,
in Agent's determination, to fulfill Borrower's obligations under this Agreement
and the other Financing Agreements and (b) at any time to (i) take control in
any manner of any item of payment or proceeds thereof, (ii) have access to any
lockbox or postal box into which Borrower's mail is deposited, (iii) endorse
Borrower's name upon any items of payment or proceeds thereof and deposit the
same in the Agent's account for application to the Obligations, (iv) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or any goods pertaining
thereto or any other Collateral, (v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors and (vi) execute in Borrower's
name and file any UCC financing statements or amendments thereto. Borrower
hereby releases Agent and its officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Agent's own gross negligence or wilful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
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8.5 Right to Cure. Agent may, at its option, (a) cure any default by
-------------
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Agent's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Agent and Lender with
respect thereto. Agent may add any amounts so expended to the Obligations and
charge Borrower's account therefor, such amounts to be repayable by Borrower on
demand. Agent shall be under no obligation to effect such cure, payment or
bonding and shall not, by doing so, be deemed to have assumed any obligation or
liability of Borrower. Any payment made or other action taken by Agent under
this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.
8.6 Access to Premises. From time to time as requested by Agent, at the
------------------
cost and expense of Borrower, (a) Agent or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including, without limitation, the Records, and (b) Borrower shall
promptly furnish to Agent such copies of such books and records or extracts
therefrom as Agent may request, and (c) use during normal business hours such of
Borrower's personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and if an Event of Default exists or has occurred
and is continuing for the collection of Accounts and realization of other
Collateral.
SECTION 9. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower hereby represents and warrants to Agent and Lender the following
(which shall survive the execution and delivery of this Agreement), the truth
and accuracy of which are a continuing condition of the making of Loans and
providing Letter of Credit Accommodations to Borrower:
9.1 Corporate Existence, Power and Authority; Subsidiaries. Borrower is a
------------------------------------------------------
corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Agent or Lender in or to any
of the Collateral. The execution, delivery and performance of this Agreement,
the other Financing Agreements and the transactions contemplated hereunder and
thereunder are all within Borrower's corporate powers, have been duly authorized
and are not in contravention of law or the terms of Borrower's articles of
incorporation or by-laws, or any indenture, agreement or undertaking to which
Borrower is a
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party or by which Borrower or its property are bound. This Agreement and the
other Financing Agreements constitute legal, valid and binding obligations of
Borrower enforceable in accordance with their respective terms. Borrower does
not have any Subsidiaries except as set forth on the Information Certificate.
9.2 Financial Statements; No Material Adverse Change. All financial
------------------------------------------------
statements relating to Borrower delivered by Borrower to Agent have been
prepared in accordance with GAAP and fairly present the financial condition and
the results of operation of Borrower as at the dates and for the periods set
forth therein (subject, as to interim statements, to normal year-end adjustments
and the absence of footnotes). Except as disclosed in any interim financial
statements furnished by Borrower to Agent prior to the date of this Agreement,
there has been no material adverse change in the assets, liabilities, properties
and condition, financial or otherwise, of Borrower, since the date of the most
recent audited financial statements furnished by Borrower to Agent prior to the
date of this Agreement.
9.3 Chief Executive Office; Collateral Locations. The chief executive
--------------------------------------------
office of Borrower and Borrower's Records concerning Accounts and Inventory are
located only at the address set forth below and its only other places of
business and the only other locations of Collateral, if any, are the addresses
set forth in the Information Certificate, subject to the right of Borrower to
establish new locations in accordance with Section 10.2 below. The Information
Certificate correctly identifies any of such locations which are not owned by
Borrower and sets forth the owners and/or operators thereof and to the best of
Borrower's knowledge, the holders of any mortgages on such locations.
9.4 Priority of Liens; Title to Properties. The security interests and
--------------------------------------
liens granted to Agent, for itself and the benefit of Lender, under this
Agreement and the other Financing Agreements constitute valid and perfected
first priority liens and security interests in and upon the Collateral subject
only to the liens indicated on Schedule 9.4 hereto and the other liens permitted
under Section 9.8 hereof. Borrower has good and marketable title to all of its
properties and assets subject to no liens, mortgages, pledges, security
interests, encumbrances or charges of any kind, except those granted to Agent,
for the benefit of Lender, and such others as are specifically listed on
Schedule 9.4 hereto or permitted under Section 10.8 hereof.
9.5 Tax Returns. Borrower has filed, or caused to be filed, in a timely
-----------
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Agent) where the failure to file would have a Material Adverse Effect. All
information in such tax returns, reports and declarations is complete and
accurate in all material respects. Borrower has paid or caused to be paid all
material taxes due and payable or claimed due and payable in any assessment
received by it, and has collected, deposited and remitted in accordance with all
applicable laws all sales and/or use taxes applicable to the conduct of its
business, except taxes the validity of which are being contested in good faith
by appropriate proceedings diligently pursued and available to Borrower and with
respect to which adequate reserves have been set aside on its books. Adequate
36
<PAGE>
provision has been made for the payment of all accrued and unpaid Federal,
State, county, local, foreign and other taxes whether or not yet due and payable
and whether or not disputed. Borrower has collected and deposited in a separate
bank account or remitted to the appropriate tax authority all sales and/or use
taxes applicable to its business required to be collected under the laws of the
United States and each possession or territory thereof, and each State or
political subdivision thereof, including any State in which Borrower owns any
Inventory or owns or leases any other property.
9.6 Litigation. Except as set forth on the Information Certificate, there
----------
is no present investigation by any governmental agency pending, or to the best
of Borrower's knowledge threatened, against or affecting Borrower, its assets or
business and there is no action, suit, proceeding or claim by any Person
pending, or to the best of Borrower's knowledge threatened, against Borrower or
its assets or goodwill, or against or affecting any transactions contemplated by
this Agreement, which if adversely determined against Borrower would have a
Material Adverse Effect.
9.7 Compliance with Other Agreements and Applicable Laws.
----------------------------------------------------
(a) Borrower is not in default in any respect under, or in violation
in any respect of any of the terms of, any agreement, contract, instrument,
lease or other commitment to which it is a party or by which it or any of its
assets are bound where which default or violation would have a Material Adverse
Effect. Borrower is in compliance in all respects with the requirements of all
applicable laws, rules, regulations and orders of any governmental authority
relating to its business, including, without limitation, those set forth in or
promulgated pursuant to the Occupational Safety and Health Act of 1970, as
amended, the Fair Labor Standards Act of 1938, as amended, ERISA, the Code, as
amended, and the rules and regulations thereunder, all Federal, State and local
statutes, regulations, rules and orders relating to consumer credit (including,
without limitation, as each has been amended, the Truth-in-Lending Act, the Fair
Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit
Reporting Act, and regulations, rules and orders promulgated thereunder), all
Federal, State and local states, regulations, rules and orders pertaining to
sales of consumer goods (including, without limitation, the Consumer Products
Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as
amended, and all regulations, rules and orders promulgated thereunder) where the
failure to comply would have a Material Adverse Effect.
(b) Borrower has obtained all material permits, licenses, approvals,
consents, certificates, orders or authorizations of any governmental agency
required for the lawful conduct of its business. Schedule 9.7 hereto sets forth
all material permits, licenses, approvals, consents, certificates, orders or
authorizations (the "Permits") issued to or held by Borrower as of the date
hereof by any federal, state or local governmental agency and any applications
pending by Borrower with such federal, state or local governmental agency. The
Permits constitute all permits, licenses, approvals, consents, certificates,
orders or authorizations necessary for Borrower to own and operate its business
as presently conducted or proposed to be conducted
37
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where the failure to have such Permits would have a material adverse effect on
the business, performance, operations or properties of Borrower or the legality,
validity or enforceability of this Agreement or the other Financing Agreements
or the ability of Borrower to perform its obligations under the Agreement or any
of the other Financing Agreements or the rights and remedies of Agent and Lender
under this Agreement or any of the other Financing Agreements. All of the
Permits are valid and subsisting and in full force and effect. There are no
actions, claims or proceedings pending or, to the best of Borrower's knowledge,
threatened that seek the revocation, cancellation, suspension or modification of
any of the Permits.
9.8 Environmental Compliance.
------------------------
(a) Except as set forth on Schedule 9.8 hereto, Borrower has not
generated, used, stored, treated, transported, manufactured, handled, produced
or disposed of any Hazardous Materials, on or off its premises (whether or not
owned by it) in any manner which at any time violates any applicable
Environmental Law in any material respect or any license, permit, certificate,
approval or similar authorization issued to Borrower thereunder and the
operations of Borrower comply in all material respects with all applicable
Environmental Laws and all licenses, permits, certificates, approvals and
similar authorizations thereunder.
(b) Except as set forth on Schedule 9.8 hereto, there is no
investigation, proceeding, complaint, order, directive, claim, citation or
notice by any governmental authority or any other person pending or to the best
of Borrower's knowledge threatened, with respect to any non-compliance with or
violation of the requirements of any applicable Environmental Law by Borrower
nor has there been any release, spill or discharge, overtly threatened or
actual, of any Hazardous Material on any properties of Borrower, or to the best
of Borrower's knowledge, releases, spills or discharges from any properties at
which Borrower has transported, stored or disposed of any Hazardous Materials
which would have a Material Adverse Effect.
(c) Except as set forth in Schedule 9.8 hereto, Borrower has no
material liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any Hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture, handling,
production or disposal of any Hazardous Materials.
(d) Borrower has all licenses, permits, certificates, approvals or
similar authorizations required to be obtained or filed in connection with the
operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect in each case where the failure to obtain or maintain such
licenses, permits, certificates, approvals or similar authorizations would have
a material adverse effect on the assets or business of Borrower or would impair
the ability of Borrower to perform its obligations hereunder or under any of the
other Financing Agreements to which it is a party or of Agent or Lender to
enforce any Obligations or realize upon any Collateral.
38
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9.9 Credit Card Agreements. Set forth in Schedule 9.9 hereto is a correct
----------------------
and complete list of (a) all of the Credit Card Agreements and all other
agreements, documents and instruments existing as of the date hereof between or
among Borrower, any of its affiliates, the Credit Card Issuers, the Credit Card
Processors and any of their affiliates, (b) the percentage of each sale payable
to the Credit Card Issuer or Credit Card Processor under the terms of the Credit
Card Agreements, (c) all other fees and charges payable by Borrower under or in
connection with the Credit Card Agreements and (d) the term of such Credit Card
Agreements. The Credit Card Agreements constitute all of such agreements
necessary for Borrower to operate its business as presently conducted with
respect to credit cards and debit cards and no Accounts of Borrower arise from
purchases by customers of Inventory with credit cards or debit cards, other than
those which are issued by Credit Card Issuers with whom Borrower has entered
into one of the Credit Card Agreements set forth on Schedule 9.9 hereto or with
whom Borrower has entered into a Credit Card Agreement in accordance with
Section 10.13 hereof. Each of the Credit Card Agreements constitutes the legal,
valid and binding obligations of Borrower and to the best of Borrower's
knowledge, the other parties thereto, enforceable in accordance with their
respective terms and is in full force and effect. No default or event of
default, or act, condition or event which after notice or passage of time or
both, would constitute a default or an event of default under any of the Credit
Card Agreements exists or has occurred. Borrower and the other parties thereto
have complied with all of the terms and conditions of the Credit Card Agreements
to the extent necessary for Borrower to be entitled to receive all payments
thereunder.
9.10 Employee Benefits.
-----------------
(a) Borrower has not engaged in any transaction in connection with
which Borrower or any of its ERISA Affiliates could be subject to either a civil
penalty assessed pursuant to ERISA or a tax imposed the Code, including any
accumulated funding deficiency described in Section 9.10(c) hereof and any
deficiency with respect to vested accrued benefits described in Section 9.10(d)
hereof.
(b) No material liability to the Pension Benefit Guaranty Corporation
has been or is expected by Borrower to be incurred with respect to any employee
benefit plan of Borrower or any of its ERISA Affiliates. There has been no
reportable event (within the meaning of ERISA) or any other event or condition
with respect to any employee benefit plan of Borrower or any of its ERISA
Affiliates which presents a risk of termination of any such plan by the Pension
Benefit Guaranty Corporation.
(c) Full payment has been made of all amounts which Borrower or any
of its ERISA Affiliates is required under ERISA and the Code to have paid under
the terms of each employee benefit plan as contributions to such plan as of the
last day of the most recent fiscal year of such plan ended prior to the date
hereof, and no material accumulated funding deficiency (as defined in ERISA and
the Code), whether or not waived, exists with respect to any employee pension
benefit plan, including any penalty or tax described in Section 9.10(a) hereof
and any deficiency with respect to vested accrued benefits described in Section
9.10(d) hereof.
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(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 9.10(a) hereof and any accumulated funding deficiency
described in Section 9.10(d) hereof. The terms "current value" and "accrued
benefit" have the meanings specified in ERISA.
(e) Neither Borrower nor any of its ERISA Affiliates is or has ever
been obligated to contribute to any "multiemployer plan" (as such term is
defined in ERISA) that is subject to Title IV of ERISA.
9.11 Bank Accounts. All of the deposit accounts, investment accounts or
-------------
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 7.3 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 10.16
below.
9.12 Accuracy and Completeness of Information. All information furnished
----------------------------------------
by or on behalf of Borrower in writing to Agent or Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading.
9.13 Survival of Warranties; Cumulative. All representations and
----------------------------------
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Agent and Lender on the date of each additional
borrowing or other credit accommodation hereunder and shall be conclusively
presumed to have been relied on by Agent and Lender regardless of any
investigation made or information possessed by Agent and Lender. The
representations and warranties set forth herein shall be cumulative and in
addition to any other representations or warranties which Borrower shall now or
hereafter give, or cause to be given, to Agent and Lender.
SECTION 10. AFFIRMATIVE AND NEGATIVE COVENANTS
----------------------------------
10.1 Maintenance of Existence. Borrower shall at all times preserve,
------------------------
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Agent thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Agent a copy of the amendment to the articles
of incorporation of Borrower providing
40
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for the name change certified by the Secretary of State of the jurisdiction of
incorporation of Borrower as soon as it is available.
10.2 New Collateral Locations. Borrower may open any new location within
------------------------
the continental United States provided Borrower (a) gives Agent thirty (30) days
prior written notice of the intended opening of any such new location and (b)
executes and delivers, or causes to be executed and delivered, to Agent such
agreements, documents, and instruments as Agent may deem reasonably necessary or
desirable to protect its interests in the Collateral at such location, including
UCC financing statements.
10.3 Compliance with Laws, Regulations, Etc. Borrower shall at all times
---------------------------------------
comply in all material respects with all applicable provisions of laws, rules,
regulations, licenses, permits, approvals and orders and duly observe all
material requirements, of any foreign, Federal, State or local governmental
authority, including, without limitation, the Occupational Safety and Health Act
of 1970, as amended, the Code, the Fair Labor Standards Act of 1938, as amended,
and the rules and regulations thereunder, all Federal, State and local statutes,
regulations, rules and orders relating to consumer credit (including, without
limitation, as each has been amended, the Truth-in-Lending Act, the Fair Credit
Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act,
and regulations, rules and orders promulgated thereunder), all Federal, State
and local statutes, regulations, rules and orders pertaining to sales of
consumer goods (including, without limitation, the Consumer Products Safety Act
of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended,
and all regulations, rules and orders promulgated thereunder) and all statutes,
rules, regulations, orders, permits and stipulations relating to environmental
pollution and employee health and safety, including, without limitation, all
Environmental Laws.
10.4 Payment of Taxes and Claims. Borrower shall duly pay and discharge
---------------------------
all material taxes, assessments, contributions and governmental charges upon or
against it or its properties or assets, except for taxes the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower and with respect to which adequate reserves have been
set aside on its books. Borrower shall be liable for any tax or penalties
imposed on Agent or any Lender as a result of the financing arrangements
provided for herein and Borrower agrees to indemnify and hold Agent and Lender
harmless with respect to the foregoing, and to repay to Agent and Lender on
demand the amount thereof, and until paid by Borrower such amount shall be added
and deemed part of the Loans, provided, that, nothing contained herein shall be
-------- ----
construed to require Borrower to pay any income or franchise taxes attributable
to the income of Agent or Lender from any amounts charged or paid hereunder to
Agent or Lender. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
10.5 Insurance. Borrower shall, at all times, maintain with financially
---------
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations
41
<PAGE>
of established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to Agent as
to form, amount and insurer. Borrower shall furnish certificates, policies or
endorsements to Agent as Agent shall require as proof of such insurance, and, if
Borrower fails to do so, Agent is authorized, but not required, to obtain such
insurance at the expense of Borrower. All policies shall provide for at least
thirty (30) days prior written notice to Agent of any cancellation or reduction
of coverage and that Agent may act as attorney for Borrower in obtaining, and at
any time an Event of Default exists or has occurred and is continuing,
adjusting, settling, amending and canceling such insurance. Borrower shall cause
Agent to be named as a loss payee and an additional insured (but without any
liability for any premiums) under such insurance policies and Borrower shall
obtain non-contributory lender's loss payable endorsements to all insurance
policies in form and substance satisfactory to Agent. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Agent, for the benefit of Lender, as its interests may appear and further
specify that Agent shall be paid regardless of any act or omission by Borrower
or any of its affiliates. At its option, Agent may apply any insurance proceeds
received by Agent at any time to the cost of repairs or replacement of
Collateral and/or to payment of the Obligations, whether or not then due, in any
order and in such manner as Agent may determine or hold such proceeds as cash
collateral for the Obligations, except, that, notwithstanding anything to the
------ ----
contrary contained herein, in the event that any of the Collateral shall be lost
or physically damaged or destroyed, upon the written request of Borrower, Agent
shall release the net cash proceeds from insurance received by Agent pursuant to
this Section 10.5 to Borrower as a result of such loss, damage or destruction
provided, that, all of the following conditions are satisfied: (a) no Event of
- -------- ----
Default or act, condition or event which with notice or passage of time or both
would constitute an Event of Default shall exist or have occurred and be
continuing, (b) the amount of the insurance proceeds are sufficient, in Agent's
determination, to effect such repair, refurbishing or replacement in a
satisfactory manner, (c) such proceeds shall be used first to repair, refurbish
or replace the Collateral so lost, damaged or destroyed (free and clear of any
security interests, liens, claims or encumbrances), (d) the insurance carrier
shall have waived any right of subrogation against Borrower under its policy,
and (e) the casualty resulted in a payment of $500,000 in insurance proceeds or
less.
10.6 Financial Statements and Other Information.
------------------------------------------
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its Subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Agent: (i) within thirty (30) days after the end of each fiscal month, monthly
unaudited consolidated financial statements, and, if Borrower has any
Subsidiaries, unaudited consolidating financial statements (including in each
case balance sheets, statements of income and loss, statements of cash flow and
statements of shareholders' equity), all in reasonable detail, fairly presenting
the financial position and the results of the operations of Borrower and its
Subsidiaries as of the end of and through such fiscal month and (ii) within
ninety (90) days after the end of each fiscal year, audited consolidated
financial statements and, if
42
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Borrower has any Subsidiaries, audited consolidating financial statements of
Borrower and its Subsidiaries (including in each case balance sheets, statements
of income and loss, statements of cash flow and statements of shareholders'
equity), and the accompanying notes thereto, all in reasonable detail, fairly
presenting the financial position and the results of the operations of Borrower
and its Subsidiaries as of the end of and for such fiscal year, together with
the unqualified opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrower and
reasonably acceptable to Agent, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrower and its Subsidiaries as of the end of and
for the fiscal year then ended.
(b) Borrower shall promptly notify Agent in writing of the details of
(i) any loss, damage, investigation, action, suit, proceeding or claim relating
to the Collateral or any other property which is security for the Obligations or
which would result in any material adverse change in Borrower's business,
properties, assets, goodwill or condition, financial or otherwise and (ii) the
occurrence of any Event of Default or act, condition or event which, with the
passage of time or giving of notice or both, would constitute an Event of
Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Agent copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(d) Borrower shall furnish or cause to be furnished to Agent such
budgets, forecasts, projections and other information respecting the Collateral
and the business of Borrower, as Agent may, from time to time, reasonably
request. Agent and Lender are hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Borrower to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Borrower hereby irrevocably
authorizes and directs all accountants or auditors to deliver to Agent, at
Borrower's expense, copies of the financial statements of Borrower and any
reports or management letters prepared by such accountants or auditors on behalf
of Borrower and to disclose to Agent such information as they may have regarding
the business of Borrower. Any documents, schedules, invoices or other papers
delivered to Agent may be destroyed or otherwise disposed of by Agent one (1)
year after the same are delivered to Agent, except as otherwise designated by
Borrower to Agent in writing.
10.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower
--------------------------------------------------------
shall not, directly or indirectly:
(a) merge into or with or consolidate with any other Person or permit
any other Person to merge into or with or consolidate with it, except, that,
------ ----
Borrower may merge with and into or consolidate with any other Person, provided,
--------
that, each of the following conditions is
- ----
43
<PAGE>
satisfied as determined by Agent: (i) Agent shall have received not less than
twenty (20) Business Days prior written notice of the intention of Borrower to
so merge or consolidate and such information with respect thereto as Agent may
request, (ii) as of the effective date of the merger or consolidation and after
giving effect thereto, no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of Default,
shall exist or have occurred and be continuing, (iii) promptly upon Agent's
request, Borrower shall furnish, or cause to be furnished to Agent, true,
correct and complete copies of all agreements, documents and instruments
relating to such merger or consolidation, including, but not limited to, the
certificate or certificates of merger or consolidation as filed with each
appropriate Secretary of State, (iv) promptly upon Agent's requests, the
surviving entity shall immediately upon the effectiveness of the merger or
consolidation expressly confirm in writing pursuant to an agreement, in form and
substance satisfactory to Agent, its continuing liability in respect of the
Obligations and Financing Agreements and execute and deliver such other
agreements, documents and instruments as Agent may request in connection
therewith, (v) any Obligor shall, promptly upon Agent's request, ratify and
confirm, in form and substance satisfactory to Agent, that its guarantee of the
Obligations shall apply to the Obligations as assumed by such surviving entity,
(vi) the Person with whom Borrower is merging or consolidating shall be engaged
in the same or a similar business as Borrower, (vii) the assets acquired by
Borrower pursuant to such merger or consolidation shall be free and clear of any
security interest, mortgage, pledge, lien, charge or other encumbrance, (viii)
at its option, Agent shall have conducted a field examination with respect to
the Person, its assets and its business with whom Borrower is merging or
consolidating, and so long as the results thereof are satisfactory, Inventory
acquired by Borrower pursuant to such merger or consolidation may be considered
Eligible Inventory, subject to the terms and conditions contained herein, (ix)
in no event shall the total amount of all payments by Borrower in connection
with such merger or consolidation (whether as consideration for the merger or
consolidation or otherwise), together with capital contributions, loans or other
payments by Borrower permitted under Section 10.10(d), exceed $1,500,000, (x) as
of the date of any such payment, the daily average of the Excess Availability
for the immediately preceding thirty (30) consecutive day period shall be not
less than $2,500,000, and as of the date of any such capital contribution, loan
or other payment and after giving effect thereto, the Excess Availability shall
be not less than $1,000,000, (xi) the surviving entity shall, immediately before
and immediately after giving effect to such transaction or series of
transactions have a net worth (including, without limitation, any Indebtedness
incurred or anticipated to be incurred in connection with or in respect of such
transaction or series of transactions) equal to or greater than the net worth it
had immediately prior to such transaction or series of transactions, and (xii)
Borrower shall not become obligated with respect to any obligations or
indebtedness, nor shall any of its property become subject to any security
interest, lien, claim or other encumbrance, pursuant to such merger or
consolidation, or
(b) sell, assign, lease, transfer, abandon or otherwise dispose of any
Capital Stock or indebtedness to any other Person or any of its assets to any
other Person, except for:
------ ---
(i) sales of Inventory in the ordinary course of business,
44
<PAGE>
(ii) sales of Equipment and fixtures (other than sales permitted
pursuant to Section 10.7(b)(iii) and Section 10.7(b)(iv) below), in the ordinary
course of the business of Borrower; provided, that, as to each and all such
-------- ----
sales, each of the following conditions is satisfied: (A) the consideration
received in connection with any such sale or disposition shall be at least equal
to the fair market value of such assets, (B) the fair market value of any such
assets so sold by Borrower in a single transaction or series of related
transactions shall not exceed $250,000 in any one case or $600,000 in the
aggregate for all such assets so sold by Borrower in any fiscal year, (C) any
and all net cash proceeds payable or delivered to Borrower from such sales shall
be used to repay any indebtedness which is secured by a purchase money security
interest or other security interest on the asset so sold or otherwise disposed
of and any remaining proceeds shall be either: (1) paid or delivered, or caused
to be paid or delivered, to Agent either, at Agent's option, for application to
the Obligations or to be held by Agent as cash collateral for the Obligations on
terms and conditions acceptable to Agent or (2) used to purchase assets to be
used in the ordinary course of the business of Borrower to replace the assets
sold or otherwise disposed of by Borrower within ten (10) Business Days after
the receipt of such proceeds by Borrower, which replacements shall have a fair
market value in the aggregate of not less than the fair market value of the
assets being replaced, (D) Agent shall have received not less than ten (10)
Business Days prior written notice of any such sale or other disposition of
assets having a fair market value in excess of $25,000, which notice shall set
forth in reasonable detail satisfactory to Agent, the parties to such sale or
other disposition, the assets to be sold or otherwise disposed of, the purchase
price and the manner of payment thereof and such other information with respect
thereto as Agent may request and (E) as of the date of such sale and after
giving effect thereto, no Event of Default or act, condition or event which with
notice or passage of time would constitute an Event of Default shall exist or
have occurred and be continuing,
(iii) the disposition of worn-out or obsolete Equipment so long as
(A) if an Event of Default exists or has occurred and is continuing, any
proceeds are paid to Agent, for the benefit of Lender, and (B) such sales do not
involve Equipment having an aggregate fair market value in excess of $250,000
for all such Equipment disposed of in any fiscal year of Borrower,
(iv) sales or other dispositions by Borrower of assets in
connection with the closing or sale of a retail store location of Borrower in
the ordinary course of Borrower's business which consist of leasehold interests
in the premises of such store, the Equipment and fixtures located at such
premises and the books and records relating exclusively and directly to the
operations of such store; provided, that, as to each and all such sales, (A) on
-------- ----
the date of, and after giving effect to, any such sale, in any calendar year,
Borrower shall not have closed or sold retail store locations accounting for
more than ten (10%) percent of all sales of Borrower in the immediately
preceding twelve (12) month period, (B) Agent shall have received not less than
ten (10) Business Days prior written notice of such sale, which notice shall set
forth in reasonable detail satisfactory to Agent, the parties to such sale or
other disposition, the assets to be sold or otherwise disposed of, the purchase
price and the manner of payment thereof and such other information with respect
thereto as Agent may request, (C) as of the date of such sale or other
45
<PAGE>
disposition and after giving effect thereto, no Event of Default, or act,
condition or event which with notice or passage of time would constitute an
Event of Default, shall exist or have occurred, (D) such sale shall be on
commercially reasonable prices and terms in a bona fide arm's length
---- ----
transaction, and (E) any and all net proceeds payable or delivered to Borrower
in respect of such sale or other disposition shall be paid or delivered, or
caused to be paid or delivered, to Agent, for the benefit of Lender, in
accordance with the terms of this Agreement either, at Agent's option, for
application to the Obligations in accordance with the terms hereof (except to
the extent such proceeds reflect payment in respect of indebtedness secured by a
properly perfected first priority security interest in the assets sold, in which
case, such proceeds shall be applied to such indebtedness secured thereby) or to
be held by Agent as cash collateral for the Obligations on terms and conditions
acceptable to Agent,
(v) the issuance and sale by Borrower of Capital Stock of Borrower
after the date hereof, provided, that, (A) Agent shall have received not less
-------- ----
than ten (10) Business Days prior written notice of such issuance and sale by
Borrower, which notice shall specify the parties to whom such shares are to be
sold, the terms of such sale, the total amount which it is anticipated will be
realized from the issuance and sale of such stock and the net cash proceeds
which it is anticipated will be received by Borrower from such sale, (B)
Borrower shall not be required to pay any dividends or repurchase or redeem such
Capital Stock or make any other payments in respect thereof, (C) the terms of
such Capital Stock, and the terms and conditions of the purchase and sale
thereof, shall not include any terms that include any limitation on the right of
Borrower to request or receive Loans or Letter of Credit Accommodations or to
amend or modify any of the terms and conditions of this Agreement or any of the
other Financing Agreements or otherwise in any way relate to or affect the
arrangements of Borrower with Agent and Lender or are more restrictive or
burdensome to Borrower than the terms of any Capital Stock in effect on the date
hereof, and (D) as of the date of such issuance and sale and after giving effect
thereto, no Event of Default or act, condition or event which with notice or
passage of time or both would constitute an Event of Default shall exist or have
occurred; or
(c) form or acquire any Subsidiaries, except, that, Borrower may form
------ ----
or acquire Subsidiaries after the date hereof; provided, that, each of the
-------- ----
following conditions is satisfied, as determined by Agent: (i) promptly upon
such formation or acquisition, Borrower shall cause any such Subsidiary to
execute and deliver to Agent, in form and substance satisfactory to Agent: (A)
an absolute and unconditional guarantee of payment of all of the Obligations,
(B) a general security agreement granting to Agent, for itself and the benefit
of Lender, a first and only security interest in and lien upon all of the assets
and properties of such Subsidiary, (C) related Uniform Commercial Code financing
statements, and (D) such other agreements, documents and instruments as Agent
may reasonably require, (ii) promptly upon Agent's request, borrower shall
deliver the original stock certificates evidencing such shares of Capital Stock,
together with stock powers with respect thereto duly executed in blank, (iii)
the amount of the investment by Borrower in the Capital Stock of such Subsidiary
and any other amounts paid by Borrower to or for the formation or acquisition of
such Subsidiary shall not exceed the amounts permitted under
46
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Section 10.10 hereof and (iv) no Event of Default, or act, condition or event
which with notice or passage of time or both would constitute an Event of
Default, shall exist or have occurred;
(d) wind up, liquidate or dissolve, or
(e) agree to do any of the foregoing.
10.8 Encumbrances. Borrower shall not create, incur, assume or suffer to
------------
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including, without
limitation, the Collateral, except:
------
(a) liens and security interests of Agent, for itself and the benefit
of Lender;
(b) liens securing the payment of taxes, either not yet overdue or the
validity of which are being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower and with respect to which adequate
reserves have been set aside on its books;
(c) non-consensual statutory liens (other than liens securing the
payment of taxes) arising in the ordinary course of Borrower's business to the
extent: (i) such liens secure indebtedness which is not overdue or (ii) such
liens secure indebtedness relating to claims or liabilities which are fully
insured and being defended at the sole cost and expense and at the sole risk of
the insurer or being contested in good faith by appropriate proceedings
diligently pursued and available to Borrower, in each case prior to the
commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books;
(d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of Real Property which do not interfere in any
material respect with the use of such Real Property or ordinary conduct of the
business of Borrower as presently conducted thereon or materially impair the
value of the Real Property which may be subject thereto;
(e) purchase money security interests in Equipment (including capital
leases) and fixtures, and purchase money mortgages on real estate, or other
security interests in equipment and fixtures, arising after the date hereof to
secure indebtedness permitted under Sections 10.9(c) and 10.9(d) hereof, in each
case, so long as such security interests and mortgages do not apply to any
property of Borrower other than the Equipment or real estate so acquired or
otherwise subject to such security interest, and the indebtedness secured
thereby does not exceed the cost of the Equipment or real estate so acquired or
otherwise subject to such security interest, as the case may be;
(f) liens or rights of setoff or credit balances of Borrower with
Credit Card Issuers, but not liens on or rights of setoff against any other
property or assets of Borrower
47
<PAGE>
pursuant to the Credit Card Agreements (as in effect on the date hereof) to
secure the obligations of Borrower to the Credit Card Issuers as a result of
fees and chargebacks;
(g) deposits of cash with the owner or lessor of premises leased and
operated by Borrower in the ordinary course of the business of Borrower to
secure the performance by Borrower of its obligations under the terms of the
lease for such premises; and
(h) the liens and security interests set forth on Schedule 9.4 hereto.
10.9 Indebtedness. Borrower shall not incur, create, assume, become or be
------------
liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, except:
(a) the Obligations;
(b) trade obligations and normal accruals in the ordinary course of
business not yet due and payable, or with respect to which Borrower is
contesting in good faith the amount or validity thereof by appropriate
proceedings diligently pursued and available to Borrower and with respect to
which adequate reserves have been set aside on its books;
(c) purchase money indebtedness of Borrower (including capital
leases) to the extent not secured by liens (including capital leases) in
violation of any other provision of this Agreement, provided, that, the
-------- ----
aggregate amount of such indebtedness incurred after the date hereof, together
with indebtedness of Borrower permitted under Section 10.9(d) below, shall not
exceed $2,500,000 in the aggregate for any fiscal year of Borrower, except,
------
that, to the extent Borrower may incur indebtedness under this Section 10.9(c)
- ----
and Section 10.9(d) in the aggregate in any one fiscal year, commencing with the
fiscal year of Borrower ending on the Saturday closest to January 31, 1998 in
amounts less than $2,500,000, Borrower may incur additional amounts of
indebtedness under this Section 10.9(c) and Section 10.9(d) in the aggregate in
any of the following fiscal years in amounts up to the difference between
$2,500,000 and the actual amount of such indebtedness under Section 10.9(d) and
this Section 10.9(c) incurred in such prior fiscal years (but in no event shall
such indebtedness incurred under Section 10.9(d) and this Section 10.9(c) in the
aggregate in any one fiscal year exceed $5,000,000);
(d) indebtedness of Borrower arising after the date hereof in
connection with loans by a financial institution to Borrower based on the value
of, and secured only by a security interest in, Equipment or fixtures of
Borrower acquired after the date hereof, provided, that:
-------- ----
(i) as to any such indebtedness, (A) Agent shall have received
not less than ten (10) Business Days prior written notice of the intention to
incur such indebtedness, which notice shall set forth in reasonable detail
satisfactory to Agent, the amount of such indebtedness, the person to whom such
indebtedness will be owed, the interest rate, the schedule of repayments and
maturity date with respect thereto and such other information with respect
thereto as Agent may request, (B) Agent shall have received true, correct and
complete copies of all agreements,
48
<PAGE>
documents and instruments evidencing or otherwise related to such indebtedness,
as duly authorized, executed and delivered by the parties thereto, (C) such
indebtedness shall be incurred by Borrower at commercially reasonable rates and
terms in a bona fide arm's length transaction, (D) such indebtedness shall not
---- ----
at any time include terms and conditions which in any manner adversely affect
Agent or any rights of Agent as determined in good faith by Agent or which are
more restrictive or burdensome than the terms or conditions of any other
indebtedness of Borrower (taken as a whole) as in effect on the date hereof, (E)
Borrower shall cause the person to whom such indebtedness is owed to remit all
of the proceeds of the loans giving rise to such indebtedness directly to Agent
for application to the Obligations in such order and manner as Agent shall
determine, (F) such indebtedness shall only be secured by Equipment or fixtures
to the extent the security interest therein is permitted under Section 10.8
hereof, (G) as of the date of incurring such indebtedness and after giving
effect thereto, no Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default shall exist or
have occurred, (H) the aggregate amount of such indebtedness incurred after the
date hereof, together with indebtedness of Borrower permitted under Section
10.9(c) above, shall not exceed $2,500,000 in the aggregate for any fiscal year
of Borrower, except, that, to the extent Borrower may incur indebtedness under
------ ----
Section 10.9(c) and this Section 10.9(d) in the aggregate in any one fiscal
year, commencing with the fiscal year of Borrower ending on the Saturday closest
to January 31, 1998, in amounts less than $2,500,000, Borrower may incur
additional amounts of indebtedness under Section 10.9(c) and this Section
10.9(d) in the aggregate in any of the following fiscal years in amounts up to
the difference between $2,500,000 and the actual amount of such indebtedness
under Section 10.9(c) and this Section 10.9(d) incurred in such prior fiscal
years (but in no event shall such indebtedness incurred under Section 10.9(c)
and this Section 10.9(d) in the aggregate in any one fiscal year exceed
$5,000,000), (I) Borrower may only make regularly scheduled payments of
principal and interest in respect of such indebtedness, (J) Borrower shall not,
directly or indirectly, (1) amend, modify, alter or change the terms of the
agreements with respect to such indebtedness or (2) redeem, retire, defease,
purchase or otherwise acquire such indebtedness, or set aside or otherwise
deposit or invest any sums for such purpose, and (K) Borrower shall furnish to
Agent all notices or demands in connection with such indebtedness either
received by Borrower or on its behalf, promptly after the receipt thereof, or
sent by Borrower or on its behalf, concurrently with the sending thereof, as the
case may be; and
(ii) so long as each of the conditions set forth in Section 10.9(d)(i)
above are satisfied, as determined by Agent in good faith, to the extent
required by the financial institution making such loans, Agent shall, upon
Borrower's request and at Borrower's expense, execute and deliver to Borrower a
UCC partial release, in form and substance satisfactory to Agent, with respect
to the Equipment or fixtures which constitute collateral for such indebtedness;
(e) obligations or indebtedness existing as of the date hereof (and
after giving effect to the terms hereof) set forth on Schedule 10.9 hereto,
provided, that, (i) Borrower may only make regularly scheduled payments of
- -------- ----
principal and interest in respect of such indebtedness
49
<PAGE>
in accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof, (ii) Borrower shall
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise
acquire such indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and (iii) Borrower shall furnish to Agent all notices or
demands in connection with such indebtedness either received by Borrower or on
its behalf, promptly after the receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
10.10 Loans, Investments, Guarantees, Etc. Borrower shall not, directly
------------------------------------
or indirectly, make any loans or advance money or property to any person, or
invest in (by capital contribution, dividend or otherwise) or purchase or
repurchase the Capital Stock or indebtedness or all or a substantial part of the
assets or property of any person, or guarantee, assume, endorse, or otherwise
become responsible for (directly or indirectly) the indebtedness, performance,
obligations or dividends of any Person or agree to do any of the foregoing,
except:
- ------
(a) the endorsement of instruments for collection or deposit in the
ordinary course of business;
(b) investments in: (i) short-term direct obligations of the United
States Government, (ii) negotiable certificates of deposit issued by any bank
satisfactory to Agent, payable to the order of the Borrower or to bearer and
delivered to Agent, and (iii) commercial paper rated A1 or P1; provided, that,
-------- ----
as to any of the foregoing, unless waived in writing by Agent, Borrower shall
take such actions as are deemed necessary by Agent to perfect the security
interest of Agent, for the ratable benefit of Lender, in such investments;
(c) the existing investment of Borrower in the Capital Stock of
Children's Products, Inc.;
(d) capital contributions, loans or other payments by Borrower to any
wholly-owned Subsidiary of Borrower formed after the date hereof in accordance
with Section 9.7 or loans by Borrower to employees of Borrower after the date
hereof, provided, that, each of the following conditions is satisfied as
-------- ----
determined by Agent: (i) in no event shall the total amount of capital
contributions, loans or other amounts paid by Borrower to or for the formation
or acquisition of all such Subsidiaries, together with all loans by Borrower to
employees of Borrower, and amounts paid in connection with any merger or
consolidation permitted under Section 10.7 hereof, exceed $1,500,000, (ii) at
the time of any such capital contribution, loan or other payment and after
giving effect thereto, no Event of Default or act, condition or event which with
notice and passage of time or both would constitute an Event of Default, shall
exist or have occurred, (iii) in the case of any loans by Borrower to a
Subsidiary or employee, the indebtedness arising from such loans shall not be
evidenced by any promissory note or other instrument, unless the original of
such note or other instrument is delivered to Agent, duly endorsed and assigned
by the payee to Agent in a form and manner acceptable to Agent, (iv) in
50
<PAGE>
the case of any loan by Borrower to employees of Borrower, such loans shall be
for reasonable and necessary work-related travel or other ordinary business
expenses to be incurred by such employees in connection with their work for
Borrower or for the relocation of such employees in connection with their work
for Borrower, or for any other purpose related in any manner to their employment
by Borrower, and (v) as of the date of any such capital contribution, loan or
other payment, the daily average of the Excess Availability for the immediately
preceding thirty (30) consecutive day period shall be not less than $2,500,000,
and as of the date of any such capital contribution, loan or other payment and
after giving effect thereto, the Excess Availability shall be not less than
$1,000,000, and
(e) the existing loans, advances and guarantees by Borrower
outstanding as of the date hereof as set forth on Schedule 10.10 hereto;
provided, that, as to such loans, advances and guarantees, (i) Borrower shall
- -------- ----
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such loans, advances or guarantees or any agreement, document or instrument
related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase
or otherwise acquire such guarantee or set aside or otherwise deposit or invest
any sums for such purpose and (ii) Borrower shall furnish to Agent all notices,
demands or other materials in connection with such loans, advances or guarantees
either received by Borrower or on its behalf, promptly after the receipt
thereof, or sent by Borrower or on its behalf, concurrently with the sending
thereof, as the case may be.
10.11 Dividends and Redemptions. Borrower shall not, directly or
-------------------------
indirectly, declare or pay any dividends on account of any shares of class of
Capital Stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of Capital Stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
10.12 Transactions with Affiliates. Borrower shall not directly or
----------------------------
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, employee, shareholder, director, agent or
any other person affiliated with Borrower, except in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than Borrower would obtain in
a comparable arm's length transaction with an unaffiliated person or (b) make
any payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable compensation
to officers, employees and directors for services rendered to Borrower in the
ordinary course of business.
10.13 Credit Card Agreements. Borrower shall (a) observe and perform all
----------------------
material terms, covenants, conditions and provisions of the Credit Card
Agreements to be observed and performed by it at the times set forth therein;
(b) not do, permit, suffer or refrain from doing
51
<PAGE>
anything, as a result of which there could be a default under or breach of any
of the terms of any of the Credit Card Agreements and (c) at all times maintain
in full force and effect the Credit Card Agreements and not terminate, cancel,
surrender, modify, amend, waive or release any of the Credit Card Agreements, or
consent to or permit to occur any of the foregoing; except, that, (i) Borrower
may terminate or cancel any of the Credit Card Agreements in the ordinary course
of the business of Borrower; provided, that, Borrower shall give Agent not less
-------- ----
than fifteen (15) days prior written notice of its intention to so terminate or
cancel any of the Credit Card Agreements; (d) not enter into any new Credit Card
Agreements with any new Credit Card Issuer unless (i) Agent shall have received
not less than fifteen (15) days prior written notice of the intention of
Borrower to enter into such agreement (together with such other information with
respect thereto as Agent may request) and (ii) Borrower delivers, or causes to
be delivered to Agent, a Credit Card Acknowledgment in favor of Agent, for the
ratable benefit of Lender; (e) give Agent immediate written notice of any Credit
Card Agreement entered into by Borrower after the date hereof, together with a
true, correct and complete copy thereof and such other information with respect
thereto as Agent may request; and (f) furnish to Agent, promptly upon the
request of Agent, such information and evidence as Agent may require from time
to time concerning the observance, performance and compliance by Borrower or the
other party or parties thereto with the terms, covenants or provisions of the
Credit Card Agreements.
10.14 Adjusted Tangible Net Worth. Borrower shall, at all times, maintain
---------------------------
Adjusted Tangible Net Worth of not less than the respective amounts set forth
below for the period indicated:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C> <C>
(a) From the date hereof to November 30, 1997 $18,000,000
(b) From December 1 of each year to and including
March 31 of the next year $23,000,000
(c) From April 1 of each year to and including
November 30 of such year $16,500,000
</TABLE>
10.15 Compliance with ERISA.
(a) Borrower shall not with respect to any "employee benefit plans"
maintained by Borrower or any of its ERISA Affiliates: (i) terminate any of
such employee pension plans so as to incur any liability to the Pension Benefit
Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to
exist any prohibited transaction involving any of such employee benefit plans or
any trust created thereunder which would subject Borrower or such ERISA
Affiliate to a tax or penalty or other liability on prohibited transactions
imposed under the Code or ERISA, (iii) fail to pay to any such employee benefit
plan any contribution which it is obligated to pay under ERISA, the Code or the
terms of such plan, (iv) allow or suffer to exist
52
<PAGE>
any accumulated funding deficiency, whether or not waived, with respect to any
such employee benefit plan, (v) allow or suffer to exist any occurrence of a
reportable event or any other event or condition which presents a material risk
of termination by the Pension Benefit Guaranty Corporation of any such employee
benefit plan that is a single employer plan, which termination could result in
any liability to the Pension Benefit Guaranty Corporation or (vi) incur any
withdrawal liability with respect to any multiemployer pension plan.
(b) As used in this Section 10.15, the term "employee pension
benefit plans," "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
the Code and ERISA.
10.16 Additional Bank Accounts. Borrower shall not, directly or
------------------------
indirectly, open, establish or maintain any deposit account, investment account
or any other account with any bank or other financial institution, other than
the Blocked Accounts and the accounts set forth in Schedule 7.3 hereto, except:
(a) as to any new or additional Blocked Accounts and other such new or
additional accounts which contain any Collateral or proceeds thereof, with the
prior written consent of Agent and subject to such conditions thereto as Agent
may establish and (b) as to any accounts used by Borrower to make payments of
payroll, taxes or other obligations to third parties, after prior written notice
to Lender.
10.17 Costs and Expenses. Borrower shall pay to Agent, for the benefit of
------------------
Lender, on demand all costs, expenses, filing fees and taxes paid or payable in
connection with the preparation, negotiation, execution, delivery, recording,
administration, collection, liquidation, enforcement and defense of the
Obligations, the rights of Agent, for the benefit of Lender, in the Collateral,
this Agreement, the other Financing Agreements and all other documents related
hereto or thereto, including any amendments, supplements or consents which may
hereafter be contemplated (whether or not executed) or entered into in respect
hereof and thereof, including: (a) all costs and expenses of filing or recording
(including Uniform Commercial Code financing statement filing taxes and fees,
documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable); (b) all insurance premiums, appraisal fees and search fees; (c)
costs and expenses of remitting loan proceeds, collecting checks and other items
of payment, and establishing and maintaining the Blocked Accounts, together with
Agent's customary charges and fees with respect thereto; (d) charges, fees or
expenses charged by any issuer in connection with the Letter of Credit
Accommodations; (e) costs and expenses of preserving and protecting the
Collateral; (f) costs and expenses paid or incurred in connection with obtaining
payment of the Obligations, enforcing the security interests and liens of Agent,
for the benefit of Lender, selling or otherwise realizing upon the Collateral,
and otherwise enforcing the provisions of this Agreement and the other Financing
Agreements or defending any claims made or threatened against Agent and/or
Lender arising out of the transactions contemplated hereby and thereby
(including preparations for and consultations concerning any such matters); (g)
all reasonable out-of-pocket expenses and costs heretofore and from time to time
hereafter incurred by Agent during the course of periodic field examinations of
the Collateral and Borrower's operations, plus
53
<PAGE>
a per diem charge at the rate of $600 per person per
day for Agent's examiners in the field and office; and (h) the fees and
disbursements of counsel (including legal assistants) to Agent and Lender in
connection with any of the foregoing.
10.18 Further Assurances. At the request of Agent at any time and from
------------------
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Agent may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In
the event of such request by Agent, Agent may, at its option, cease to make any
further Loans or provide any further Letter of Credit Accommodations until Agent
has received such certificate and, in addition, Agent has determined that such
conditions are satisfied. Where permitted by law, Borrower hereby authorizes
Agent to execute and file one or more UCC financing statements signed only by
Agent.
SECTION 11. EVENTS OF DEFAULT AND REMEDIES
------------------------------
11.1 Events of Default. The occurrence or existence of any one or more of
-----------------
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) (i) Borrower fails to pay any of the Obligations within three
(3) days after the same becomes due and payable or (ii) Borrower or any Obligor
fails to perform any of the covenants contained in Sections 10.1, 10.2, 10.3,
10.4, 10.6, 10.13, 10.14, 10.15 or 10.16 of this Agreement and such failure
shall continue for fifteen (15) days; provided, that, such fifteen (15) day
-------- ----
period shall not apply in the case of: (A) any failure to observe any such
covenant which is not capable of being cured at all or within such fifteen (15)
day period or which has been the subject of a prior failure within a six (6)
month period or (B) an intentional breach of Borrower or any Obligor of any such
covenant or (iii) Borrower fails to perform any of the terms, covenants,
conditions or provisions contained in this Agreement or any of the other
Financing Agreements other than those described in Sections 11.1(a)(i) and
11.1(a)(ii) above;
(b) any representation, warranty or statement of fact made by
Borrower to Agent or any Lender in this Agreement, the other Financing
Agreements or any other agreement, schedule, confirmatory assignment or
otherwise shall when made or deemed made be false or misleading in any material
respect;
54
<PAGE>
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Agent or any Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $500,000 in any one case or in excess of
$1,000,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of thirty (30) days or execution shall at any time not be
effectively stayed, or any judgment other than for the payment of money, or
injunction, attachment, garnishment or execution is rendered against Borrower or
any Obligor or any of their assets;
(e) Borrower or any Obligor dissolves or suspends or discontinues
doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within forty-five
(45) days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Agent or Lender, or any capitalized lease obligations,
contingent indebtedness in connection with any guarantee, letter of credit,
indemnity or similar type of instrument in favor of any person other than Agent
or Lender, in any case in an amount in excess of $1,000,000, which default
continues for more than the applicable cure period, if any, with respect
thereto, or any default by Borrower or any Obligor under any material contract,
lease, license or other obligation to any person other than Agent or Lender,
which default continues for more than the applicable cure period, if any, with
respect thereto;
55
<PAGE>
(j) any Change of Control;
(k) the indictment or threatened indictment of Borrower or any
Obligor by a governmental authority under any criminal statute, or commencement
or threatened commencement of criminal or civil proceedings against Borrower or
any Obligor, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any material portion of the property
of Borrower or such Obligor;
(l) there shall be a material adverse change in the business, assets
or prospects of Borrower or any Obligor after the date hereof; or
(m) there shall be an event of default under any of the other
Financing Agreements.
11.2 Remedies.
--------
(a) At any time an Event of Default exists or has occurred and is
continuing, Agent and Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Agent and Lender hereunder, under any of the
other Financing Agreements, the Uniform Commercial Code or other applicable law,
are cumulative, not exclusive and enforceable, in Agent's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Agent and Lender may at any
time or times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Agent, for the benefit of Lender, may,
in its discretion and without limitation, (i) accelerate the payment of all
Obligations and demand immediate payment thereof to Agent, for the benefit of
Lender, (provided, that, upon the occurrence of any Event of Default described
-------- ----
in Sections 11.1(g) and 11.1(h), all Obligations shall automatically become
immediately due and payable), (ii) with or without judicial process or the aid
or assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require Borrower, at Borrower's expense, to assemble and make available to
Agent any part or all of the Collateral at any place and time designated by
Agent, (iv) collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) remove any or all of the Collateral from any
premises on or in which the same may be located for the purpose of effecting the
sale, foreclosure or other disposition thereof or for any other purpose,
56
<PAGE>
(vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including, without limitation, entering into contracts with respect
thereto, public or private sales at any exchange, broker's board, at any office
of Agent or elsewhere) at such prices or terms as Agent may deem reasonable, for
cash, upon credit or for future delivery, with Agent or Lender having the right
to purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold
or leased by Agent upon credit terms or for future delivery, the Obligations
shall not be reduced as a result thereof until payment therefor is finally
collected by Agent, for the benefit of Lender. If notice of disposition of
Collateral is required by law, five (5) days prior notice by Agent to Borrower
designating the time and place of any public sale or the time after which any
private sale or other intended disposition of Collateral is to be made, shall be
deemed to be reasonable notice thereof and Borrower waives any other notice. In
the event Agent institutes an action to recover any Collateral or seeks recovery
of any Collateral by way of prejudgment remedy, Borrower waives the posting of
any bond which might otherwise be required.
(c) Agent may apply the cash proceeds of Collateral actually received
by Agent, for the benefit of Lender, from any sale, lease, foreclosure or other
disposition of the Collateral to payment of the Obligations, in whole or in part
and in such order as Agent may elect, whether or not then due. Borrower shall
remain liable to Agent and Lender for the payment of any deficiency with
interest at the highest rate provided for herein and all costs and expenses of
collection or enforcement, including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an Event
of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Agent and Lender may, at their option, without
notice, (i) cease making Loans or arranging for Letter of Credit Accommodations
or reduce the lending formulas or amounts of Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Agent or Lender to Borrower.
SECTION 12. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW
-------------------------------
12.1 Confession of Judgment.
----------------------
(a) Borrower, to the extent permitted by law, and without the further
consent of or notice to Borrower, hereby irrevocably and unconditionally
authorizes the Prothonotary, Clerk of Court, or any attorney of any court of
record in the Commonwealth of Pennsylvania, or any other jurisdiction, as
attorney for Borrower to appear for Borrower in such court and confess judgment
against Borrower and in favor of Agent or Lender, at any time on or after an
Event of
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<PAGE>
Default exists or has occurred and is continuing, for all or any portion of the
Obligations (including, but not limited to, principal, interest, fees, costs and
expenses and including attorneys' fees and legal expenses not to exceed five
(5%) percent of the outstanding and unpaid Obligations), for which this
Agreement or a verified copy hereof shall be sufficient warrant. The authority
to enter judgment shall not be exhausted by one exercise hereof, but, to the
extent permitted by law, shall continue from time to time until final payment
and satisfaction in full of all of the Obligations. The foregoing right and
remedy is in addition to and not in lieu of any other right or remedy available
to Agent and Lender under this Agreement, the other Financing Agreements,
applicable law or otherwise.
(b) Borrower, being fully aware of its right to notice and a hearing
concerning the validity of any and all claims that may be asserted against
Borrower by Agent and Lender before a judgment can be entered hereunder or
before execution may be levied on such judgment against any and all property of
Borrower, hereby waives each of these rights and agrees and consents to judgment
being entered by confession in accordance with the terms hereof and execution
being levied on such judgment against any and all property of Borrower, in each
case without first giving notice and the opportunity to be heard on the validity
of the claim or claims upon which such judgment is entered.
12.2 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.
---------------------------------------------------------------------
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of New York
(without giving effect to principles of conflicts of law).
(b) Borrower, Agent and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the Supreme Court of the State of New York in New
York County and the United States District Court for the Southern District of
New York and waive any objection based on venue or forum non conveniens with
----- --- ----------
respect to any action instituted therein arising under this Agreement or any of
the other Financing Agreements or in any way connected with or related or
incidental to the dealings of the parties hereto in respect of this Agreement or
any of the other Financing Agreements or the transactions related hereto or
thereto, in each case whether now existing or hereafter arising, and whether in
contract, tort, equity or otherwise, and agree that any dispute with respect to
any such matters shall be heard only in the courts described above (except that
Agent shall have the right to bring any action or proceeding against Borrower or
its property in the courts of any other jurisdiction which Agent deems necessary
or appropriate in order to realize on the Collateral or to otherwise enforce its
rights against Borrower or its property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be
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<PAGE>
deemed to be completed five (5) days after the same shall have been so deposited
in the U.S. mails, or, at Agent's option, by service upon Borrower in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, Borrower shall appear in answer to such process, failing
which Borrower shall be deemed in default and judgment may be entered by Agent
against Borrower for the amount of the claim and other relief requested.
(d) BORROWER, AGENT AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER, AGENT
AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT
BORROWER, AGENT OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) Neither Agent nor Lender shall have any liability to Borrower
(whether in tort, contract, equity or otherwise) for losses suffered by Borrower
in connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and non-
appealable judgment or court order binding on Agent and Lender, that the losses
were the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Agent and Lender shall be entitled to the
benefit of the rebuttable presumption that it acted in good faith and with the
exercise of ordinary care in the performance by it of the terms of this
Agreement.
12.3 Waiver of Notices. Borrower hereby expressly waives demand,
-----------------
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Agent may elect to give shall entitle Borrower to
any other or further notice or demand in the same, similar or other
circumstances.
12.4 Amendments and Waivers. Neither this Agreement nor any provision
----------------------
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Agent, and as to amendments, as also signed by an authorized officer of
Borrower. Agent shall not, by any act, delay, omission or
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<PAGE>
otherwise be deemed to have expressly or impliedly waived any of its rights,
powers and/or remedies unless such waiver shall be in writing and signed by an
authorized officer of Agent. Any such waiver shall be enforceable only to the
extent specifically set forth therein. A waiver by Agent of any right, power
and/or remedy on any one occasion shall not be construed as a bar to or waiver
of any such right, power and/or remedy which Agent or Lender would otherwise
have on any future occasion, whether similar in kind or otherwise.
12.5 Waiver of Counterclaims. Borrower waives all rights to interpose any
-----------------------
claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
12.6 Indemnification. Borrower shall indemnify and hold Agent, Lender and
---------------
their directors, agents, employees and counsel, harmless from and against any
and all losses, claims, damages, liabilities, costs or expenses imposed on,
incurred by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section may be unenforceable because it
violates any law or public policy, Borrower shall pay the maximum portion which
it is permitted to pay under applicable law to Agent and/or Lender in
satisfaction of indemnified matters under this Section. The foregoing indemnity
shall survive the payment of the Obligations and the termination or non-renewal
of this Agreement.
SECTION 13. THE AGENT
---------
13.1 Appointment, Powers and Immunities. Lender hereby irrevocably
----------------------------------
appoints and authorizes Agent to act as its agent hereunder and under the other
Financing Agreements with such powers as are specifically delegated to Agent by
the terms of this Agreement and of the other Financing Agreements, together with
such other powers as are reasonably incidental thereto. Agent (a) shall have no
duties or responsibilities except those expressly set forth in this Agreement
and in the other Financing Agreements, and shall not by reason of this Agreement
or any other Financing Agreement be a trustee or fiduciary for Lender; (b) shall
not be responsible to Lender for any recitals, statements, representations or
warranties contained in this Agreement or in any other Financing Agreement, or
in any certificate or other document referred to or provided for in, or received
by it under, this Agreement or any other Financing Agreement, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Financing Agreement or any other document referred to or
provided for herein or therein or for any failure by Borrower or any Obligor or
any other Person to perform any of its
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<PAGE>
obligations hereunder or thereunder; and (c) shall not be responsible to Lender
for any action taken or omitted to be taken by it hereunder or under any other
Financing Agreement or under any other document or instrument referred to or
provided for herein or therein or in connection herewith or therewith, except
for its own gross negligence or willful misconduct as determined by a final non-
appealable judgment of a court of competent jurisdiction. Agent may employ
agents and attorneys-in-fact and shall not be responsible for the negligence or
misconduct of any such agents or attorneys-in-fact selected by it in good faith.
Agent may deem and treat the payee of any note as the holder thereof for all
purposes hereof unless and until the assignment thereof pursuant to an agreement
(if and to the extent permitted herein) in form and substance satisfactory to
Agent shall have been delivered to and acknowledged by Agent.
13.2 Reliance by Agent. Agent shall be entitled to rely upon any
-----------------
certification, notice or other communication (including any thereof by
telephone, telecopy, telex, telegram or cable) believed by it to be genuine and
correct and to have been signed or sent by or on behalf of the proper Person or
Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by Agent. As to any matters not
expressly provided for by this Agreement or any other Financing Agreement, Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions given by Lender as is
required in such circumstance, and such instructions of Lender and any action
taken or failure to act pursuant thereto shall be binding on Lender.
13.3 Events of Default.
-----------------
(a) Agent shall not be deemed to have knowledge or notice of the
occurrence of an Event of Default or other failure of a condition precedent to
the Loans and Letter of Credit Accommodations hereunder, unless and until Agent
has received written notice from Lender or Borrower specifying such Event of
Default or any unfulfilled condition precedent, and stating that such notice is
a "Notice of Default or Failure of Condition". In the event that Agent receives
such a Notice of Default or Failure of Condition, Agent shall give prompt notice
thereof to Lender. Agent shall (subject to Section 13.7) take such action with
respect to any such Event of Default or failure of condition precedent as Agent
shall determine. Without limiting the foregoing, and notwithstanding the
existence or occurrence and continuance of an Event of Default or any other
failure to satisfy any of the conditions precedent set forth in Section 5 of
this Agreement to the contrary, the Agent may, but shall have no obligation to,
continue to make Loans and issue or cause to be issued Letter of Credit
Accommodations for the account and risk of Lender from time to time if Agent
believes making such Loans or issuing or causing to be issued such Letter of
Credit Accommodations is in the best interests of Lender.
(b) Except with the prior written consent of Agent, Lender may not
assert or exercise any enforcement right or remedy in respect of the Loans,
Letter of Credit Accommodations or other Obligations, as against Borrower or any
Obligor or any of the Collateral or other property of Borrower or any Obligor.
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<PAGE>
13.4 Indemnification. Lender agrees to indemnify Agent (to the extent not
---------------
reimbursed by Borrower hereunder and without limiting the Obligations of
Borrower hereunder) for any and all claims of any kind and nature whatsoever
that may be imposed on, incurred by or asserted against Agent (including by
Lender) arising out of or by reason of any investigation in or in any way
relating to or arising out of this Agreement or any other Financing Agreement or
any other documents contemplated by or referred to herein or therein or the
transactions contemplated hereby or thereby (including the costs and expenses
that Agent is obligated to pay hereunder) or the enforcement of any of the terms
hereof or thereof or of any such other documents, provided, that, Lender shall
-------- ----
not be liable for any of the foregoing to the extent it arises from the gross
negligence or willful misconduct of the party to be indemnified as determined by
a final non-appealable judgment of a court of competent jurisdiction.
13.5 Non-Reliance on Agent and Other Lender. Lender agrees that it has,
--------------------------------------
independently and without reliance on Agent or any other Person, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis of Borrower and any Obligors and has made its own decision to enter
into this Agreement and that it will, independently and without reliance upon
Agent or any other Person, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement or any of the
other Financing Agreements. Agent shall not be required to keep itself informed
as to the performance or observance by Borrower or any Obligor of any term or
provision of this Agreement or any of the other Financing Agreements or any
other document referred to or provided for herein or therein or to inspect the
properties or books of Borrower or any Obligor. Agent will use reasonable
efforts to provide Lender with any information received by Agent from Borrower
which is required to be provided to Lender hereunder, with a copy of any Notice
of Default or Failure of Condition received by Agent from Borrower or any Lender
and with a copy of any notice of an Event of Default delivered by Agent to
Borrower; provided, that, Agent shall not be liable to Lender for any failure to
-------- ----
do so, except to the extent that such failure is attributable to Agent's own
gross negligence or willful misconduct as determined by a final non-appealable
judgment of a court of competent jurisdiction. Except for notices, reports and
other documents expressly required to be furnished to Lender by Agent hereunder,
Agent shall not have any duty or responsibility to provide Lender with any other
credit or other information concerning the affairs, financial condition or
business of Borrower or any of its Subsidiaries (or any of their affiliates)
that may come into the possession of Agent or any of its affiliates.
13.6 Failure to Act. Except for action expressly required of Agent
--------------
hereunder and under the other Financing Agreements, Agent shall in all cases be
fully justified in failing or refusing to act hereunder and thereunder unless it
shall receive further assurances to its satisfaction from Lender of its
indemnification obligations under Section 13.5 hereof against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.
13.7 Resignation of Agent. Subject to the appointment and acceptance of a
--------------------
successor Agent as provided below, Agent may resign at any time by giving notice
thereof to Lender and
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Borrower. Upon any such resignation, Lender shall have the right to appoint a
successor Agent with the consent of Borrower, which consent shall not be
unreasonably withheld, conditioned or delayed. If no successor Agent shall have
been so appointed by Lender, and/or so consented to by Borrower and the
appointment accepted by such successor Agent within thirty (30) days after the
retiring Agent's giving of notice of resignation, then the retiring Agent may,
on behalf of Lender, appoint (without the consent of Borrower) a successor Agent
that shall be a bank, commercial finance company or other financial institution.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent
in accordance with the terms hereof, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from its
duties and obligations hereunder. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Section 13 shall continue in effect
for its benefit in respect of any actions taken or omitted to be taken by it
while it was acting as Agent.
13.8 Consents and Releases of Collateral under Financing Agreements.
--------------------------------------------------------------
Except as otherwise provided in Section 12.4 hereof with respect to certain
amendments or modifications to this Agreement, Agent may consent to any
modification, supplement or waiver under any of the Financing Agreements;
provided, that, without the prior consent of Lender, Agent shall not release any
- -------- ----
Collateral or otherwise terminate any security interest in or lien upon any of
the Collateral under any of the Financing Agreements, except that no such
consent shall be required, and Agent is hereby authorized (i) to release any
security interest in or lien upon any of the Collateral which is the subject of
a disposition permitted hereunder or under the other Financing Agreements, or
(ii) to release, in any fiscal year of Borrower, any security interest in or
lien upon any of the Collateral the value of which does not exceed $5,000,000.
13.9 Collateral Matters.
------------------
(a) Except as otherwise expressly provided for in this Agreement,
Agent shall have no obligation whatsoever to Lender or any other Person to
investigate, confirm or assure that the Collateral exists or is owned by
Borrower or any Obligor or is cared for, protected or insured or has been
encumbered, or that any particular items of Collateral meet the eligibility
criteria applicable in respect of the Loans or Letter of Credit Accommodations
hereunder, or whether any particular Availability Reserves are appropriate, or
that the liens and security interests granted to Agent herein or pursuant hereto
or otherwise have been properly or sufficiently or lawfully created, perfected,
protected or enforced or are entitled to any particular priority, or to exercise
at all or in any particular manner or under any duty of care, disclosure or
fidelity, or to continue exercising, any of the rights, authorities and powers
granted or available to Agent in this Agreement or in any of the other Financing
Agreements, it being understood and agreed that in respect of the Collateral, or
any act, omission or event related thereto, Agent may act in any manner it may
deem appropriate, in its discretion, and that Agent shall have no duty or
liability whatsoever to Lender, other than liability for its own gross
negligence or willful misconduct as determined by a final non-appealable
judgment of a court of competent jurisdiction.
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(b) Lender hereby appoints Agent, and Agent hereby appoints Lender,
as agent for the purpose of perfecting the security interest of Agent in assets
which, in accordance with Article 9 of the Uniform Commercial Code can be
perfected only by possession. Should Lender obtain possession of any such
Collateral, Lender shall notify Agent thereof and, promptly upon Agent's request
therefor, shall deliver such Collateral to Agent or in accordance with Agent's
instructions.
SECTION 14. TERM OF AGREEMENT; MISCELLANEOUS
--------------------------------
14.1 Term.
----
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Renewal Date"), and from year to year thereafter, unless
sooner terminated pursuant to the terms hereof; provided, that, this Agreement
-------- ----
and all other Financing Agreements must be terminated simultaneously. Upon the
effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Agent, for the benefit of Lender, in full, all outstanding
and unpaid Obligations and shall furnish cash collateral to Agent, for the
benefit of Lender, in such amounts as Agent determines are reasonably necessary
to secure Agent and Lender from loss, cost, damage or expense, including
attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Agent and Lender have not yet received final and indefeasible payment.
Such payments in respect of the Obligations and cash collateral shall be
remitted by wire transfer in Federal funds to such bank account of Agent, as
Agent may, in its discretion, designate in writing to Borrower for such purpose.
Interest shall be due until and including the next business day, if the amounts
so paid by Borrower to the bank account designated by Agent are received in such
bank account later than 12:00 noon, New York time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and the
continuing security interest of Agent, for the benefit of Lender, in the
Collateral and the rights and remedies of Agent and Lender hereunder, under the
other Financing Agreements and applicable law, shall remain in effect until all
such Obligations have been fully and finally discharged and paid. Upon the
receipt by Agent and Lender of payment in full in cash or other immediately
available funds of all of the Obligations (which are not contingent) and cash
collateral in such amounts and on such terms as Agent shall deem reasonably
acceptable for all contingent Obligations, upon Borrower's request and at
Borrower's expense, except as otherwise required by applicable law, Agent shall
execute and deliver to Borrower UCC-3 termination statements and such other
release documents with respect to the
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Collateral as may be reasonably requested by Borrower, in form and substance
satisfactory to Agent, to effectuate the termination of the security interests
granted by Borrower to Agent herein and in the other Financing Agreements.
(c) In the event this Agreement is terminated prior to the end of the
then current term or renewal term of this Agreement for any reason, in view of
the impracticality and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Lender's lost
profits as a result thereof, Borrower agrees to pay to Agent, for the benefit of
Lender, upon the effective date of such termination, an early termination fee in
the amount set forth below if such termination is effective in the period
indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C> <C>
(i) 3% of the Maximum Credit From the date hereof to and
(as then in effect) including October 9, 1998.
(ii) 2% of the Maximum Credit From October 10, 1998 to and
(as then in effect) including October 9, 1999.
(iii) 1% of the Maximum Credit From October 10, 1999 to and
(as then in effect) including October 8, 2000.
</TABLE>
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Agent, for the benefit of Lender shall be entitled to such early termination fee
upon the occurrence of any Event of Default described in Sections 11.1(g) and
11.1(h) hereof, even if Agent or Lender does not exercise its right to terminate
this Agreement, but elects, at its option, to provide financing to Borrower or
permit the use of cash collateral under the United States Bankruptcy Code. The
early termination fee provided for in this Section 14.1 shall be deemed included
in the Obligations.
(d) Notwithstanding anything to the contrary contained in Section
14.1(c), in the event of the termination of this Agreement by Borrower prior to
the end of the then current term or renewal term of this Agreement and the full
and final repayment of all of the Obligations and the receipt by Agent and
Lender of cash collateral all as provided in Section 14.1(a) at any time after
the first anniversary of the date hereof, Borrower shall only be required to pay
to Agent, for the benefit of Lender, an early termination fee in an amount equal
to one-half of one (1/2%) percent of the Maximum Credit (as then in effect) if
each of the following conditions is satisfied: (i) no Event of Default or act,
condition or event which with notice or passage of time or both would constitute
an Event of Default shall exist or have occurred and be continuing, (ii) Agent
shall have received not less than thirty (30) days prior written notice of the
intention of Borrower to so terminate this Agreement and (iii) the final payment
in full of all of the Obligations is received upon the consummation of a
Qualified Public Offering. The early termination fee shall
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not be reduced pursuant to this Section if Borrower shall take any action or
fail to take any action primarily for the purpose of reducing such fee.
(e) Notwithstanding anything to the contrary contained in Section
14.1(c) above, in the event of the termination of this Agreement by Borrower
prior to the end of the then current term or renewal term of this Agreement and
the full and final repayment of all of the Obligations and the receipt by Agent
and Lender of cash collateral all as provided in Section 14.1(c) with the
proceeds of initial loans and advances by Lender to Borrower pursuant to a
revolving credit facility provided by Lender to Borrower to replace the
financing arrangements provided for herein, and as to which Agent shall not be
acting on behalf of Lender, Borrower shall not be required to pay the early
termination fee provided for above.
14.2 Notices. All notices, requests and demands hereunder shall be in
-------
writing and (a) made to Agent and Lender at their addresses set forth below and
to Borrower at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next Business Day, one (1) Business Day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing.
14.3 Partial Invalidity. If any provision of this Agreement is held to be
------------------
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
14.4 Successors. This Agreement, the other Financing Agreements and any
----------
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Agent and Borrower and their
respective successors and assigns, except that Borrower may not assign its
rights under this Agreement, the other Financing Agreements and any other
document referred to herein or therein without the prior written consent of
Agent and Lender. Lender may not assign its rights and obligations under this
Agreement (or any part thereof) without the prior written consent of Agent,
except as permitted under Section 14.5(b) hereof. Any purported assignment by
Lender without such prior express consent or compliance with Section 14.5(b)
where applicable, shall be void. The terms and provisions of this Agreement and
the other Financing Agreements are for the purpose of defining the relative
rights and obligations of Borrower, Agent and Lender with respect to the
transactions contemplated hereby and there shall be no third party beneficiaries
of any of the terms and provisions of this Agreement or any of the other
Financing Agreements.
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14.5 Assignments and Participations.
------------------------------
(a) Lender may, in the ordinary course of its commercial banking or
finance business and in accordance with applicable law, at any time sell to one
or more banks, commercial finance companies or other financial institutions
("Participants"), including, without limitation, Congress Financial Corporation
in its individual capacity, participating interests in all or a portion of its
rights and obligations under this Agreement and the other Financing Agreements
(including all or a part of its interest in the Obligations). In the event of
any such sale by Lender of a participating interest to a Participant, Lender's
obligations under this Agreement to the other parties to this Agreement shall
remain unchanged, Lender shall remain solely responsible for the performance
thereof, Lender shall remain the holder of any such obligations for all purposes
under this Agreement and the other Financing Agreements, and Borrower and Agent
shall continue to deal solely and directly with Lender in connection with
Lender's rights and obligations under this Agreement and the other Financing
Agreements. Borrower agrees that if amounts outstanding under this Agreement
are due or unpaid, or shall have been declared or shall have become due and
payable upon the occurrence of an Event of Default, each Participant shall, to
the maximum extent permitted by applicable law, be deemed to have the right of
setoff in respect of its participating interest in amounts owing under this
Agreement to the same extent as if the amount of its participating interest were
owing directly to it as a Lender under this Agreement; provided, that, in
-------- ----
purchasing such participating interest, such Participant shall be deemed to have
agreed to share with Lender the proceeds thereof as provided in Section 7.7
hereof. Notwithstanding anything to the contrary contained herein, Lender shall
not grant any participation under which the Participant shall have rights to
approve any amendment to or waiver of or consent under this Agreement or the
other Financing Agreements, except with the consent of Agent.
------
(b) Lender may, in accordance with applicable law, at any time and
from time to time assign to another bank, commercial finance company or other
financial institution or any of its affiliates, or in connection with the sale
of its business or all or substantially all of its loan portfolio, with the
written consent of Agent, to a bank, commercial finance company or other
financial institution (an "Assignee") all (or, with the consent of Agent, less
than all, but in no event less than $5,000,000) of its rights and obligations
under this Agreement and the other Financing Agreements, pursuant to an
assignment agreement, in form and substance satisfactory to Agent, executed by
such Assignee and Lender and delivered to Agent for its acceptance and recording
in its records. Upon such execution, delivery, acceptance and recording, from
and after the effective date determined pursuant to such assignment agreement,
the Assignee thereunder shall be a party hereto and, to the extent provided in
such assignment agreement, (i) have the rights and obligations of Lender
hereunder with a Commitment and Commitment Percentage as set forth therein, and
(ii) Lender thereunder shall, to the extent provided in such assignment
agreement, be released from its obligations under this Agreement (and, in the
case of an assignment agreement covering all or the remaining portion of
Lender's rights and obligations under this Agreement, Lender shall cease to be a
party hereto). Borrower may at any time and from time to time, notify Agent of
any bank, commercial finance company or other financial
67
<PAGE>
institution that is interested in obtaining an assignment of all or any portion
of the rights and obligations of Lender under this Agreement and the other
Financing Agreements.
(c) Upon its receipt of an assignment agreement executed by Lender
and an Assignee, Agent shall (i) promptly accept such assignment agreement and
(ii) on the effective date determined pursuant thereto record the information
contained therein in Agent's records and give notice of such acceptance and
recordation to Lender and Borrower.
(d) Except as otherwise provided in this Section 14.5, Lender shall
not, as between Borrower and Lender, be relieved of any of its obligations
hereunder as a result of any sale, assignment, transfer or negotiation of, or
granting of participation in, all or any part of the Obligations owed to Lender.
Lender is permitted to sell assignments and participations under this Section
14.5 may furnish any information concerning Borrower and its Subsidiaries and
affiliates in the possession of Lender from time to time to Assignees and
Participants (including, prospective Assignees and Participants).
(e) Borrower shall assist Lender in selling assignment participations
under this Section 14.5 in whatever manner reasonably necessary in order to
enable or effect any such assignment or participation, including (but not
limited to) the execution and delivery of any and all agreements, notes and
other documents and instruments as shall be requested and the delivery of
informational materials, appraisals or other documents for, and the
participation of relevant management in meetings and conference calls with,
potential Assignees or Participants. Borrower shall certify the correctness,
completeness and accuracy of all descriptions of Borrower and its affairs
provided, prepared or reviewed by Borrower that are contained in any selling
materials and all other information provided by it and included in such
materials.
14.6 Entire Agreement. This Agreement, the other Financing Agreements,
----------------
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.
68
<PAGE>
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69
<PAGE>
IN WITNESS WHEREOF, Agent, Lender and Borrower have caused these presents
to be duly executed as of the day and year first above written.
AGENT BORROWER
- ----- --------
CONGRESS FINANCIAL CORPORATION, CHILDREN'S CONCEPTS, INC.
as Agent doing business as Zany Brainy
By:______________________________ By:________________________________
Title:____________________________ Title:______________________________
Address: Chief Executive Office:
- ------- -----------------------
1133 Avenue of the Americas 308 East Lancaster Avenue
New York, New York 10036 Wynnewood, Pennsylvania 19096
LENDER
- ------
CORESTATES BANK, N.A.
By:_____________________________
Title:___________________________
Address:
- --------
2240 Butler Pike
Plymouth Meeting, Pennsylvania 19462
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<PAGE>
AMENDMENT NO. 1 TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
---------------------------
February 1 1999
Congress Financial Corporation
as Agent on behalf of the Lender,
as referred to below
1133 Avenue of the Americas
New York, New York 10036
Ladies and Gentlemen:
Congress Financial Corporation, in its capacity as agent pursuant to the
Loan Agreement (as hereinafter defined) acting for and on behalf of First Union
National Bank, as successor to CoreStates Bank, N.A., as lender (in such
capacity, "Agent") and CoreStates Bank, N.A. ("Lender") have entered into
financing arrangements with Children's Concept, Inc., doing business as Zany
Brainy ("Borrower") pursuant to which Agent and Lender may make loans and
advances and provide other financial accommodations to Borrower as set forth in
the Amended and Restated Loan and Security Agreement, dated October 9, 1997, by
and among Agent, Lender and Borrower (as amended hereby and as the same may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement") and the other agreements, documents
or instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto (all of the foregoing, including the
Loan Agreement, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced, being collectively
referred to herein as the "Financing Agreements"). All capitalized terms used
herein shall have the meaning assigned thereto in the Loan Agreement, unless
otherwise defined herein.
Borrower and Children's Products, Inc. ("Guarantor") have requested certain
amendments to the Loan Agreement and Agent and Lender are willing to agree to
such amendments, subject to the terms and conditions contained in this
Amendment. By this Amendment, Agent, Lender, Borrower and Guarantor desire and
intend to evidence such amendments.
In consideration of the foregoing and the agreements and covenants
contained herein, the parties hereto agree as follows:
1. Section 3.4. The Loan Agreement is hereby amended to delete all
-----------
references to "Section 3.5" contained therein and substitute the following
therefor: "Section 3.4".
<PAGE>
2. Inventory Lending Formula. Section 3.1(a) of the Loan Agreement is
-------------------------
hereby deleted in its entirety and replaced with the following:
"(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to fund the Loans in amounts requested by Borrower up
to the amount equal to:
(i) the lesser of the Maximum Credit (as then in effect); or
(A) during the period commencing on January 1 of each calendar
year through and including March 31 of such calendar year, the lesser of:
(1) fifty-five (55%) percent multiplied by the Value of Eligible Inventory
or (2) seventy-eight (78%) percent of the Net Off Peak Recovery Cost
Percentage multiplied by the Cost of Eligible Inventory, or
(B) during the period commencing on April 1 of each calendar
year through and including July 31 of such calendar year, the lesser of:
(1) sixty (60%) percent multiplied by the Value of the Eligible Inventory
or (2) eighty-five (85%) percent of the Net Off Peak Recovery Cost
Percentage multiplied by the Cost of Eligible Inventory, or
(C) during the period commencing on August 1 of each calendar
year through and including October 31 of such calendar year, the lesser of
(1) sixty-five percent (65%) multiplied by the Value of the
Eligible Inventory or (2) ninety-two (92%) percent of the Net Peak Recovery
Cost Percentage multiplied by the Cost of Eligible Inventory or,
(D) during the period commencing on November 1 of each
calendar year through and including November 30 of such calendar year, the
lesser of (1) sixty-five (65%) percent multiplied by the Value of the
Eligible Inventory or (2) seventy (70%) percent of the Net Peak Recovery
Cost Percentage multiplied by the Cost of Eligible Inventory, or
(E) during the period commencing on December 1 of each
calendar year through and including December 31 of such calendar year, the
lesser of (1) fifty-five (55%) percent of the value of the Eligible
Inventory or (2) fifty-nine (59%) percent of the Net Peak Recovery Cost
Percentage multiplied by the Cost of Eligible Inventory minus
-----
(ii) the Availability Reserves."
3. Loans, Investments, Guarantees, Etc. Section 10.10(d)(i) of the Loan
------------------------------------
Agreement is hereby deleted in its entirety and the following substituted
therefor:
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<PAGE>
"(i) in no event shall the total amount of capital contributions, loans or
other amounts paid by Borrower to or for the formation or acquisition of a
Subsidiary engaged principally in owning and operating a site on the
internet on behalf of Borrower for the purpose of selling the Inventory
exceed $3,000,000 and in no event shall the total amount of capital
contributions, loans or other amounts paid by Borrower to or for the
formation or acquisition of all other Subsidiaries, together with all loans
by Borrower to employees of Borrower, and amounts paid in connection with
any merger or consolidation permitted under Section 10.7 hereof, exceed
$1,500,000,"
4. Additional Representations and Warranties. Borrower represents,
-----------------------------------------
warrants and convenants with and to Agent and Lender as follows, which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof, and the truth and accuracy of, or compliance with
each, together with the representations, warranties and covenants in the other
Financing Agreements, being a continuing condition of the making of Loans by
Agent and Lender to Borrower:
(a) No Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default exists or has
occurred as of the date of this Amendment (after giving effect to the amendments
to the Financing Agreements made by this Amendment).
(b) This Amendment has been duly executed and delivered by Borrower
and is in full force and effect as of the date hereof and the agreements and
obligations of Borrower contained herein consitute legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
5. Conditions to Effectiveness of Amendment. The effectiveness of the
----------------------------------------
other provisions of this Amendment shall be subject to the satisfacton of each
of the following additional conditions precedent:
(a) Agent and Lender shall have received an executed original or
executed original counterparts of this Amendment (as the case may be) duly
authorized, executed and delivered by the respective party or parties hereto;
and
(b) no Event of Default shall exist or have occurred and no event
shall have occurred or exist which with notice or passage of time or both would
constitute an Event of Default.
6. Effect of this Amendment. Except as modified pursuant hereto, no other
------------------------
changes or modifications to the Loan Agreement and the other Financing
Agreements are intended or implied and in all other respects the Loan Agreement
and the other Financing Agreements are hereby specifically ratified, restated
and confirmed by all parties hereto as of the effective date hereof. To the
extent of conflict between the terms of this Amendment, the Loan
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<PAGE>
Agreement and the other Financing Agreements, the terms of this Amendment shall
control. The Loan Agreement and this Amendment shall be read and construed as
one agreement.
7. Further Assurances. The parties hereto shall execute and deliver such
------------------
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Amendment.
8. Governing Law. The validity, interpretation and enforcement of this
-------------
Amendment and any dispute arising out of the relationship between the parties
hereto in connection with this Amendment, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of New York
(without giving effect to principles of conflicts of law).
9. Binding Effect. This Amendment shall be binding upon and inure to the
--------------
benefit of each of the parties hereto and their respective successors and
assigns.
10. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by each of the parties hereto in separate counterparts, each of
which shall be an original, but all of which shall together constitute one and
the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
The parties hereto have caused this Amendment to be duly executed and
delivered by their authorized officers as of the day and year first above
written.
Very truly yours,
CHILDREN'S CONCEPT, INC.
^^ signature illegible
By:______________________
Title: Secretary
-------------------
AGREED:
CONGRESS FINANCIAL CORPORATION,
as Agent
^^ signature illegible
By:____________________________
Title: V.P.
-------------------------
ACKNOWLEDGED AND AGREED:
CHILDREN'S PRODUCTS, INC.
^^ signature illegible
By:____________________________
Title: President
-------------------------
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