<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d) of the Securities and Exchange Act
of 1934.
For Period ended October 30, 1999 Commission File Number
---------------- 0-26185
-----------
Zany Brainy, Inc.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2663337
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
2520 Renaissance Boulevard, King of Prussia, PA 19406
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 278-7800
--------------
Indicate by check whether the registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
------ -----
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 1999
- ---------------------------- -------------------------------
Common Stock, par value $.01 21,582,231
<PAGE>
ZANY BRAINY, INC.
FORM 10-Q
QUARTER ENDED October 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended
October 30, 1999 and October 31, 1998......................................................Page 1
Consolidated Balance Sheets as of October 30, 1999 and January 30, 1999.......................Page 2
Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 30, 1999
and October 31, 1998.......................................................................Page 3
Notes to Consolidated Financial Statements....................................................Page 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................Page 8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK......................................................................Page 14
PART II - OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................Page 16
ITEM 2. EXHIBITS & REPORTS ON FORM 8-K........................................................Page 16
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------------- ---------------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
NET SALES $ 46,697 $ 30,661 $ 131,416 $ 87,766
COST OF GOODS SOLD, including
occupancy costs 33,408 22,070 95,164 64,317
------------------ ------------------ ------------------ ------------------
Gross profit 13,289 8,591 36,252 23,449
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 16,504 12,076 44,695 33,327
------------------ ------------------ ------------------ ------------------
Operating loss (3,215) (3,485) (8,443) (9,878)
INTEREST INCOME 138 12 316 47
INTEREST EXPENSE (151) (449) (806) (839)
------------------ ------------------ ------------------ ------------------
Loss before income tax benefit (3,228) (3,922) (8,933) (10,670)
INCOME TAX BENEFIT 1,227 - 3,395 -
------------------ ------------------ ------------------ ------------------
NET LOSS $ (2,001) $ (3,922) $ (5,538) $ (10,670)
================== ================== =================== ===================
NET LOSS PER COMMON
SHARE:
Basic $ (0.09) $ (0.73) $ (0.40) $ (1.99)
Diluted $ (0.09) $ (0.73) $ (0.40) $ (1.99)
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 21,528 5,378 13,901 5,370
Diluted 21,528 5,378 13,901 5,370
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except share data)
October 30, January 30,
1999 1999
---------------- ---------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 674 $ 1,695
Receivables, net 4,977 3,390
Inventories, net 108,518 43,252
Deferred tax asset 7,708 4,313
Prepaid expenses 3,187 940
---------------- ---------------
Total current assets 125,064 53,590
PROPERTY AND EQUIPMENT, net 33,432 25,905
DEFERRED TAX ASSET 2,024 2,024
OTHER ASSETS, net 253 622
INVESTMENT IN JOINT VENTURE 5,000 -
---------------- ---------------
$ 165,773 $ 82,141
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 1,504 $ 1,682
Line of credit 10,000 -
Accounts payable 50,037 16,161
Accrued liabilities 11,926 10,205
---------------- ---------------
Total current liabilities 73,467 28,048
---------------- ---------------
DEFERRED RENT 4,790 2,942
---------------- ---------------
CAPITALIZED LEASE OBLIGATIONS, net of current portion 1,779 2,860
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value, 5,000,000 shares and 4,000,000
shares authorized at October 30, 1999 and January 30, 1999, respectively,
0 and 2,402,955 shares issued and outstanding, respectively - 24
Common stock, $.01 par value, 100,000,000
shares and 25,000,000 shares authorized at October 30, 1999
and January 30, 1999, respectively, 21,582,231 and 5,383,571
shares issued and outstanding, respectively 216 54
Additional paid-in capital 103,672 60,826
Accumulated deficit (18,151) (12,613)
---------------- ---------------
Total shareholders' equity 85,737 48,291
---------------- ---------------
$ 165,773 $ 82,141
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements
2
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
--------------------------------------------------
October 30, 1999 October 31, 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,538) $ (10,670)
Adjustments to reconcile net loss to net cash
used in operating activities--------
Depreciation and amortization 6,196 4,450
Provision for deferred rent 1,848 638
Deferred income tax benefit (3,395) 96
Changes in assets and liabilities--------
(Increase) decrease in
Receivables (1,587) (1,067)
Inventories (65,266) (38,452)
Prepaid expenses (2,247) (2,200)
Other assets 369 -
Increase in
Accounts payable 33,876 23,179
Accrued liabilities 1,721 5,081
----------------- -----------------
Net cash used in operating activities (34,023) (18,945)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (13,723) (5,917)
Investment in joint venture (5,000) -
----------------- -----------------
Net cash used in investing activities (18,723) (5,917)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on line of credit, net 10,000 21,823
Net proceeds from sale of common stock 42,313 -
Payments on capitalized leases (1,259) (965)
Proceeds from exercise of stock options 541 59
Proceeds from exercise of warrants 130 -
----------------- -----------------
Net cash provided by financing activities 51,725 20,917
----------------- -----------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,021) (3,945)
----------------- -----------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,695 5,030
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 674 $ 1,085
================= =================
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and should be read in conjunction with the audited financial
statements as of January 30, 1999 included in our registration statement on Form
S-1 (No 333-74719) as filed with the Securities and Exchange Commission and in
our prospectus dated June 2, 1999 (the "Prospectus"). Certain information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the accompanying unaudited financial statements contain all
material adjustments, consisting of normal recurring accruals, necessary to
present fairly our financial position, results of operations and cash flow for
the periods indicated, and have been prepared in a manner consistent with the
January 30, 1999 financial statements. In light of the seasonal nature of our
business, the results of operations for the thirteen and thirty-nine weeks ended
October 30, 1999 are not necessarily indicative of operating results for a full
fiscal year.
2. INITIAL PUBLIC OFFERING
In June, we sold 4,722,669 shares of Common stock at $10.00 per share
($9.30 after an underwriting discount of $.70 per share) in an initial public
offering (the "Offering"). All shares of Preferred stock outstanding prior to
the Offering were converted into 11,250,273 shares of Common stock. The Offering
generated proceeds of $43.9 million ($42.3 million after deducting transaction
expenses of $1.6 million). We used $18.4 million to pay down our line of credit
balance plus accrued interest and $22.2 million for 18 new store openings, the
relocation of the distribution center, new enterprise software and the internet
investment. The remainder of the net proceeds will be used for general corporate
purposes.
3. SUPPLEMENTAL CASH FLOWS INFORMATION
For the thirty-nine weeks ended October 31, 1998 and October 30, 1999, we
made payments of $666,000 and $661,000, respectively, in interest. We incurred
capitalized lease obligations of $1.0 million and $0 during the thirty-nine
weeks ended October 31, 1998 and October 30, 1999 respectively.
4
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4. MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of average cost (first-in,
first-out) or market. Costs associated with certain buying and distribution
activities are included in inventories.
5. NET LOSS PER SHARE
Net loss per share is calculated utilizing the principles of Statement of
Financial Accounting Standards No. 128, "Earnings per Share". The weighted
average impact of stock options, warrants and Preferred stock was excluded from
the calculation of diluted loss per share for all periods presented as they were
anti-dilutive due to our net loss.
6. LINE OF CREDIT
In June 1999, our existing line of credit was paid down with proceeds from
the Offering and the existing credit facility was terminated. We entered into a
new three year credit facility covering a maximum principal amount of
$30,000,000, subject to a borrowing base. The borrowing base is defined as 50%
of all eligible inventory. This unsecured line of credit bears interest at the
prime rate, the annual Federal funds rate plus .5%, or, if we elect, at an
annual rate of LIBOR plus 1.75%. As of October 30, 1999, we had $10.0 million
outstanding on the line of credit and an additional $1.0 million in outstanding
letters of credit. The credit facility requires us to comply with various
quarterly and annual covenants. We are in compliance with all debt covenants as
of October 30, 1999.
7. STOCK OPTIONS AND WARRANTS
As of October 30, 1999, we had options to purchase 3,278,022 shares of
Common stock outstanding of which options to purchase 1,265,907 shares are
currently exercisable at a weighted average price of $3.46. In addition,
warrants to purchase 15,000 shares of Common stock are outstanding. These
warrants have an exercise price of $4.00 per share and expire in January 2003.
In June 1999, warrants to purchase 32,550 shares of Common stock at $4.00 per
share were exercised.
Information with respect to all options outstanding is as follows
(unaudited):
5
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<TABLE>
<CAPTION>
Weighted
Option Price Average Price
Shares Per Share Per Share
---------- -------------- -------------
<S> <C> <C> <C>
Options Outstanding, January 30, 1999 2,852,862 $0.67 - $9.00 $ 3.84
Granted 794,850 $3.33 - $11.75 11.43
Exercised (170,738) $0.67 - $5.25 2.91
Canceled (198,952) $3.33 - $11.75 6.32
---------- -------------- ----------
Options Outstanding, October 30, 1999 3,278,022 $2.67 - $11.75 $ 5.58
---------- -------------- ----------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
From time to time, we are named as a defendant in legal actions arising
from our normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be estimated, in
our opinion, any such liability will not have a material adverse effect on our
financial position, operating results or liquidity.
9. RELATED PARTY TRANSACTIONS
During the third quarter, we formed ZB Holdings LLC, a joint venture with
Online Retail Partners, LLC. ZB Holdings was formed for the purpose of
developing and operating, www.zanybrainy.com, an Internet shopping website
------------------
offering its customers comprehensive content, leading product assortment in its
category and related value-added online services. ZB Holdings formed
ZanyBrainy.com LLC, a wholly owned subsidiary, for the purpose of developing and
operating such a site. We contributed $5.0 million for the purchase of 100% of
the outstanding Preferred interests of ZB Holdings and Online Retail Partners
contributed a total of $5.0 million for the purchase of 100% of the Common
interests of ZB Holdings. Online Retail Partners contributed another $10.0
million to the joint venture in November 1999. Both partners hold 50% of the
voting stock of the joint venture; after Online Retail Partners' latest
contribution, we have an ownership interest in the joint venture of
approximately 53%. There could be future dilution of our interests if further
investments, or stock grants, in the joint venture are made.
The investment will be accounted for under the equity method of accounting
with profits and losses allocated in accordance with the joint venture
agreement.
We have entered into certain agreements pursuant to which we will supply
certain services to ZanyBrainy.com at our cost. We also act as ZanyBrainy.com's
agent with respect to purchases of product that will be offered on their
Internet shopping site. During the thirteen and thirty-nine weeks ended
October 30, 1999, we provided services to
6
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ZanyBrainy.com totaling $1,321,000 and $1,390,000, respectively, which were
treated as an offset to selling, general and administrative expenses. During the
thirteen and thirty-nine weeks ended October 30, 1999, we procured merchandise
totaling $3,606,000, for ZanyBrainy.com. Costs representing procurement and
distribution activities were treated as an offset to cost of goods sold. At
October 30, 1999, a receivable of $949,000 from ZanyBrainy.com was included in
receivables, net on the accompanying balance sheet.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Zany Brainy is a rapidly growing specialty retailer of high quality toys, games,
books and multimedia products for children, with 103 stores operating in 26
states as of October 30, 1999.
Results of Operations
The following table sets forth our financial data expressed as a
percentage of net sales, and operating data for the periods indicated.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------------------- --------------------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold /1/ 71.5 72.0 72.4 73.3
-------------------- -------------------- -------------------- --------------------
Gross profit 28.5 28.0 27.6 26.7
Selling, general and administrative
expenses 35.3 39.4 34.0 38.0
-------------------- -------------------- -------------------- --------------------
Operating loss (6.8) (11.4) (6.4) (11.3)
Interest expense, net 0.0 1.4 0.4 0.9
-------------------- -------------------- -------------------- --------------------
Loss before income tax benefit (6.8) (12.8) (6.8) (12.2)
Income tax benefit 2.6 - 2.6 -
-------------------- -------------------- -------------------- --------------------
Net loss (4.2%) (12.8%) (4.2%) (12.2%)
==================== ==================== ==================== ====================
Comparable store net sales /2/ 3% 9% 7% 10%
==================== ==================== ==================== ====================
Total number of stores at
end of period 103 65 103 65
==================== ==================== ==================== ====================
Stores opened during period 12 8 28 13
==================== ==================== ==================== ====================
</TABLE>
/1/ Cost of sales includes buying, distribution, and occupancy costs
/2/ A store becomes comparable in the 14th full month of store operations
Thirteen Weeks Ended October 30, 1999 (Third Quarter of 1999) Compared to
Thirteen Weeks Ended October 31, 1998 (Third Quarter of 1998)
NET SALES. Net sales increased $16.0 million, or 52.3%, to $46.7 million
in the thirteen weeks ended October 30, 1999 from $30.7 million in the
comparable 1998 period. This increase resulted from (i) a comparable store net
sales increase of 3%, (ii) sales from 28 new stores opened thus far in fiscal
1999, and (iii) sales from those stores opened in fiscal 1998 which are not yet
included in our comparable store net sales base. We believe the increase in
comparable store net sales for the third quarter is attributable to, among other
things, increased sales from several core product categories, such as software,
books, and electronics. Sales of Pokemon products, which are represented in
8
<PAGE>
several different departments including games, books, stationery, and plush,
represented approximately 12% of sales for the quarter. Sales of Beanie Babies
declined from approximately 8% of sales in the third quarter of 1998, to 3% of
sales for the comparable 1999 period as a result of a tightening of supplies. We
expect, and have planned for, Beanie Babies' sales to remain significantly below
last year's levels for the remainder of the fiscal year.
GROSS PROFIT. Gross profit increased $4.7 million, or 54.7%, to $13.3
million during the third quarter, from $8.6 million in the same period last
year. The gross profit increased to 28.5% of net sales for the period, from
28.0% in the comparable 1998 period. The increase of 0.5% was due to leveraging
of distribution and buying costs and better buying margins, which were partially
offset by increased freight expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include all direct store level expenses, and all
corporate level costs not directly associated with or allocable to cost of
sales. Selling, general and administrative expenses increased $4.4 million, or
36.7%, to $16.5 million during the third quarter, from $12.1 million in the same
period last year. Selling, general and administrative expenses decreased to
35.3% of net sales from 39.4% of net sales due to leveraging of corporate,
store, and other expenses. The dollar increase in selling, general and
administrative expenses was primarily attributable to $3.6 million in store
payroll and other selling expenses incurred in the third quarter associated with
the opening of 38 additional stores following the third quarter of 1998.
Corporate expenses also increased approximately $800,000 during this period to
support this additional store growth.
INTEREST EXPENSE, NET. Net interest expense was approximately $13,000 for
the period, a decrease of $424,000 from the comparable period in 1998. This
decrease was due to less borrowing under our line of credit, and an increase in
investment income. Late in the third quarter we made additional borrowings on
the line to support an early holiday build of inventories.
INCOME TAX BENEFIT. For the thirteen weeks ended October 30, 1999, we
recorded an income tax benefit of $1.2 million primarily related to the Federal
tax benefit of the net loss. For the thirteen weeks ended October 31,
9
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1998, no benefit was recorded with respect to the net operating loss
carryforward because we established a valuation allowance. The effective tax
rate for the third quarter of fiscal 1999 was 38.0%.
Thirty-Nine Weeks Ended October 30, 1999 Compared to Thirty-Nine Weeks Ended
October 31, 1998
NET SALES. Net sales increased $43.7 million, or 49.7%, to $131.4 million
for the thirty-nine weeks ended October 30, 1999 from $87.8 million in the
comparable 1998 period. This increase resulted from (i) a comparable store net
sales increase of 7%, (ii) sales from 28 new stores opened thus far in fiscal
1999, and (iii) sales from stores opened in fiscal 1998 which are not included
in our comparable store net sales base. Beanie Babies represented approximately
6% of our sales during this thirty-nine week period, which, as planned, were
significantly less than last year's Beanie Babies' sales for the comparable
period. We expect, and have planned for, Beanie Babies' sales to remain
significantly below last year's levels for the remainder of the fiscal year.
Sales of Pokemon products for the thirty-nine week period represented slightly
more than 5% of our sales. We expect Pokemon to be popular through the fourth
quarter.
GROSS PROFIT. Gross profit increased $12.8 million, or 54.6%, to $36.3
million during the period, from $23.5 million in the same period last year. The
gross profit increased to 27.6% of net sales for the period, from 26.7% in the
comparable 1998 period. The increase of 0.9% was due to leveraging of buying,
occupancy and distribution expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.4 million, or 34.1%, to $44.7 million in
the period, from $33.3 million in the same period last year. Selling, general
and administrative expenses decreased to 34.0% of net sales from 38.0% of net
sales due to leveraging of store personnel, selling and general and
administrative expenses. The dollar increase in such expenses was primarily
attributable to $9.8 million in store payroll and other selling expenses
associated with the opening of 38 additional stores following the third quarter
of 1998. Corporate expenses increased $1.6 million to support the additional
store growth.
INTEREST EXPENSE, NET. Net interest expense was approximately $490,000
for the period, a decrease of $302,000 from the comparable period in 1998. This
decrease was due to less borrowings, and an increase in investment income during
the period.
10
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INCOME TAX BENEFIT. For the thirty-nine weeks ended October 30, 1999, we
recorded an income tax benefit of $3.4 million primarily related to the Federal
tax benefit of the net loss. For the thirty-nine weeks ended October 31, 1998,
no benefit was recorded with respect to the net operating loss carryforward
because we established a valuation allowance. The effective tax rate for the
first three quarters of fiscal 1999 was 38.0%.
LIQUIDITY AND CAPITAL RESOURCES
Our main sources of liquidity have been the proceeds from the Offering,
and borrowing under our credit facilities. We require cash principally to
finance capital investment in new stores, new store inventories, and seasonal
working capital. We opened 28 stores through the thirty-nine weeks ended October
30, 1999.
Cash flows used in operating activities were $34.0 million for the
thirty-nine weeks ended October 30, 1999, an increase of $15.1 million over the
same period for the previous year. The increase was primarily a result of the
purchase of additional inventory to support 28 new stores, as was partially
offset by an increase in accounts payable and a decrease in the net loss.
Cash flows used in investing activities were $18.7 million for the
thirty-nine week period ending October 30, 1999, an increase of $12.8 million
over the same period for the previous year. The increase was due to increased
capital spending for the new stores, new enterprise software, a new distribution
center, and our investment of $5.0 million in the Internet joint venture.
Cash flows provided by financing activities during the thirty-nine week
period ending October 30, 1999 reflect the net proceeds of $42.3 million from
the sale of common stock associated with the Offering, along with $10.0 million
provided through borrowings on our credit facilities. For the comparable period
last year, cash was provided through borrowings of $21.8 million on our credit
facility.
On June 14, 1999, we entered into a three year credit facility with First
Union National Bank in the amount of $30,000,000 with an interest rate of the
Base Rate or Libor plus 1.75%. The Base Rate is defined as the higher of (1) the
11
<PAGE>
Federal funds rate plus .5% per annum or (2) the prime rate. We terminated,
without penalty, a credit facility with another bank upon completion of the
Offering. Additionally, on August 25, 1999, we entered into an agreement with
another bank to provide a $5.0 million lease line of credit. As of October 30,
1999 the full $5.0 million under this lease line was remaining.
We believe that our operating cash flow together with the unused portion
of our credit facility and other financing arrangements will be sufficient to
finance current operating requirements including capital expenditures and new
store openings for at least the next twelve months. However, if we choose to
invest additional funds in the Internet joint venture, we may seek additional
sources of financing to support that initiative.
Seasonality of Business
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, results of operations for the entire year depend
heavily on fourth quarter results and the success of the Christmas selling
season. Based upon previous experience, we do not expect to earn a profit in the
first three quarters of a fiscal year in the foreseeable future.
Internet Sales Channel
During the third quarter we implemented an Internet shopping site
(www.zanybrainy.com) through a joint venture with Online Retail Partners. We
------------------
each initially contributed $5.0 million to this joint venture. Online Retail
Partners contributed an additional $10.0 million to the joint venture in
November 1999. The joint venture will require substantial participation of our
management and affiliates for certain resources. In addition, further investment
in the joint venture by Online Retail Partners or others could further reduce
our equity ownership in ZanyBrainy.com. There is also a risk that selling our
products on the Internet could divert customers from our stores and depress
existing store sales. We cannot assure that the Internet shopping site will be
profitable. In addition, while Online Retail Partners has agreed to take all
losses of ZanyBrainy.com up to the extent of their capital account, any losses
beyond that will require us to recognize losses up to the amount of our
investment. In addition, we would have to recognize losses if our investment
were to become permanently impaired, up to the amount of our investment.
12
<PAGE>
Year 2000 Compliance
We have completed a comprehensive review of our computer systems and
other micro processor-based equipment and have taken appropriate measures to
remedy any Year 2000 issues.
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 of CDS, a subsidiary of Sterling
Software. CDS has discontinued operations. We completed an upgrade to SFR
version 7.0, which is Year 2000 compliant, in the first quarter of 1999.
Late in 1998, we agreed to purchase new enterprise software from JDA.
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. Given the increased business volume
during the Christmas season, we have decided to defer JDA 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 in the position to implement 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 recently
implemented ICL POS and SIS systems which are Year 2000 compliant.
We have upgraded the Microsoft NT operating systems in all stores. The
new operating system has been certified by Microsoft to be Year 2000 compliant.
The store register hardware has been determined to be Year 2000 compliant. The
final measure to prepare the in-store systems for Year 2000 was a shipment of
Year 2000 compliant personal computers for the SIS workstations.
If store systems should cease to operate on January 1, 2000, we have
several options available to continue to process sales and receipts in the
stores. In a worst case scenario, the existing disaster procedure to hand-write
receipts would be put into place. The receipt of purchase records 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
13
<PAGE>
require incremental manual intervention. While the cost of the 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 the service to a compliant vendor. If
the credit card processor is not compliant, we would be required to approve and
settle credit requests manually.
As of the end of our third quarter, we have incurred approximately
$90,000 in costs associated with Year 2000 issues. The total costs associated
with modifications, upgrades and/or replacements to become Year 2000 compliant
is not expected to be material to our financial position. We have not developed
a formal contingency plan. If year 2000 problems are discovered, they will be
addressed as they occur.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis about the following: our use of the remainder of the
proceeds from the Offering; the sufficiency of our operating cash flow over the
next 12 months; our expectations with respect to our inability to earn a profit
in the first three quarters of a fiscal year in the foreseeable future; the
impact that future investments in the internet joint venture would have on our
equity ownership of the internet business; our expectations with respect to
Beanie Babies' sales; our expectations with respect to Pokemon sales; the
potential negative effects selling our products on the internet could have on
our existing store sales and our customer base; our expectations with respect to
implementing a profitable internet shopping site; the impact of any losses
associated with the internet business; our ability to complete our enterprise
software conversion from SFR to JDA, and to have JDA ready for implementation in
December 1999; our ability to implement Year 2000 compliant JDA software in the
event that SFR fails; our plans for, and the sufficiency of, existing disaster
procedures in the event of Year 2000 failure; the impact on our operations if
our telecommunications and credit card processing service providers are not Year
2000 compliant; estimated costs associated with becoming Year 2000 compliant,
and sources of funds for these costs; and our plans to address any Year 2000
problems that may arise.
There are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements
including, but not limited to, the following: a decline in the level of demand
for our products; actions by our competitors; a decline in general economic and
business conditions and in the specialty retail or toy industry in particular;
our inability to manage our growth, open new stores on a timely basis and expand
in new and existing markets; our ability to successfully market and expand the
internet shopping site and successfully work with ORP; the availability of
product and our ability to replenish product on a timely basis; unanticipated
cash requirements to support current operations or expansion of our business;
unanticipated costs of Year 2000 compliance; and our ability to attract, train
and retain highly qualified associates. These and other risks and uncertainties
affecting Zany Brainy are
15
<PAGE>
discussed in greater detail in this report and in other filings by Zany Brainy
with the Securities and Exchange Commission.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 2, 1999, the registration statement relating to the Offering was ordered
effective by the Securities and Exchange Commission. All shares offered pursuant
to the Registration Statement, including shares covered by the underwriters'
over-allotment option were sold. Donaldson, Lufkin & Jenrette Securities
Corporation, Deutsche Bank Alex Brown Incorporated, William Blair & Company,
LLC., U.S. Bancorp Piper Jaffray Incorporated, and DLJdirect Inc. were the
managing underwriters of the Offering. The Offering terminated June 15, 1999
upon the closing of the sale of all shares subject to the underwriters'
over-allotment option. The number of shares registered, the aggregate price of
the offering amount registered, the amount sold and the aggregate offering price
in the amount sold by us and certain of our shareholders in the Offering were as
follows:
<TABLE>
<CAPTION>
Number of Aggregate Price of
Shares Registered the offering amount Amount Sold Aggregate Offering
----------------- Registered ----------- Price of the amount sold
---------- ------------------------
<S> <C> <C> <C> <C>
Zany Brainy 4,722,669 $47,226,690 4,722,669 $47,226,690
The Selling Shareholders 2,292,331 $22,923,310 2,292,331 $22,923,310
</TABLE>
We incurred the following expenses with respect to the Offering during the
period February 1999 through June 1999, none of which were direct or indirect
payments to our directors, officers, or their associates or to persons owning
10% or more of any class of equity securities of the Company or to affiliates of
the Company
Underwriting Discounts and
Commissions Other Expenses Total Expenses
----------- -------------- --------------
$3,305,868 $1,607,539 $4,913,407
The net offering proceeds to the Company after deducting the foregoing
discounts, commissions, fees and expenses were $42.3 million. A reasonable
estimate of how these proceeds were used by the Company during the period June
7, 1999 through October 30, 1999 is as follows:
Repayment of Line of Credit Agreement 18,400,000
New Store Openings and Distribution Center Relocation 18,900,000
Investment in ZanyBrainy.com 5,000,000
None of the foregoing expenses constituted direct or indirect payments to
directors, officers, or their associates or to persons owning 10% or more of any
class of equity securities of the Company or to affiliates of the Company.
ITEM 2. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Limited Liability Company Agreement of ZB Holdings LLC
dated as of October 20, 1999.
10.2 - Contribution and Interest Purchase Agreement by and among
Zany Brainy, Inc., Online Retail Partners LLC and ZB
Holdings LLC dated as of October 18, 1999.
27.0 - Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during the
quarter ended October 30, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Zany Brainy, Inc.
Date: December 14, 1999 By: /s/ Keith C. Spurgeon
----------------- ----------------------
Keith C. Spurgeon
Chairman & Chief
Executive Officer
Date: December 14, 1999 By: /s/ Robert A. Helpert
----------------- ----------------------
Robert A. Helpert
Chief Financial Officer,
Secretary and Treasurer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Limited Liability Company Agreement of ZB Holdings LLC dated
as of October 20, 1999.
10.2 Contribution and Interest Purchase Agreement by and among Zany
Brainy, Inc., Online Retail Partners LLC and ZB Holdings LLC
dated as of October 18, 1999.
27.0 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> JAN-31-1999 JAN-31-1999
<PERIOD-END> OCT-30-1999 OCT-30-1999
<CASH> 674 674
<SECURITIES> 0 0
<RECEIVABLES> 4,977 4,977
<ALLOWANCES> 0 0
<INVENTORY> 108,518 108,518
<CURRENT-ASSETS> 125,064 125,064
<PP&E> 33,432 33,432
<DEPRECIATION> 24,824 24,824
<TOTAL-ASSETS> 165,773 165,773
<CURRENT-LIABILITIES> 73,467 73,467
<BONDS> 1,779 1,779
0 0
0 0
<COMMON> 216 216
<OTHER-SE> 85,521 85,521
<TOTAL-LIABILITY-AND-EQUITY> 165,773 165,773
<SALES> 46,697 131,416
<TOTAL-REVENUES> 46,697 131,416
<CGS> 49,912 139,859
<TOTAL-COSTS> 49,912 139,859
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13 490
<INCOME-PRETAX> (3,228) (8,933)
<INCOME-TAX> 1,227 3,395
<INCOME-CONTINUING> (2,001) (5,538)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,001) (5,538)
<EPS-BASIC> (.09) (.40)
<EPS-DILUTED> (.09) (.40)
</TABLE>
<PAGE>
LIMITED LIABILITY COMPANY
AGREEMENT
OF
ZB HOLDINGS LLC
a Delaware Limited Liability Company
Dated as of October 20, 1999
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
ZB HOLDINGS LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT OF ZB HOLDINGS LLC (the
"Agreement") is made and entered into as of the 20th day of October, 1999 (the
"Effective Date"), by and between Online Retail Partners LLC, a Delaware limited
liability company ("ONRP") and Zany Brainy, Inc., a Pennsylvania corporation
("Retail Sponsor" and, together with ONRP, the "Members", with each being
referred to, individually, as a "Member"), for the purpose of forming ZB
Holdings LLC (the "Company"), a limited liability company formed under the
Delaware Limited Liability Company Act, 6 Del. C. (S) 18-101 et seq., as amended
from time to time, (the "Act").
RECITALS
WHEREAS, the Members desire to form the Company as a limited liability
company under the Act and to enter into this Agreement;
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows:
ARTICLE 1
ORGANIZATIONAL MATTERS
1.1 FORMATION. The Members hereby form the Company under the Act for
the purposes and upon the terms and conditions hereinafter set forth. The rights
and liabilities of the Members of the Company shall be as provided in the Act,
except as otherwise expressly provided herein. In the event of any inconsistency
between any terms and conditions contained in this Agreement and any non-
mandatory provisions of the Act, the terms and conditions contained in this
Agreement shall govern.
1.2 NAME. The name of the Company formed hereby shall be ZB Holdings
LLC. The Company may also conduct business at the same time under one or more
fictitious names if the Board determines that such is in the best interests of
the Company. The Board may change the name of the Company, from time to time, in
accordance with applicable law.
1.3 PRINCIPAL PLACE OF BUSINESS; OTHER PLACES OF BUSINESS. The
principal place of business of the Company will initially be located at 47 East
11th Street, 10th Floor, New York, New York 10003, or such other place within or
outside the State of Delaware as the Board may from time to time designate. The
Company may maintain offices and places of business at such other place or
places within or outside the State of Delaware as the Board deems advisable.
<PAGE>
1.4 BUSINESS PURPOSE. The Company is formed for the object and
purpose of, and the nature of the business to be conducted and promoted by the
Company is, engaging in any lawful business, purpose or activity for which
limited liability companies may be formed under the Act and engaging in any and
all activities necessary, convenient, desirable or incidental to the foregoing,
including, without limitation, developing and operating an Internet commerce
website (the "Site") offering its customers comprehensive content, leading
product assortment in its category and related value-added online services. It
is the objective of the Members that the Site be ready for initial testing by
October 15, 1999 and become fully operational by November 1, 1999.
1.5 CERTIFICATE OF FORMATION; FILINGS. A Certificate of Formation
of the Company (the "Certificate") was executed and filed in the office of the
Delaware Secretary of State as required by the Act on October 4, 1999.
Amendments to the Certificate may be executed and filed from time to time in a
form prescribed by the Act as authorized by the Board, provided that if any such
amendments alter the rights and obligations of the parties herein, the approval
of a Majority in Interest will be required. The Board shall also cause to be
made, on behalf of the Company, such additional filings and recordings as the
Board shall deem necessary or advisable.
1.6 FICTITIOUS BUSINESS NAME STATEMENTS. Following the execution of
this Agreement, fictitious business name statements shall be filed and published
when and if the Board determines it necessary. Any such statement shall be
renewed as required by applicable law, unless the Board determines otherwise.
1.7 DESIGNATED AGENT FOR SERVICE OF PROCESS. The Company shall
continuously maintain a registered office and a designated and duly qualified
agent for service of process on the Company in the State of Delaware.
1.8 TERM. The term of the Company commenced on the date that the
Certificate was filed with the Office of the Delaware Secretary of State, and
shall continue until the Company is dissolved pursuant to this Agreement. The
existence of the Company as a separate legal entity shall continue until
cancellation of the Certificate in the manner required by the Act.
1.9 TITLE TO COMPANY PROPERTY. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the Company, and no Member individually shall have any interest in such
property. Title to all such property may be held in the name of the Company or a
designee, which designee may be a Member or its Affiliate.
1.10 MEMBERSHIP INTERESTS UNCERTIFICATED. The interests of the
Members of the Company shall not be certificated.
2
<PAGE>
ARTICLE 2
DEFINITIONS
Capitalized words and phrases used and not otherwise defined elsewhere
in this Agreement shall have the following meanings:
2.1 "ACT" is defined in the Preamble.
2.2 "ADDITIONAL MEMBERS" means those Persons admitted to the Company
as Members of the Company pursuant to Paragraph 3.4 of the Agreement.
2.3 "ADDITIONAL ROFR MEMBERSHIP INTERESTS" is defined in Paragraph
7.2.2 of this Agreement.
2.4 "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant fiscal year, after giving effect to the following
adjustments:
2.4.1 Add to such Capital Account the following items:
(a) The amount, if any, that such Member is obligated
to contribute to the Company upon liquidation of such Member's
Membership Interest, pursuant to the terms of this Agreement; and
(b) The amount that such Member is obligated to
restore or is deemed to be obligated to restore pursuant to
Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence
of each of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
2.4.2 Subtract from such Capital Account such Member's share of
the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and
(6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall
be interpreted consistently therewith.
2.5 "AFFECTED MEMBERSHIP INTERESTS" is defined in Paragraph 7.2.1 of
this Agreement.
2.6 "AFFILIATE" means, with reference to a specified Person: (a) a
Person that, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, the specified
Person, (b) any Person that is a director, executive officer, general partner,
manager or trustee of, or serves in a similar capacity with respect to, the
specified Person, or for which the specified Person is a director, executive
officer, general partner, manager or trustee, or serves in a similar capacity,
or (c) any member of the Immediate Family of the specified Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with") as used with
3
<PAGE>
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided, however, that a Person which owns less than twenty percent
(20%) of the outstanding equity interests of a specified Person shall not be
deemed to be an Affiliate of the specified Person solely by reason of such
equity ownership.
2.7 "AGREEMENT" is defined in the Preamble.
2.8 "ASSIGNEE" means any Person (a) to whom a Member (or assignee
thereof) Transfers all or any part of its interest in the Company, and (b) which
has not been admitted to the Company as a Substitute Member pursuant to
Paragraph 7.7 of this Agreement.
2.9 "BOARD" shall mean the board of managers of the Company. The
Board shall be composed of seven members, including (a) the Chief Executive
Officer of the Company, (b) three individuals designated by ONRP and (c) three
individuals designated by Retail Sponsor. To the extent that ZB.com or any other
Subsidiary of the Company has a board of managers, such Subsidiary's board of
managers shall be composed of the same individuals as the Board. Each member of
the Board (i) shall be a natural person who need not be resident of the State of
Delaware and (ii) is hereby designated as a "manager" of the Company within the
meaning of the Act.
2.10 "CAPITAL ACCOUNT" means the Capital Account maintained for each
Member on the Company's books and records in accordance with the following
provisions:
2.10.1 To each Member's Capital Account there shall be added
(a) such Member's Capital Contributions, (b) such Member's allocable
share of Net Profits and any items in the nature of income or gain
that are specially allocated to such Member pursuant to Article 5
hereof or other provisions of this Agreement, and (c) the amount of
any Company liabilities assumed by such Member or which are secured by
any Company Assets distributed to such Member.
2.10.2 From each Member's Capital Account there shall be
subtracted (a) the amount of (i) cash and (ii) the Gross Asset Value
of any Company Assets (other than cash) distributed to such Member
(other than any payment of principal and/or interest to such Member
pursuant to the terms of a loan made by the Member to the Company)
pursuant to any provision of this Agreement, (b) such Member's
allocable share of Net Losses and any other items in the nature of
expenses or losses that are specially allocated to such Member
pursuant to Article 5 or other provisions of this Agreement, and (c)
liabilities of such Member assumed by the Company or which are secured
by any property contributed by such Member to the Company.
2.10.3 In the event any interest in the Company is transferred
in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it
relates to the transferred interest.
4
<PAGE>
2.10.4 In determining the amount of any liability for purposes
of Paragraphs 2.10.1 and 2.10.2 hereof, there shall be taken into
account Code Section 752(c) and any other applicable provisions of the
Code and Regulations.
2.10.5 The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended
to comply with Regulations Sections 1.704-1(b) and 1.704-2 and shall
be interpreted and applied in a manner consistent with such
Regulations. In the event that the Board shall, upon the advice of
counsel, determine that it is necessary to modify the manner in which
the Capital Accounts, or any additions or subtractions thereto, are
computed in order to comply with such Regulations, the Board may make
such modification, provided that it will not have a material effect on
the amounts distributable to any Member pursuant to Article 9 hereof
upon the dissolution of the Company. The Board shall also, upon the
advice of counsel, make (a) any adjustments that are necessary in
cases as to which guidance under Regulations Section 1.704-1(b)(2)(iv)
is lacking to maintain equality between the Capital Accounts of the
Members and the amount of Company capital reflected on the Company's
balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (b) any appropriate
modifications in the event that unanticipated events might otherwise
cause this Agreement not to comply with Regulations Sections 1.704-
1(b) and 1.704-2.
2.11 "CAPITAL CONTRIBUTION AGREEMENT" means the Contribution and
Interest Purchase Agreement, dated as of October 15, 1999, by and among the
Retail Sponsor, ONRP and the Company.
2.12 "CAPITAL CONTRIBUTIONS" means, with respect to any Member, the
total amount of cash and the initial Gross Asset Value of property (other than
cash) contributed to the capital of the Company by such Member, whether as an
initial Capital Contribution or as an additional Capital Contribution.
2.13 "CASH AVAILABLE FOR DISTRIBUTION" means, with respect to any
fiscal year, all Company cash receipts (excluding the proceeds from any
Terminating Capital Transaction), after deducting payments for Operating Cash
Expenses, payments required to be made in connection with any loan to the
Company or any other loan secured by a lien on any Company Assets, capital
expenditures and any other amounts set aside for the restoration, increase or
creation of reasonable Reserves.
2.14 "CERTIFICATE" means the Certificate of Formation of the Company
filed under the Act in the Office of the Delaware Secretary of State for the
purpose of forming the Company as a Delaware limited liability company, and any
duly authorized, executed and filed amendments or restatements thereof.
2.15 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time (or any corresponding provisions of succeeding law).
2.16 "COMMON INTEREST" means the Voting Common Interests and the
Non-Voting Common Interests.
5
<PAGE>
2.17 "COMPANY" is defined in the Preamble.
2.18 "COMPANY MINIMUM GAIN" has the meaning set forth in Regulations
Sections 1.704-2(b)(2) and 1.704-2(d)(1) for the phrase "partnership minimum
gain."
2.19 "COMPANY ASSETS" means all direct and indirect interests in
real and personal property owned by the Company from time to time, and shall
include both tangible and intangible property (including cash).
2.20 "CONFIDENTIAL INFORMATION" means all non-public information,
including, without limitation, data, customer lists or other customer-specific
or marketing information, customer buying patterns, algorithms, know-how, ideas
and all business, technical, pricing, cost and financial information, provided
to the other party and any other information marked or disclosed as being
confidential information that is obtained by the other party.
2.21 "CONVERSION CORPORATION" is defined in Paragraph 8.3.2.
2.22 "CONVERTING SUBSIDIARY" is defined in Paragraph 8.3.1.
2.23 "CORPORATE CONVERSION" is defined in Paragraph 8.3.2.
2.24 "CUTOFF DATE" is defined in Paragraph 7.2.3.
2.25 "DEPRECIATION" means, for each fiscal year or other period, an
amount equal to the federal income tax depreciation, amortization or other cost
recovery deduction allowable with respect to an asset for such year or other
period, except that if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount that bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year or other period bears to such
beginning adjusted tax basis; provided, however, that (a) if the federal income
tax depreciation, amortization or other cost recovery deduction for such year or
other period is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Board
and (b) for any asset with respect to which the Company uses the "remedial
allocation method" under Regulations Section 1.704-3(d), Depreciation shall be
determined in accordance with Regulations Section 1.704-3(d)(2).
2.26 "DIRECTOR" means a manager of the Company who is a member of
the Board.
2.27 "ECONOMIC INTEREST" means a Person's right to share in the Net
Profits, Net Losses, or similar items of, and to receive distributions from, the
Company, but does not include any other rights of a Member including, without
limitation, the right to vote or to participate in the management of the
Company, or, except as specifically provided in this Agreement or required under
the Act, any right to information concerning the business and affairs of the
Company.
6
<PAGE>
2.28 "EFFECTIVE DATE" is defined in the Preamble.
2.29 "GROSS ASSET VALUE" means, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
2.29.1 The initial Gross Asset Value of any asset contributed
by a Member to the Company shall be the gross fair market value of
such asset set forth in Exhibit A.
2.29.2 The Gross Asset Values of all Company Assets immediately
prior to the occurrence of any event described in subparagraph (a),
subparagraph (b), subparagraph (c) or subparagraph (d) hereof shall be
adjusted to equal their respective gross fair market values, as
determined by the Board using such reasonable method of valuation as
it may adopt, as of the following times:
(a) the acquisition of an additional interest in the
Company (other than in connection with the execution of this
Agreement) by a new or existing Member in exchange for more than a de
minimis Capital Contribution, if the Board reasonably determines that
such adjustment is necessary or appropriate to reflect the relative
Economic Interests of the Members in the Company;
(b) the distribution by the Company to a Member of more
than a de minimis amount of Company Assets as consideration for an
interest in the Company, if the Board reasonably determines that such
adjustment is necessary or appropriate to reflect the relative
Economic Interests of the Members in the Company;
(c) the liquidation of the Company within the meaning
of Regulations Section 1.704-1(b)(2)(ii)(g); and
(d) at such other times as the Board shall reasonably
determine necessary or advisable in order to comply with Regulations
Sections 1.704-1(b) and 1.704-2.
2.29.3 The Gross Asset Value of any Company Asset distributed to a
Member shall be the gross fair market value of such asset on the date of
distribution as determined by the Board.
2.29.4 The Gross Asset Values of Company Assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that
Gross Asset Values shall not be adjusted pursuant to this Paragraph 2.29.4 to
the extent that the Board reasonably determines that an adjustment pursuant to
Paragraph 2.29.2 above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
Paragraph 2.29.4.
7
<PAGE>
2.29.5 If the Gross Asset Value of a Company Asset has been
determined or adjusted pursuant to Paragraph 2.29.1, Paragraph 2.29.2
or Paragraph 2.29.4 hereof, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such
Company Asset for purposes of computing Net Profits and Net Losses.
2.30 "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
2.31 "IMMEDIATE FAMILY" means, and is limited to, an individual
Member's current spouse, parents, parents-in-law, grandparents, children,
siblings, and grandchildren, or a trust or estate all of the beneficiaries of
which consist of, or an entity controlled by, such Member or any of the
foregoing individuals.
2.32 "INCAPACITY" means the entry of an order of incompetence or of
insanity, or the death, dissolution, bankruptcy (as defined in the Act) or
termination (other than by merger or consolidation) of any Person.
2.33 "INDEMNITEE" is defined in Paragraph 6.6.1.
2.34 "INITIAL ASSETS" is defined in Paragraph 3.1.
2.35 "IPO" means any underwritten public offering of equity
securities.
2.36 "ISSUER" is defined in Paragraph 8.4.1.
2.37 "ISSUER SECURITIES" is defined in Paragraph 8.4.1.
2.38 "LIQUIDATOR" is defined in Paragraph 9.5.1.
2.39 "MAJORITY IN INTEREST" means Members holding a majority of the
aggregate of the Voting Common Interests and Voting Preferred Interests held by
all Members of the Company.
2.40 "MEMBER" means each of ONRP and Retail Sponsor and includes any
Person admitted as an Additional Member or a Substitute Member pursuant to the
provisions of this Agreement, in such Person's capacity as a member of the
Company, and "Members" means two (2) or more of such Persons when acting in
their capacity as members of the Company. For purposes of the Act, the Members
shall constitute one (1) class or group of members.
2.41 "MEMBER MINIMUM GAIN" means an amount, with respect to each
Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if
such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined
in accordance with Regulations Section 1.704-2(i) with respect to "partner non-
recourse debt minimum gain."
2.42 "MEMBER NONRECOURSE DEBT" has the meaning set forth in
Regulations Section 1.704-2(b)(4) for the phrase "partner nonrecourse debt."
8
<PAGE>
2.43 "MEMBER NONRECOURSE DEDUCTIONS" has the meaning set forth in
Regulations Section 1.704-2(i) for the phrase "partner nonrecourse deductions."
2.44 "MEMBERSHIP INTEREST" means the Common Interests and the
Preferred Interests and refers to the interest of a Member in the Company at any
particular time, including, without limitation, the Member's Economic Interest,
any and all rights to participate in the Company's affairs and the rights to any
and all benefits to which a Member may be entitled as provided in this
Agreement, together with the obligations of such Member to comply with all of
the terms and provisions of this Agreement. The initial Membership Interests of
the Members are set forth in Exhibit A.
2.45 "MEMBERSHIP INTEREST TRANSFER" means any Transfer of Membership
Interests, other than a Permitted Transfer.
2.46 "NET PROFITS" OR "NET LOSSES" means, for each fiscal year or
other period, an amount equal to the
Company's taxable income or loss for such year or period determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
2.46.1 Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Net
Profits or Net Losses pursuant to this Paragraph 2.46 shall be added
to such taxable income or loss;
2.46.2 Any expenditure of the Company described in Code
Section 705(a)(2)(B) or treated as a Code Section 705(a)(2)(B)
expenditure pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Net Profits or Net
Losses pursuant to this Paragraph 2.46, shall be subtracted from such
taxable income or loss;
2.46.3 Gain or loss resulting from any disposition of Company
Assets where such gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Gross Asset Value of
the Company Assets disposed of, notwithstanding that the adjusted tax
basis of such Company Assets differs from its Gross Asset Value;
2.46.4 In lieu of the depreciation, amortization and other
cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for
such fiscal year or other periods;
2.46.5 To the extent an adjustment to the adjusted tax basis
of any asset included in Company Assets pursuant to Code Section
734(b) or Code Section 743(b) is required pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in
determining Capital Accounts as a result of a distribution other than
in liquidation of a Member's Membership Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment
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decreases the basis of the asset) from the disposition of the asset
and shall be taken into account for the purposes of computing Net
Profits and Net Losses;
2.46.6 If the Gross Asset Value of any Company Asset is
adjusted in accordance with Paragraph 2.29.2 or Paragraph 2.29.3 of
this Agreement, the amount of such adjustment shall be taken into
account in the taxable year of such adjustment as gain or loss from
the disposition of such asset for purposes of computing Net Profits or
Net Losses; and
2.46.7 Notwithstanding any other provision of this Paragraph
2.46, any items that are specially allocated pursuant to Paragraph 5.2
or Paragraph 5.3.2 hereof shall not be taken into account in computing
Net Profits or Net Losses.
2.47 "NONRECOURSE DEDUCTIONS" has the meaning set forth in
Regulations Sections 1.704-2(b)(1) and 1.704-2(c).
2.48 "NONRECOURSE LIABILITY" has the meaning set forth in
Regulations Sections 1.704-2(b)(3) and 1.752-1(a)(2).
2.49 "NON-VOTING COMMON INTEREST" means a Common Interest in the
Company (a) having the right to receive allocations of Net Profits or Net
Losses, distributions and proceeds of liquidation in the manner specified for
Common Interests in this Agreement but (b) which is not entitled to vote on any
matter submitted to the Members for approval in accordance with Paragraph 6.2 of
this Agreement.
2.50 "NON-VOTING PREFERRED INTEREST" means a Preferred Interest in
the Company (a) having the right to receive allocations of Net Profits or Net
Losses, distributions and proceeds of liquidation in the manner specified for
Preferred Interests in this Agreement but (b) which is not entitled to vote on
any matter submitted to the Members for approval in accordance with Paragraph
6.2 of this Agreement.
2.51 "NON-VOTING STOCK" is defined in Paragraph 8.4.4 of this
Agreement.
2.52 "OFFER NOTICE" is defined in Paragraph 7.2.1.
2.53 "OFFERING MEMBER" is defined in Paragraph 7.2.1 of this
Agreement.
2.54 "OFFICERS" is defined in Paragraph 6.9.
2.55 "ONRP" is defined in the Preamble.
2.56 "ONRPS" means ONRP Services LLC, a Delaware limited liability
company and a wholly-owned Subsidiary of ONRP.
2.57 "OPERATING AGREEMENTS" means (i) the Services Agreement, dated
as of October 15, 1999, by and between Retail Sponsor and ZB.com, (ii) the
Trademark License Agreement, dated as of October 15, 1999, by and between Retail
Sponsor and ZB.com, (iii) the
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Supply Agreement, dated as of October 15, 1999, by and between Retail Sponsor
and ZB.com, (iv) the Data Sharing/License Agreement, dated as of October 15,
1999, by and among ONRPS, Retail Sponsor and ZB.com, and (v) the Web Site
Services Agreement, dated as of October 15, 1999, by and between ONRPS and
ZB.com.
2.58 "OPERATING CASH EXPENSES" means, with respect to any fiscal
period, the amount of cash disbursed or owed in the ordinary course of business
during the period, including without limitation, all cash expenses, such as
advertising, promotion, property management, insurance premiums, taxes,
utilities, repair, maintenance, legal, accounting, bookkeeping, computing,
equipment use, travel on Company business, telephone expenses and salaries, and
direct expenses of Company employees (if any) and agents while engaged in
Company business. Operating Cash Expenses shall include fees paid by the Company
to the Board or any Affiliate thereof permitted by this Agreement, and the
actual cost of goods, materials and administrative services used for or by the
Company, whether incurred by the Board, any Affiliate thereof or any non-
Affiliate in performing functions set forth in this Agreement reasonably
requiring the use of such goods, materials or administrative services. Operating
Cash Expenses shall not include expenditures paid from Reserves.
2.59 "OWNERSHIP PERCENTAGE" means the ownership percentage of the
Membership Interests of a Member in the Company as determined by dividing the
number of Membership Interests held by such Member by the total number of
Membership Interests then outstanding. The initial Ownership Percentage for each
Member is set forth in Exhibit A.
2.60 "PERMITTED TRANSFER" means any Transfer of Membership
Interests: (i) made by a Member to one or more of such Member's Affiliates or,
if such Member is a partnership or limited liability company, to its partners or
members; (ii) made by any Member to the Company, subject to Paragraph 6.2.1(1);
(iii) made by a Member to his or her Immediate Family; (iv) made by a Member
pursuant to testamentary or intestate disposition; or (v) made by Retail Sponsor
of Non-Voting Preferred Interests to no more than 10 of its management employees
provided that such Transfer shall not relate to more than 66,667 of such Non-
Voting Preferred Interests.
2.61 "PERSON" means and includes an individual, a corporation, a
partnership (general or limited), a limited liability company, a trust, an
unincorporated organization, a government or any department or agency thereof,
or any entity similar to any of the foregoing.
2.62 "PLAN" means any stock option or similar equity incentive plan
of ZB.com, as adopted and as amended from time to time with the approval of a
Majority in Interest.
2.63 "PREFERENCE AMOUNT" means, with respect to each Membership
Interest, an amount equal to $10.00.
2.64 "PREFERRED INTEREST" means the Voting Preferred Interests and
the Non-Voting Preferred Interests.
2.65 "PRO RATA SHARE" is defined in Paragraph 7.2.2.
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2.66 "PURCHASERS" is defined in Paragraph 7.2.4.
2.67 "RECOURSE LIABILITY" has the meaning set forth in Regulations
Section 1.752-1(a)(1).
2.68 "REGULATIONS" means proposed, temporary and final Treasury
Regulations promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding Treasury
Regulations).
2.69 "REGULATORY ALLOCATIONS" is defined in Paragraph 5.2.8.
2.70 "RESERVES" means funds set aside or amounts allocated to
reserves that shall be maintained in amounts deemed sufficient by the Board for
working capital, to pay taxes, insurance, debt service, and other costs or
expenses incident to the conduct of business by the Company as contemplated
hereunder.
2.71 "RESPONSIBLE PARTY" is defined in Paragraph 6.6.6.
2.72 "RETAILER" means any Person with which ONRP has formed a
limited liability company or other joint ventures for the purpose of developing
and operating an Internet commerce website.
2.73 "RETAIL SPONSOR" is defined in the Preamble.
2.74 "ROFR ACCEPTANCE NOTICE" is defined in Paragraph 7.2.2.
2.75 "ROFR ALLOTMENT" means for any Member the product of (A) the
total number of Affected Membership Interests available for purchase thereunder
multiplied by (B) a fraction, the numerator of which is the number of Membership
Interests owned by such Member and the denominator of which is the total number
of issued and outstanding Membership Interests excluding the Affected Membership
Interests.
2.76 "SAME CATEGORY" means children's (i) toys (including games,
dolls, plush toys, electronic toys, puzzles and arts and crafts), (ii) audio and
video tapes and other multimedia products, (iii) books, (iv) software, (v)
juvenile furniture (excluding newborn and infant furniture) and (vi) educational
resource products, which, in each case, are targeted to children age 12 and
under.
2.77 "SITE" is defined in Paragraph 1.4.
2.78 "SUBSCRIPTION AGREEMENT" means the Contribution and Interest
Purchase Agreement, dated as of October 18, 1999, by and among the Company, ONRP
and Retail Sponsor.
2.79 "SUBSEQUENT FINANCING" is defined in Paragraph 3.2.3.
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2.80 "SUBSIDIARY" means any and all corporations, partnerships,
limited liability companies and other entities with respect to which either the
Company or the Retail Sponsor, directly or indirectly, own 50% or more of the
securities having the power to elect members of the board of directors or
similar body governing the affairs of such entity.
2.81 "SUBSTITUTE MEMBER" means any Person (a) to whom a Member (or
assignee thereof) Transfers all or any part of its interest in the Company, and
(b) which has been admitted to the Company as a Substitute Member pursuant to
Paragraph 7.7 of this Agreement.
2.82 "TAX DISTRIBUTION" is defined in Paragraph 4.3.
2.83 "TERMINATING CAPITAL TRANSACTION" means any sale or other
disposition of all or substantially all of the assets of the Company or a
related series of transactions that, taken together, result in the sale or other
disposition of all or substantially all of the assets of the Company.
2.84 "TERMINATION PAYMENT" is defined in Paragraph 7.6.
2.85 "TRADE SECRETS" means the "trade secrets" as defined under
applicable law.
2.86 "TRANSFER" means, with respect to any Membership Interest, or
any part thereof, in the Company, a sale, conveyance, exchange, assignment,
pledge, encumbrance, gift, bequest, hypothecation or other transfer or
disposition by any other means, whether for value or no value and whether
voluntary or involuntary (including, without limitation, by operation of law),
or an agreement to do any of the foregoing.
2.87 "TRANSFER PERIOD TERMINATION DATE" is defined in Paragraph
7.2.5.
2.88 "VOTING COMMON INTEREST" means a Common Interest in the Company
having (a) the right to receive allocations of Net Losses and Net Profits,
distributions and proceeds of liquidation in the manner specified for Common
Interests in this Agreement and (b) the right to vote on any matter submitted to
the Members for approval in accordance with Paragraph 6.2 of this Agreement.
2.89 "VOTING PREFERRED INTEREST" means a Preferred Interest in the
Company having (a) the right to receive allocations of Net Losses and Net
Profits, distributions and proceeds of liquidation in the manner specified for
Preferred Interests in this Agreement and (b) the right to vote on any matter
submitted to the Members for approval in accordance with Paragraph 6.2.3.
2.90 "ZB.COM" means ZanyBrainy.com LLC, a Delaware limited liability
company and, upon the execution of the Capital Contribution Agreement, a wholly-
owned Subsidiary of the Company.
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ARTICLE 3
CAPITAL; CAPITAL ACCOUNTS AND MEMBERS
3.1 INITIAL CAPITAL CONTRIBUTIONS OF MEMBERS. At the date hereof,
the authorized Membership Interests are as follows: 500,000 Voting Common
Interests; 373,483 Non-Voting Common Interests; 500,000 Voting Preferred
Interests; and 666,667 Non-Voting Preferred Interests. The names, addresses,
initial Capital Contributions (the "Initial Assets") Membership Interests and
Ownership Percentages of the Members are set forth on Exhibit A attached hereto
and incorporated herein. All Members acknowledge and agree that the initial
Capital Contributions set forth in Exhibit A represent the amount of money and
the Gross Asset Value of all property (other than money) initially contributed
by the Members. The Board shall be required to update Exhibit A from time to
time as necessary to accurately reflect the information therein. Any amendment
to Exhibit A shall not be deemed an amendment to this Agreement. Any reference
in this Agreement to Exhibit A shall be deemed to be a reference to Exhibit A as
amended and in effect from time to time.
3.2 ADDITIONAL CAPITAL CONTRIBUTIONS BY MEMBERS.
3.2.1 No Member shall be (a) required or (b) except as
provided in this Paragraph 3.2 or as otherwise approved by a Majority
in Interest, permitted, to make any additional Capital Contributions
to the Company.
3.2.2 If the Board determines that the Follow-On Subscription
(as defined below) is needed prior to November 15, 1999, then the
Company shall provide written notice thereof to ONRP (the "Follow-On
Subscription Notice"). On the earlier of (a) November 15, 1999 or (b)
five days after its receipt of the Follow-On Subscription Notice, ONRP
shall make an additional Capital Contribution of $10.0 million in
consideration of the issuance of 373,483 Non-Voting Common Interests
(the "Follow-On Subscription"), provided, however, that ONRP shall
have no obligation to make the Follow-On Subscription unless (a)
Retail Sponsor has, in all material respects, complied with its
obligations under the Operating Agreements and (b) the representations
and warranties of the Company and Retail Sponsor contained in the
Subscription Agreement are true and correct at the time the Follow-On
Subscription is consummated.
3.2.3 In the event of any future equity financing by the
Company, including an initial public offering of equity securities by
the Company, but excluding the Follow-On Subscription, (each, a
"Subsequent Financing"), each of the Members shall have the right to
subscribe, to the extent of its then-current Ownership Percentage, to
such Subsequent Financing unless in the case of any such Subsequent
Financing that is an underwritten public offering of common stock, (a)
the managing underwriter in connection with such Subsequent Financing
advises that a full or partial waiver of such right is required in
order to consummate such Subsequent Financing and (b) such waiver
would not materially prejudice either Retail Sponsor or ONRP. In the
event of any future equity financing by ZB.com or any other Subsidiary
of the Company, each of the Members shall be afforded the ratable
right to purchase additional Non-Voting Common Interests or Non-Voting
Preferred Interests (which shall be determined based on the type of
Membership Interests already owned by each such Member) in the Company
in an
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amount sufficient to permit the Company to purchase a sufficient
number of equity securities of ZB.com or such other Subsidiary to
permit the Company to maintain its ratable ownership percentage
therein.
3.3 CAPITAL ACCOUNTS. A Capital Account shall be established and
maintained for each Member in accordance with the terms of this Agreement.
3.4 ADDITIONAL MEMBERS. Following formation of the Company, the
Board is hereby authorized, upon receipt of approval of a Majority in Interest,
to issue interests in the Company directly from the Company, and to admit one or
more recipients of such interests as additional Members ("Additional Members")
from time to time, on such terms and conditions and for such Capital
Contributions, if any, as the Board may determine with the approval of a
Majority in Interest. No action or consent by any Person other than a Majority
in Interest shall be required in connection with the admission of an Additional
Member. As a condition to being admitted to the Company, each Additional Member
shall execute an agreement to be bound by the terms and conditions of this
Agreement.
3.5 MEMBER CAPITAL. Except as otherwise provided in this Agreement
or with the prior written consent of a Majority in Interest: (a) no Member shall
demand or be entitled to receive a return of or interest on its Capital
Contributions or Capital Account, (b) no Member shall withdraw any portion of
its Capital Contributions or receive any distributions from the Company as a
return of capital on account of such Capital Contributions, and (c) the Company
shall not redeem or repurchase the Membership Interest, or any portion thereof,
of any Member.
3.6 MEMBER LOANS. No Member shall be required or permitted to make
any loans or otherwise lend any funds to the Company, except with the consent of
a Majority in Interest. Notwithstanding the foregoing, the Members shall be
permitted (but not required) to make loans to the Company to the extent a
Majority in Interest reasonably determines that such loans are necessary,
advisable or convenient for the business of the Company, provided that any such
loans shall be unsecured and on terms that are no less favorable to the Company
as may be available from independent third parties. No loan made by any Member
to the Company shall have any effect on such Member's Membership Interests, any
such loans representing a debt of the Company payable or collectible solely from
the assets of the Company in accordance with the terms and conditions upon which
such loan was made.
3.7 LIABILITY OF MEMBERS. Except as otherwise required by an
express provision of this Agreement or any non-waivable provision of the Act or
other applicable law: (a) no Member shall be personally liable in any manner
whatsoever for any debt, liability or other obligation of the Company, whether
such debt, liability or other obligation arises in contract, tort, or otherwise;
and (b) no Member shall in any event have any liability whatsoever in excess of
(i) the amount of its Capital Contributions, (ii) its share of any assets and
undistributed profits of the Company, and (iii) the amount of any wrongful
distribution to such Member, if, and only to the extent, such Member has actual
knowledge (at the time of the distribution) that such distribution is made in
violation of Section 18-607 of the Act. Except as expressly provided herein, no
Member, in its capacity as such, shall have liability to the Company, any other
Member or the creditors of the Company.
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3.8 ZB.COM.
3.8.1 CONTRIBUTIONS TO ZB.COM. Except as otherwise determined
by the Board, all assets received by the Company will be contributed
to ZB.com. ZB.com will have two types of membership interests: (i)
voting preferred interests and (ii) non-voting common interests. In
exchange for its contribution of the Initial Assets to ZB.com, the
Company will receive 1,666,667 voting preferred interests of ZB.com.
The Company will contribute the proceeds of the Follow-On Subscription
to ZB.com in exchange for the issuance of 373,483 additional voting
preferred interests of ZB.com.
3.8.2 303,214 non-voting common interests of ZB.com will be
reserved for option grants to employees of the Company and/or its
subsidiaries, including ZB.com. Initially, 262,785 of these non-voting
common interests of ZB.com will be reserved for option grants to
employees of the Company and ZB.com and 40,429 non-voting common
interests of ZB.com will be reserved for option grants to employees of
ONRP and Retail Sponsor. The grants of options to employees of the
Company and/or its subsidiaries, ONRP and/or Retail Sponsor shall be
made by the Board (in its sole and absolute discretion) in accordance
with the provisions of the Plan.
3.8.3 Warrants to purchase 51,546 non-voting common interests
of ZB.com will be reserved for issuance to Ramsey/Beirne Associates,
Inc. for their services in conducting certain executive search
services on behalf of the Company and ZB.com.
3.8.4 The Members anticipate that ZB.com would be the site of
any initial public offering with respect to the business of the Site.
Prior to an initial public offering, upon the receipt of approval of a
Majority in Interest, ZB.com shall be converted into a Delaware
corporation in accordance with Paragraph 8.3 of this Agreement.
3.8.5 The Chief Executive Officer of the Company shall also
be the Chief Executive Officer of ZB.com. The Board shall also
constitute the board of managers of ZB.com.
ARTICLE 4
DISTRIBUTIONS
4.1 DISTRIBUTIONS OF CASH AVAILABLE FOR DISTRIBUTION.
4.1.1 Except as otherwise provided in Paragraph 4.3 and
Article 9 and subject to the provisions of Paragraph 6.2, Cash
Available for Distribution shall be distributed to the Members only at
such times as may be determined in the sole discretion of the Board.
4.1.2 Subject to Paragraph 4.3 and Article 9 hereof, all
distributions of Cash Available for Distribution shall be distributed
to the Members in accordance with the priorities set forth in
Paragraph 4.4.
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4.2 DISTRIBUTIONS UPON LIQUIDATION. Distributions made in
conjunction with the final liquidation of the Company, including, without
limitation, the net proceeds of a Terminating Capital Transaction, shall be
applied or distributed as provided in Article 9 hereof.
4.3 TAX DISTRIBUTIONS. With respect to each fiscal year, the
Company shall distribute to the Members, to the extent of Cash Available for
Distribution, amounts intended to enable the Members to discharge their United
States federal, state and local income tax liabilities arising from the
allocations made pursuant to Article 5, (each, a "Tax Distribution"). The amount
of any such Tax Distribution shall be determined by the Board in its reasonable
discretion taking into account (a) the maximum combined United States and state
tax rate applicable to individuals or corporations (whichever is higher) on
ordinary income and net short-term capital gain or on net long-term capital
gain, as applicable, and taking into account the deductibility of state and
local income taxes for United States federal income tax purposes (and the
deductibility of local income taxes for state tax purposes, if applicable), and
(b) the amounts so allocated pursuant to Article 5 to each Member, and otherwise
based on such reasonable assumptions as the Board determines in good faith to be
appropriate. Tax Distributions shall be made to the Members pro rata in
accordance with their respective allocation of the corresponding items of gain
or income, and shall be treated as advances with respect to amounts otherwise to
be received by such Members pursuant to this Article 4 or Article 9.
4.4 DISTRIBUTIONS. Subject to the provisions of Article 9 and
Paragraph 4.3 hereof, and subject to the rights and preferences of any classes
of Membership Interests approved in accordance with the provisions of this
Agreement and issued by the Company from time to time, Cash Available for
Distribution and distributions in kind of Company Assets shall be distributed:
4.4.1 First, to the Members holding Preferred Interests, in
proportion to the number of their Preferred Interests, until an amount
equal to the Preference Amount has been paid with respect to such
Preferred Interests;
4.4.2 Second, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until an amount
equal to the Preference Amount has been paid with respect to such
Common Interests; and
4.4.3 Thereafter, to the Members in proportion to their
respective Ownership Percentages.
4.5 DISTRIBUTIONS IN KIND. No right is given to any Member to
demand or receive property other than cash as provided in this Agreement. The
Board may determine to make a distribution in kind of Company Assets to the
Members, and such Company Assets shall be distributed in such a fashion as to
ensure that the fair market value thereof is distributed and allocated in
accordance with this Article 4 and Articles 5 and 9 hereof; provided, however,
that no Member may be compelled to accept a distribution consisting, in whole or
in part, of any Company Assets in kind unless the ratio that the fair market
value of such distribution in kind bears to such Member's total distribution
does not exceed the ratio that the fair market value of similar distributions in
kind bear to the total distributions of other Members receiving
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distributions concurrently therewith (if any), except upon a dissolution and
winding up of the Company.
4.6 WITHHOLDING. The Company may withhold distributions or
portions thereof if it is required to do so by any applicable rule, regulation,
or law, and each Member hereby authorizes the Company to withhold from or pay on
behalf of or with respect to such Member any amount of federal, state, local or
foreign taxes that the Board determines that the Company is required to withhold
or pay with respect to any amount distributable or allocable to such Member
pursuant to this Agreement. Any amount paid on behalf of or with respect to a
Member pursuant to this Paragraph 4.6 shall constitute a loan by the Company to
such Member, which loan shall be repaid by such Member within fifteen (15) days
after notice from the Company that such payment must be made; provided, however,
that there shall be no such loan treatment if (a) the Company withholds such
payment from a distribution which would otherwise be made to the Member or (b)
the Board determines, in its sole and absolute discretion, that such payment may
be satisfied out of Cash Available For Distribution which would, but for such
payment, be distributed to the Member. Any amounts withheld pursuant to this
Paragraph 4.6 shall be treated as having been distributed to such Member. Each
Member hereby unconditionally and irrevocably grants to the Company a security
interest in such Member's Membership Interests in the Company to secure such
Member's obligation to pay to the Company any amounts required to be paid
pursuant to this Paragraph 4.6. In the event that a Member fails to pay any
amounts owed to the Company pursuant to this Paragraph 4.6 when due, the
remaining Member(s) may, in their respective sole and absolute discretion, elect
to make the payment to the Company on behalf of such defaulting Member, and in
such event shall be deemed to have loaned such amount to such defaulting Member
and shall succeed to all rights and remedies of the Company as against such
defaulting Member (including, without limitation, the right to receive
distributions). Any amounts payable by a Member hereunder shall bear interest at
12.0% from the date such amount is due (i.e., 15 days after demand) until such
amount is paid in full. Each Member shall take such actions as the Company shall
request in order to perfect or enforce the security interest created hereunder.
A Member's obligations hereunder shall survive the dissolution, liquidation, or
winding up of the Company.
4.7 LIMITATIONS ON DISTRIBUTIONS. Notwithstanding any provision to
the contrary contained in this Agreement, neither the Company nor the Board, on
behalf of the Company, shall knowingly make a distribution to any Member or the
holder of any interest in the Company on account of its Membership Interest or
Economic Interest in the Company (as applicable) in violation of Section 18-607
of the Act.
ARTICLE 5
ALLOCATIONS OF NET PROFITS AND NET LOSSES
5.1 GENERAL ALLOCATION OF NET PROFITS AND LOSSES.
5.1.1 Net Profits and Net Losses shall be determined and
allocated with respect to each fiscal year of the Company as of the
end of such fiscal year. Subject to the other provisions of this
Agreement, an allocation to a Member of a share of Net Profits or Net
Losses shall be treated as an allocation of the same share of each
item of
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income, gain, loss or deduction that is taken into account in
computing Net Profits or Net Losses.
5.1.2 Subject to the other provisions of this Article 5, Net
Profits shall be allocated in the following order of priority:
(a) First, to the Members, in proportion to their
respective Ownership Percentages, until an amount equal to the
amount of Net Losses previously allocated to such Membership
Interests pursuant to Paragraph 5.1.3(d), if any, has been
allocated with respect to such Membership Interests;
(b) Second, to the Members holding Preferred Interests,
in proportion to the number of their Preferred Interests, until
an amount equal to the amount of Net Losses previously allocated
to such Preferred Interests pursuant to Paragraph 5.1.3(c), if
any, has been allocated with respect to such Preferred
Interests;
(c) Third, to the Members holding Common Interests,
in proportion to the number of their Common Interests, until an
amount equal to the amount of Net Losses previously allocated to
such Common Interests pursuant to Paragraph 5.1.3(b), if any,
has been allocated with respect to such Common Interests; and
(d) Thereafter, to the Members in proportion to their
respective Ownership Percentages.
5.1.3 Subject to the other provisions of this Article 5, Net
Losses shall be allocated in the following order of priority:
(a) First, to the Members, in proportion to their
respective Ownership Percentages, until each such Membership
Interest has been allocated an amount equal to the amount of Net
Profits previously allocated to such Membership Interest
pursuant to Paragraph 5.1.2(d), if any;
(b) Second, to the Members holding Common Interests,
in proportion to the number of their Common Interests, until
each such Member's Capital Account has been reduced to zero,
provided that with respect to any Member holding Common
Interests and Preferred Interests, this clause (b) shall reduce
such Member's Capital Account only to the extent of such
Member's Common Interests;
(c) Third, to any Member holding Preferred Interests,
in proportion to the number of their Preferred Interests, until
each such Capital Account has been reduced to zero, provided
that with respect to any Member holding Common Interests and
Preferred Interests, this clause (c) shall reduce such Member's
Capital Account only to the extent of such Member's Preferred
Interests; and
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(d) Thereafter, to the Members pro rata in proportion
to their respective Ownership Percentages.
5.2 REGULATORY ALLOCATIONS. Notwithstanding the foregoing provisions
of this Article 5, the following special allocations shall be made in the
following order of priority:
5.2.1 If there is a net decrease in Company Minimum Gain during
a Company taxable year, then each Member shall be allocated items of
Company income and gain for such taxable year (and, if necessary, for
subsequent years) in an amount equal to such Member's share of the net
decrease in Company Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g)(2). This Paragraph 5.2.1 is intended to
comply with the minimum gain chargeback requirement of Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.
5.2.2 If there is a net decrease in Member Minimum Gain
attributable to a Member Nonrecourse Debt during any Company taxable
year, each Member who has a share of the Member Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(5), shall be specially allocated
items of Company income and gain for such taxable year (and, if
necessary, subsequent years) in an amount equal to such Member's share
of the net decrease in Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in a manner consistent with the
provisions of Regulations Section 1.704-2(g)(2). This Paragraph 5.2.2
is intended to comply with the partner nonrecourse debt minimum gain
chargeback requirement of Regulations Section 1.704-2(i)(4) and shall
be interpreted consistently therewith.
5.2.3 If any Member unexpectedly receives an adjustment,
allocation, or distribution of the type contemplated by Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain
shall be allocated to all such Members (in proportion to the amounts
of their respective Adjusted Capital Account Deficits) in an amount
and manner sufficient to eliminate the Adjusted Capital Account
Deficit of such Member as quickly as possible. It is intended that
this Paragraph 5.2.3 qualify and be construed as a "qualified income
offset" within the meaning of Regulations Section 1.704-
1(b)(2)(ii)(d).
5.2.4 If the allocation of Net Loss to a Member as provided in
Paragraph 5.1 hereof would create or increase an Adjusted Capital
Account Deficit, there shall be allocated to such Member only that
amount of Net Loss as will not create or increase an Adjusted Capital
Account Deficit. The Net Loss that would, absent the application of
the preceding sentence, otherwise be allocated to such Member shall be
allocated to the other Members in accordance with their relative
Economic Interests, subject to the limitations of this Paragraph
5.2.4.
5.2.5 To the extent that an adjustment to the adjusted tax
basis of any Company Asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations Section 1.704-
1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to
be taken into account in determining Capital Accounts as the result of
a distribution to a Member in complete liquidation of its Membership
Interests in the
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Company, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
such basis), and such gain or loss shall be specially allocated to the
Members in accordance with their Economic Interests in the Company in
the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or
to the Members to whom such distribution was made in the event that
Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
5.2.6 The Nonrecourse Deductions for each taxable year of the
Company shall be allocated to the Members in proportion to their
respective Ownership Percentages.
5.2.7 The Member Nonrecourse Deductions shall be allocated each
year to the Member that bears the economic risk of loss (within the
meaning of Regulations Section 1.752-2) for the Member Nonrecourse
Debt to which such Member Nonrecourse Deductions are attributable.
5.2.8 The allocations set forth in Paragraphs 5.2.1, 5.2.2,
5.2.3, 5.2.4, 5.2.5, 5.2.6 and 5.2.7 hereof (the "Regulatory
Allocations") are intended to comply with certain requirements of
Regulations Sections 1.704-1(b) and 1.704-2. Notwithstanding the
provisions of Paragraph 5.1.2 or 5.1.3, the Regulatory Allocations
shall be taken into account in allocating other items of income, gain,
loss and deduction among the Members so that, to the extent possible,
the net amount of such allocations of other items and the Regulatory
Allocations to each Member shall be equal to the net amount that would
have been allocated to each such Member if the Regulatory Allocations
had not occurred.
5.3 TAX ALLOCATIONS.
5.3.1 Except as provided in Paragraph 5.3.2 hereof, for income
tax purposes under the Code and the Regulations each Company item of
income, gain, loss and deduction shall be allocated among the Members
as its correlative item of book income, gain, loss or deduction is
allocated pursuant to this Article 5.
5.3.2 Tax items with respect to Company Assets that are
contributed to the Company with a Gross Asset Value that varies from
its basis in the hands of the contributing Member immediately
preceding the date of contribution shall be allocated among the
Members for income tax purposes pursuant to Regulations promulgated
under Code Section 704(c) so as to take into account such variation.
The Company shall account for such variation under any method approved
under Code Section 704(c) and the applicable Regulations as chosen by
the Board, including, without limitation, the "traditional method" as
described in Regulations Section 1.704-3(b). If the Gross Asset Value
of any Company Asset is adjusted pursuant to Paragraph 2.29,
subsequent allocations of income, gain, loss and deduction with
respect to such Company Asset shall take account of any variation
between the adjusted basis of such Company Asset for federal income
tax purposes and its Gross Asset Value in the same manner as under
Code Section 704(c) and the Regulations promulgated thereunder under
any method approved under Code Section 704(c) and the applicable
Regulations as chosen by the Board. Allocations pursuant to this
Paragraph 5.3.2 are solely for purposes of federal, state and
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local taxes and shall not affect, or in any way be taken into account
in computing, any Member's Capital Account or share of Net Profits,
Net Losses and any other items or distributions pursuant to any
provision of this Agreement.
5.4 OTHER PROVISIONS.
5.4.1 For any fiscal year during which any part of a Membership
Interest is transferred between Members or to another Person, the
portion of the Net Profits, Net Losses and other items of income,
gain, loss, deduction and credit that are allocable with respect to
such part of a Membership Interest shall be apportioned between the
transferor and the transferee under any method allowed pursuant to
Section 706 of the Code and the applicable Regulations as determined
by the Board.
5.4.2 In the event that the Code or any Regulations require
allocations of items of income, gain, loss, deduction or credit
different from those set forth in this Article 5, the Board is hereby
authorized to make new allocations in reliance on the Code and such
Regulations, and no such new allocation shall give rise to any claim
or cause of action by any Member.
5.4.3 For purposes of determining a Member's proportional
share of the Company's "excess nonrecourse liabilities" within the
meaning of Regulations Section 1.752-3(a)(3), each Member's interest
in profits shall be in proportion to the Ownership Percentage of such
Member.
5.4.4 The Members acknowledge and are aware of the income tax
consequences of the allocations made by this Article 5 and hereby
agree to be bound by the provisions of this Article 5 in reporting
their shares of Net Profits, Net Losses and other items of income,
gain, loss, deduction and credit for federal, state and local income
tax purposes.
ARTICLE 6
OPERATIONS
6.1 MANAGEMENT.
6.1.1 Except as otherwise expressly provided in this Agreement
or required by applicable law, the Board shall have sole and complete
charge and management of all the affairs and business of the Company,
in all respects and in all matters. The Board or any individual
Director to whom the Board has delegated specific authority shall be
agents of the Company's business, and the actions of the Board or such
Director taken in such capacity and in accordance with this Agreement
shall bind the Company. Except as otherwise expressly provided in this
Agreement, the Members shall not participate in the control of the
Company, and shall have no right, power or authority to act for or on
behalf of, or otherwise bind, the Company. Except as expressly
provided in this Agreement or required by any non-waivable provisions
of applicable law,
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Members shall have no right to vote on or consent to any other matter,
act, decision, or document involving the Company or its business.
6.1.2 Except as otherwise expressly provided in this Agreement,
the Board shall have full, exclusive and complete discretion to manage
and control the business and affairs of the Company, to make all
decisions affecting the business and affairs of the Company and to
take all such actions as it deems necessary, appropriate, convenient
or incidental to accomplish the purposes and direct the affairs of the
Company. The Board shall have the sole power and authority to bind the
Company, except as otherwise expressly provided in this Agreement
and/or to the extent that such power is expressly delegated in writing
to officers of the Company or any other Person by the Board, and such
delegation shall not cause the Board to cease to be the Board of the
Company.
6.1.3 The Board shall also have the exclusive right, power and
authority, in the management of the business and affairs of the
Company, to do or cause to be done any and all acts, at the expense of
the Company, deemed by the Board to be necessary, appropriate,
convenient or incidental to effectuate the business of the Company.
Without limiting the generality of the foregoing, the Board shall have
full and complete power and authority, without the approval of any
Member and, with respect to clauses (a) through (d), in the ordinary
course of the business of the Company:
(a) to conduct any business, and exercise any rights
and powers, permitted of a limited liability company organized
under the laws of the state of Delaware, in any state,
territory, district or foreign country;
(b) subject to the terms and conditions of the
Operating Agreements and Paragraph 6.2.1, to acquire by
purchase, lease, contribution or otherwise, and/or to otherwise
own, hold, operate, maintain, improve, lease, sell, convey,
mortgage, transfer or dispose of any property or other assets
(real or personal, tangible or intangible);
(c) subject to Paragraph 6.2.1, and the terms and
conditions of the Operating Agreements, to negotiate, enter
into, perform, modify, extend, terminate, amend, waive,
renegotiate and/or carry out any contracts and agreements;
(d) subject to Paragraph 6.2.1, to lend money, to
invest and reinvest its funds, and to take and hold real and/or
personal property for the payment of funds so loaned or
invested;
(e) to sue and be sued, complain and defend, and
participate in administrative, judicial and other proceedings,
in the name of, and behalf of, the Company;
(f) to pay, collect, compromise, arbitrate or otherwise
adjust or settle any and all claims or demands of or against the
Company, in such
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amounts and upon such terms and conditions, provided that the
foregoing do not materially prejudice a Member;
(g) subject to Paragraph 6.2.1, (a) to, from time to
time, employ, engage, hire or otherwise secure or terminate the
services of such Persons, including any Member or Assignee, or
any Persons related thereto or Affiliates thereof, and (b) to,
from time to time, appoint such officers and agents of the
Company as the Board deems necessary or advisable, define and
modify, from time to time, such officers' and agents' duties,
and fix and adjust, as appropriate, such officers' and agents'
compensation;
(h) subject to Paragraph 6.6, to cause the Company to
indemnify any Person in accordance with, and to the fullest
extent permitted by, applicable law, and to obtain, for or on
behalf of the Company, any and all types of insurance;
(i) subject to Paragraph 6.2.1, to borrow money and
issue evidences of indebtedness necessary, convenient or
incidental to the business of the Company, and secure the same
by mortgage, pledge or other lien on any Company Assets or other
assets of the Company;
(j) to prepare, execute, file, record, publish and
deliver any and all instruments, documents or statements
necessary or convenient to effectuate any and all actions that
the Board is authorized to take on behalf of the Company;
(k) subject to Paragraph 6.2.1(i), to merge the Company
with, or consolidate the Company with or into, any other
corporation, partnership, limited liability company or other
business entity (as defined in Section 18-209(a) of the Act)
(whether domestic or foreign);
(l) subject to Paragraph 6.2.1, to deal with, or
otherwise engage in business with, or provide services to and
receive compensation therefor from, any Person who has provided
or may in the future provide services to, lend money to, sell
property to, or purchase property from the Company, the Members
or any Affiliate of the Members; and
(m) to establish and maintain Reserves for such
purposes and in such amounts as the Board deems appropriate from
time to time.
6.1.4 Subject to the provisions of Paragraph 6.2, the Board may
commence a voluntary case on behalf of, or an involuntary case
against, the Company under a chapter of Title 11 U.S.C. by the filing
of a "petition" (as defined in 11 U.S.C. 101(42)) with the United
States Bankruptcy Court. The unanimous approval of the Board shall be
required in connection with the commencement of such a voluntary
bankruptcy. Any such petition filed by any Member or other Person
shall be deemed an unauthorized and bad faith filing and all parties
to this Agreement shall use their best efforts to cause such petition
to be dismissed.
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6.1.5 The Company, and any member of the Board on behalf of the
Company, may enter into and perform the Capital Contribution Agreement
without any further act, vote or approval of any Member
notwithstanding any other provision of this Agreement (including,
without limitation, Paragraph 6.2 hereof), the Act or other applicable
law. Any member of the Board is hereby authorized to enter into and
perform on behalf of the Company the documents described in the
immediately preceding sentence, but such authorization shall not be
deemed a restriction in the power of the Board to enter into other
documents on behalf of the Company to the extent provided for in this
Agreement. Subject to the terms of this Agreement, the Board may
authorize any Person (including, without limitation, any Member or
Officer (as defined below) to enter into and perform any other
document on behalf of the Company.
6.2 LIMITATIONS ON AUTHORITY OF BOARD.
6.2.1 Notwithstanding any contrary provision of this Agreement,
without either the approval of a Majority in Interest or the unanimous approval
of the Board, the Board shall not have the authority to:
(a) Amend this Agreement or the operating agreement of
ZB.com or any other Subsidiary of the Company or create any
additional Subsidiary of the Company or of ZB.com;
(b) Appoint or remove the executive officers of the
Company or ZB.com or any other Subsidiary of the Company
(including, without limitation, a President and/or Chief
Executive Officer);
(c) Establish or modify the compensation of the
executive officers referred to in subparagraph (b) above;
(d) Cause the Company or ZB.com or any other Subsidiary
of the Company to enter into any new agreement, or to materially
amend the terms of any existing agreement, with Retail Sponsor
or ONRP or an Affiliate of any of the foregoing;
(e) Approve the annual operating budget, including
spending, of the Company or ZB.com or any other Subsidiary of
the Company;
(f) Admit any Person or an Additional Member or admit
any Person as a member, partner, shareholder or other equity
holder in ZB.com or any other Subsidiary of the Company;
(g) Pledge the assets of the Company or ZB.com or any
other Subsidiary of the Company;
(h) Approve any Terminating Capital Transaction;
(i) Merge the Company with, or consolidate the Company
with or into, any other corporation, partnership, limited
liability company or other
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business entity (as defined in Section 18-209(a) of the Act)
(whether domestic or foreign);
(j) Borrow money or issue evidences or guarantees of
indebtedness;
(k) Commence a voluntary cause on behalf of, or an
involuntary case against, the Company under a chapter of Title
11 U.S.C. by the filing of a "petition" (as defined in 11 U.S.C.
101 (42)) with the United States Bankruptcy Court;
(l) Except as expressly provided for herein, declare, set
aside or pay any dividend or make any other distribution of cash
or property, or redeem, repurchase or make any similar payments
in connection with the retirement of any Membership Interests;
or
(m) Dissolve the Company.
6.2.2 Notwithstanding any contrary provision of this Agreement,
without the written consent of all Members, the Board shall not have
the authority to:
(a) Do any act in contravention of the Agreement; or
(b) Knowingly perform any act that would subject any
Member to liability for the debts, liabilities or obligations of
the Company or any other Member.
6.2.3 Each Member shall be entitled to one vote for each (a)
Voting Preferred Interest and (b) Voting Common Interest held by such
Member on any matter submitted to the Members for approval. Non-Voting
Common Interests and Non-Voting Preferred Interests shall not be
entitled to vote on any matter. Members holding Voting Common
Interests and Voting Preferred Interests shall vote together as one
class on all matters. The voting rights of any additional classes of
interests in the Company created after the date hereof shall be
determined by a Majority in Interest.
6.3 RELIANCE BY THIRD PARTIES. Any Person dealing with the Company
or the Board may rely upon a certificate signed by the Board as to:
(a) the identity of the Board or any Member of the Company;
(b) the existence or non-existence of any fact or facts which
constitute a condition precedent to acts by the Board or in any other
manner germane to the affairs of the Company;
(c) the Persons who are authorized to execute and deliver any
instrument or document for or on behalf of the Company; or
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(d) any act or failure to act by the Company or as to any
other matter whatsoever involving the Company or any Member.
6.4 COMPENSATION OF DIRECTORS.
6.4.1 The Directors shall not receive any fees for its services
in administering the officers of the Company.
6.4.2 The Directors shall be entitled to reimbursement on a
monthly basis from the Company for all out-of-pocket costs and
expenses incurred by them, in their reasonable discretion and in
accordance with policies and procedures adopted by the Board from time
to time, for or on behalf of the Company.
6.5 RECORDS AND REPORTS.
6.5.1 The Board shall cause to be kept, at the principal place
of business of the Company, or at such other location as the Board
shall reasonably deem appropriate, full and proper ledgers, other
books of account, and records of all receipts and disbursements, other
financial activities, and the internal affairs of the Company for at
least the current and past four fiscal years.
6.5.2 The Board shall also cause to be sent to each Member of
the Company, the following:
(a) within ninety (90) days following the end of each
fiscal year of the Company, a report that shall include all
necessary information required by the Members for preparation of
its federal, state and local income or franchise tax or
information returns, including each Member's share of Net
Profits, Net Losses and any other items of income, gain, loss
and deduction for such fiscal year; and
(b) a copy of the Company's federal, state and local
income tax or information returns for each fiscal year,
concurrent with the filing of such returns.
6.5.3 Members may, for purposes reasonably related to their
Membership Interests, examine and copy (at their own cost and expense)
the books and records of the Company at all reasonable business hours.
6.6 INDEMNIFICATION AND LIABILITY.
6.6.1 The Company shall indemnify and hold harmless each member
of the Board and all officers, employees, agents and Affiliates of the
Company (individually, an "Indemnitee") to the full extent permitted
by law from and against any and all losses, claims, demands, costs,
damages, liabilities, joint and several, expenses of any nature
(including reasonable attorneys' fees and disbursements), judgments,
fines, settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which the Indemnitee may
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be involved, or threatened to be involved as a party or otherwise,
relating to the performance or nonperformance of any act concerning
the activities of the Company, if (a) the Indemnitee acted in good
faith and in a manner it reasonably believed to be in, or not contrary
to, the best interests of the Company, (b) the Indemnitee's conduct
did not constitute gross negligence or willful misconduct and (c) the
Indemnitee's conduct is not based upon or attributable to the receipt
by the Indemnitee of a personal benefit to which the Indemnitee is not
entitled. The termination of an action, suit or proceeding by
judgment, order, settlement, or upon a plea of nolo contendere or its
equivalent, shall not, in and of itself, create a presumption or
otherwise constitute evidence that the Indemnitee acted in a manner
contrary to that specified in clauses (a) or (b) above.
6.6.2 Expenses incurred by an Indemnitee in defending any claim,
demand, action, suit or proceeding subject to this Paragraph 6.6 shall
be advanced by the Company prior to the final disposition of such
claim, demand, action, suit, or proceeding upon receipt by the Company
of a written commitment by or on behalf of the Indemnitee to repay
such amount if it shall be determined that such Indemnitee is not
entitled to be indemnified as authorized in this Paragraph 6.6.
6.6.3 Any indemnification provided hereunder shall be satisfied
solely out of the assets of the Company, as an expense of the Company.
No Member shall be subject to personal liability by reason of these
indemnification provisions.
6.6.4 The provisions of this Paragraph 6.6 are for the benefit
of the Indemnitees and shall not be deemed to create any rights for
the benefit of any other Person.
6.6.5 Neither the Board nor the officers of the Company shall
be liable to the Company or to a Member for any losses sustained or
liabilities incurred as a result of any act or omission of the Board
or any such officer if (a) the act or failure to act of the Board or
such officer was in good faith and in a manner it reasonably believed
to be in, or not contrary to, the best interests of the Company, (b)
the conduct of the Board or such officer did not constitute gross
negligence or willful misconduct and (c) the Indemnitee's conduct is
not based upon or attributable to the receipt by the Indemnitee of a
personal benefit to which the Indemnitee is not entitled.
6.6.6 To the extent that any Director or any officer of the
Company (each, a "Responsible Party") has, at law or in equity, duties
(including, without limitation, fiduciary duties) to the Company or
any Member or other Person bound by the terms of this Agreement, such
Responsible Parties shall not be liable to the Company, any Member, or
any such other Person for its good faith reliance on the provisions of
this Agreement so long as such Responsible Parties act in accordance
with this Agreement and exercise such standard of care applicable to a
director or any officer, as applicable, of a corporation incorporated
in the State of Delaware. The provisions of this Agreement, to the
extent, if any, that they restrict the duties of a Responsible Party
otherwise existing at law or in equity, are agreed by all parties
hereto to replace such other duties to the greatest extent permitted
under applicable law.
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6.6.7 Whenever a Responsible Party is required or permitted to
make a decision, take or approve an action, or omit to do any of the
foregoing (a) in its discretion, (b) under a similar grant of authority or
latitude or (c) without an express standard of behavior (including, without
limitation, standards such as "reasonable" or "good faith"), then such
Responsible Party shall be subject to the standard of care applicable to a
director or any officer, as applicable, of a corporation incorporated in
the State of Delaware.
6.7 Removal and Withdrawal of Directors.
6.7.1 A Director may not be removed as a Director at any time
except (a) by the Person that designated such Director or (b) for cause.
For purposes of this Paragraph 6.7.1, "cause" shall mean a finding by a
majority of the Board that the Director has engaged in conduct that is
fraudulent, disloyal, criminal or injurious to the Company, including,
without limitation, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his or her service, or that the Director has
disclosed trade secrets or confidential information of the Company to any
Persons not entitled to receive such information. Upon (i) the removal of a
Director pursuant to this Paragraph 6.7.1, (ii) the withdrawal of a
Director pursuant to Paragraph 6.7.2, or (iii) the death or Incapacity of a
Director, the Member that designated such Director shall be entitled to
designate a replacement Director.
6.7.2 Any Director may withdraw as a Director at any time without
the prior consent of any Person by providing the Board written notice
thereof.
6.8 Other Activities. Subject to the provisions of this Article and
Paragraph 10.1 (and any employment or other agreement with the Company or ZB.com
to which such Member may be a party), any members of the Board may engage or
invest in, and devote their time to, any other business venture or activity of
any nature and description (independently or with others), including, without
limitation, the business of Retail Sponsor and ONRP, as applicable, whether or
not such other activity may be deemed or construed to be in competition with the
Company. Neither the Company nor any other Member shall have any right by virtue
of this Agreement or the relationship created hereby in or to such other venture
or activity of any Member (or to the income or proceeds derived therefrom), and
the pursuit thereof, shall not be deemed wrongful or improper. Notwithstanding
the foregoing, the Board shall devote such time to the Company as it deems
reasonably necessary for the proper performance of its obligations and duties
hereunder.
6.9 Officers. The Board may select natural persons who are agents or
employees of the Company to be designated as officers of the Company (the
"Officers"), with such titles as the Board shall determine. Any number of
offices may be held by the same person. Any such Officer chosen by the Board
shall be a "manager" (within the meaning of the Act) of the Company. The Board
may choose a "President," a "Vice President," a "Secretary," a "Treasurer" and
such other Officers as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board. The salaries of all Officers shall be
fixed in a manner prescribed by the Board. The Officers shall hold office until
their successors are chosen and qualify. Any
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Officer elected or appointed by the Board may be removed at any time by the
affirmative vote of a majority of the Board. Any vacancy occurring in any office
of the Company shall be filled by the Board.
6.10 The President. The President shall be the chief executive officer
of the Company, shall preside at all meetings of the members of the Board, shall
have general active management of the business of the Company and shall see that
all orders and resolutions of the Board are carried into effect. The President
shall execute bonds, mortgages and other contracts, except where required or
permitted by law to be otherwise signed and executed and except where signing
and execution thereof shall be expressly delegated by the Board to some other
Officer or except as otherwise permitted in Paragraph 6.11.
6.11 The Vice President. In the absence of the President or in the
event of the President's inability to act, the Vice President, if any, (or in
the event there be more than one Vice President, the Vice Presidents in the
order designated by the Board, or in the absence of any designation, then in the
order of their election) shall perform the duties of the President, and when so
acting, shall have all the powers of, and be subject to all the restrictions
upon, the President. The Vice Presidents, if any, shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
6.12 The Secretary and Assistant Secretary. The Secretary shall attend
all meetings of the Board and all meetings of the Members and record all the
proceedings of the meetings of the Members and of the Board in a book to be kept
for that purpose. The Secretary shall give, or cause to be given, notice of all
meetings of the Members and Board, and shall perform such other duties as may be
prescribed by the Board or the President, under whose supervision the Secretary
shall be. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there be no such
determination, then in order of their election) shall, in the absence of the
Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
6.13 the Treasurer and Assistant Treasurer. The Treasurer shall have
the custody of the Company funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Company and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the Board.
The Treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President or the Board (when the Board so requires) an account of all of the
Treasurer's transactions and of the financial condition of the Company. The
Assistant Treasurer, or if there shall be more than one, the Assistant
Treasurers in the order determined by the Board (or if there be no such
determination, then in the order of their election), shall, in the absence of
the Treasurer or in the event of the Treasurer's inability to act, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
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6.14 Officers as Agents. The Officers, to the extent of their powers
set forth in this Agreement, are agents of the Company for the purpose of the
Company's business, and the actions of the Officers taken in accordance with
such powers shall bind the Company.
ARTICLE 7
TRANSFERS OF INTERESTS; RIGHT OF FIRST REFUSAL
7.1 Transfers. No Member or Assignee may make any Membership Interest
Transfer of all or any portion of its Membership Interest (or beneficial
interest therein) without the prior written consent of a Majority in Interest,
which consent may be given or withheld in a Majority in Interests' sole and
absolute discretion, for a period of three years commencing on the Effective
Date.
7.1.1 No Member shall make any Membership Interest Transfer or
Permitted Transfer except as specifically permitted under the terms of this
Agreement. Any Membership Interest Transfer or attempted Membership
Interest Transfer not in accordance herewith shall be null and void and of
no force or effect.
7.1.2 Prior to an IPO, ONRP may not Transfer its Membership
Interests, in whole or in part, to another Person which derived 10% or more
of its consolidated revenues (as measured in the most recent full fiscal
year) from the sale of products in the Same Category.
7.1.3 Subject to Paragraphs 7.1.1 or 7.1.2 and to the following
sentence, any Member may make a Transfer of Membership Interests which
constitutes a Permitted Transfer. Notwithstanding anything else contained
herein to the contrary, any Membership Interests Transferred pursuant to
this Agreement (including in a Permitted Transfer) shall nevertheless
remain subject to the provisions of this Agreement, and the transferee (if
not already a Party) of any such Membership Interests which remain subject
to the provisions of this Agreement shall execute and deliver to each
Party, as a condition precedent to such Transfer, documents reasonably
satisfactory to the Company confirming that it agrees to be bound by the
terms of this Agreement in the same manner as its transferor, except as
otherwise specifically provided in this Agreement.
7.1.4 The Company generally will not request an opinion of
counsel with respect to a Transfer by any Member to one of its Affiliates,
provided that such Member delivers to the Company such certificates
executed by an officer of such Member as the Company shall reasonably
request that such Transfer is exempt from the registration requirements of
the Securities Act.
7.1.5 The provisions of this Paragraph 7.1 shall terminate on the
day which is 180 days after the date on which an IPO is consummated, except
for Paragraph 7.1.2 above which shall terminate on the date on which the
IPO is consummated.
7.2 Right of First Refusal.
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7.2.1 In the event any Member (an "Offering Member") desires to
make a Membership Interest Transfer, it must first deliver written notice
thereof (an "Offer Notice") to the Company and the other Members. The Offer
Notice must contain a full description of the proposed Membership Interest
Transfer, including, without limitation, the type of Membership Interest
Transfer, the number of Membership Interests to be Transferred (the
"Affected Membership Interests"), the proposed per Membership Interest
purchase price and terms of payment for the Affected Membership Interests,
the proposed date of such Transfer and the identity of the proposed
transferee, and must be accompanied by a copy of the proposed transferee's
offer to acquire the Affected Membership Interests. An Offer Notice shall
constitute the Offering Member's binding agreement to sell the applicable
number of Affected Membership Interests to each of the other Members and
the Company on the terms and conditions specified therein.
7.2.2 Each of the other Members shall have twenty (20) days after
its receipt of the Offer Notice to elect, by delivering a written
acceptance to the Offering Member and the Company (an "ROFR Acceptance
Notice"), to purchase up to its ROFR Allotment of the Affected Membership
Interests; provided, however, in the event any such other Member specifies
a number of Affected Membership Interests in excess of its ROFR Allotment,
such other Member shall be deemed to have specified its ROFR Allotment and
such excess Affected Membership Interests shall be treated as Additional
ROFR Membership Interests (as defined below). The ROFR Acceptance Notice
shall also specify the aggregate number of additional Affected Membership
Interests, if any, which such other Member would agree to purchase
("Additional ROFR Membership Interests") in the event any of such other
Members fail to subscribe for their respective ROFR Allotments of the
Affected Membership Interests. Upon such an occurrence, the Offering Member
shall apportion the unsubscribed ROFR Allotments of the other Members among
those Members whose ROFR Acceptance Notices specified (or was deemed to
specify) an amount of Additional ROFR Membership Interests on a pro rata
basis among such Members in accordance with the number of Additional ROFR
Membership Interests specified by all such Members in their ROFR Acceptance
Notices. A ROFR Acceptance Notice shall constitute a Member's binding
agreement (subject to any closing conditions specified in the Offer Notice
or otherwise specifically provided for in Paragraph 7.2.4 below) to
purchase the number of Affected Membership Interests set forth therein
(including any Additional ROFR Membership Interests) on the terms and
conditions specified in the Offer Notice.
7.2.3 In the event the Members do not exercise their option to
purchase all of the Affected Membership Interests in accordance herewith,
the Company shall have the option (but not the obligation) to purchase all
(but not less than all) of the remaining Affected Membership Interests by
delivering a written acceptance to the Offering Member within 10 days after
receipt of the ROFR Acceptance Notices (the "Cutoff Date"). The Offering
Member shall have no obligation to sell any Affected Membership Interests
to the other Members or to the Company pursuant to this Paragraph 7.2
unless all of the Affected Membership Interests have been subscribed for in
accordance with Paragraph 7.2.2 above and this Paragraph 7.2.3.
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7.2.4 With respect to any purchase of Affected Membership
Interests pursuant to Paragraphs 7.2.2 and 7.2.3 above, the purchase price
for the Affected Membership Interests and the other terms of transfer shall
be as set forth in the Offer Notice. The closing of such Transfer shall
take place at the Company's principal office at 10:00 a.m. local time on
the tenth (10th) business day after the Offering Member receives its last
written acceptance pursuant to this Paragraph 7.2 (or, if applicable, on
the third business day following the date on which any required
governmental approvals for such Transfer are obtained or the expiration of
any waiting period under the HSR Act), or at such other place, time or date
as the Offering Member and the purchaser(s) of Affected Membership
Interests (the "Purchasers") mutually agree. At the closing, the Offering
Member shall deliver to each Purchaser its confirmation that it has
transferred the Affected Membership Interests free and clear of any and all
pledges, liens, claims, security interests or other encumbrances (other
than restrictions imposed by this Agreement) and the Purchaser shall pay to
the Offering Member the consideration set forth in the Offer Notice in
accordance with the terms described therein. In the event any Purchaser
fails to obtain any such required governmental consent or approval (or the
expiration of any waiting period under the HSR Act) prior to the 60th day
following the Cutoff Date (or such later date as may be agreed to by the
Offering Member), after having attempted in good faith, using commercially
reasonable efforts, to obtain such consent or approval (or such
expiration), such Purchaser shall be released from its obligation to
purchase any Affected Membership Interests in excess of the amount for
which such governmental consent or approval is required (or which could be
purchased without any filing under the HSR Act). Such excess Membership
Interests shall be reallocated as Additional ROFR Membership Interests
pursuant to the provisions of Paragraphs 7.2.2 and 7.2.3 above.
7.2.5 Subject to the provisions of Paragraphs 7.2.2 and 7.2.3, in
the event that all of the Affected Membership Interests are not purchased
pursuant to this Paragraph 7.2, the Offering Member shall be free to
Transfer the Affected Membership Interests in strict accordance with the
terms set forth in the Offer Notice at any time within sixty (60) days
after the Cutoff Date (the "Transfer Period Termination Date"), provided
that if the Offering Member has executed a definitive agreement for the
sale of all of the Affected Membership Interests within thirty (30) days
after the Cutoff Date, then the Offering Member shall be entitled to extend
the Transfer Period Termination Date for up to an additional thirty (30)
days to effect the closing of such sale, or, if any required governmental
approval (or expiration of any waiting period) has not been obtained by
such date, to such date (not more than 120 days after the Cutoff Date) as
may be required for any necessary governmental approvals (or expiration of
any waiting period) for such Transfer to be obtained. In the event that the
Offering Member does not sell or otherwise dispose of all of such Affected
Membership Interests in the manner set forth in the immediately preceding
sentence prior to the Transfer Period Termination Date, the right of first
refusal provided for in this Paragraph 7.2 shall continue to be applicable
to any subsequent disposition of such Membership Interests.
7.2.6 The provisions of this Paragraph 7.2 shall terminate on the
day on which an IPO is consummated.
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7.3 Further Restrictions. Notwithstanding any contrary provision in
this Agreement, any otherwise permitted Transfer shall be null and void if:
(a) such Transfer would cause a termination of the Company
for federal income tax purposes;
(b) such Transfer would, in the written opinion of counsel
to the Company, cause the Company to cease to be classified as a
partnership for federal income tax purposes;
(c) such Transfer requires the registration of such
Transferred Membership Interests pursuant to any applicable federal or
state securities laws;
(d) such Transfer causes the Company to become a "publicly
traded partnership," as such term is defined in Sections 469(k)(2) or
7704(b) of the Code;
(e) such Transfer subjects the Company to regulation under
the Investment Company Act of 1940, the Investment Advisers Act of
1940 or the Employee Retirement Income Security Act of 1974, each as
amended;
(f) such Transfer results in a violation of applicable laws;
(g) such Transfer causes the revaluation or reassessment of
the value of any Company Asset resulting in any material federal,
state or local tax liability;
(h) such Transfer is made to any Person who lacks the legal
right, power or capacity to own such Membership Interest; or
(i) the Company does not receive original copies of (i) any
instruments of Transfer and (ii) such Assignee's consent to be bound
by this Agreement as an Assignee, in each case in form and substance
satisfactory to the Board (as determined in the Board's sole and
absolute discretion).
7.4 Rights of Assignees. Until such time, if any, as a transferee of
any permitted Transfer pursuant to this Article 7 is admitted to the Company as
a Substitute Member pursuant to Paragraph 7.7: (a) such transferee shall be an
Assignee only, and only shall receive, to the extent Transferred, the
distributions and allocations of income, gain, loss, deduction, credit, or
similar item to which the Member which Transferred its Membership Interests
would be entitled, and (b) such Assignee shall not be entitled or enabled to
exercise any other rights or powers of a Member, such other rights remaining
with the transferring Member. In such a case, the transferring Member shall
remain a Member even if he has transferred his entire Membership Interest, in
whole or in part, in the Company to one or more Assignees. In the event any
Assignee desires to make a further assignment of any Membership Interest in the
Company, such
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Assignee shall be subject to all of the provisions of this Agreement to the same
extent and in the same manner as any Member desiring to make such an assignment.
7.5 Admissions, Withdrawals and Removals. No Person shall be admitted
to the Company as a Member except in accordance with Paragraph 3.4 (in the case
of Persons obtaining an interest in the Company directly from the Company) or
Paragraph 7.7 (in the case of transferees of a Permitted Transfer of a
Membership Interest in the Company from another Person). Except as otherwise
specifically set forth in Paragraphs 7.8 or upon the admission of a Substitute
Member pursuant to Paragraph 7.6, no Member shall be entitled to resign or
withdraw from being a Member of the Company without the written consent of a
Majority in Interest, which consent may be given or withheld at its sole and
absolute discretion. No Member shall be subject to removal. No admission,
withdrawal or removal of a Member shall, in and of itself, cause the dissolution
of the Company. Any purported admission or resignation which is not in
accordance with this Agreement shall be null and void.
7.6 Payment Upon Resignation of Member. If any Member resigns from the
Company with the consent of a Majority in Interest (other than pursuant to
Paragraph 7.8) then such Member automatically shall receive from the Company a
payment equal to the Member's Capital Account balance as adjusted as of the
effective date of the written election of resignation (the "Termination
Payment"). The Termination Payment shall be paid on the effective date of the
written resignation. If any Member attempts to resign from the Company (other
than pursuant to Paragraph 7.8) without the consent of a Majority in Interest or
the remaining Members, then, notwithstanding the last sentence of Paragraph 7.5,
a Majority in Interest may, in its sole and absolute discretion, permit such
resignation (without waiving, in any manner, any other rights available to it or
the Company at law or in equity and in addition to, and not in lieu of, any
other remedies to which it or the Company may be entitled), provided that such
resigning Member shall not be entitled to any Termination Payment or any other
compensation whatsoever in consideration for its terminated Membership Interest,
such Membership Interest shall be cancelled and such resigning Member shall have
no further rights or interests in the Company. Notwithstanding anything to the
foregoing in this Paragraph 7.6, if ONRP resigns from the Company without the
consent of all of the Members prior to November 15, 1999, ONRP shall make the
Follow-On Subscription payment upon its withdrawal.
7.7 Admission of Assignees as Substitute Members.
7.7.1 An Assignee shall become a Substitute Member only if all of
the requirements of this Article 7 have been met and when each of the
following conditions are satisfied:
(a) the assignor of the Membership Interests transferred
sends written notice to the Board requesting the admission of the
Assignee as a Substitute Member and setting forth the name and address
of the Assignee, the Membership Interest transferred, and the
effective date of the Transfer;
(b) the Board consents in writing to such admission, which
consent may be given or withheld in the Board's sole and absolute
discretion; and
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(c) the Board receives from the Assignee (i) such
information concerning the Assignee's financial capacities and
investment experience as may reasonably be requested by the Board, and
(ii) (x) copies of any instruments of Transfer and (y) such Assignee's
consent to be bound by this Agreement as a Substitute Member, in each
case in form and substance satisfactory to the Board (as determined in
the Board's sole and absolute discretion).
7.7.2 Upon the admission of any Substitute Member, Exhibit A
shall be amended to reflect the name, address, Membership Interests and
Ownership Percentage of such Substitute Member and to eliminate or adjust,
if necessary, the name, address, Membership Interests and Ownership
Percentage of the predecessor of such Substitute Member.
7.8 Resignation of Members. If a Member has transferred all of its
Membership Interests to one or more Assignees, then such Member shall resign
from the Company if and when all such Assignees have been admitted as Substitute
Members in accordance with this Agreement.
7.9 Conversion of Membership Interest. Upon the Incapacity of a
Member, such Incapacitated Member shall be entitled to receive only the
allocations and distributions attributable to the Member's Membership Interest
in the Company, if any, but shall not be entitled to any other rights of a
Member. Such Incapacitated Member (or its executor, administrator, trustee or
receiver, as applicable) shall thereafter be deemed an Assignee for all purposes
hereunder unless the Member of such Membership Interest is admitted as a
Substitute Member pursuant to Paragraph 7.7.
7.10 Compliance With IRS Safe Harbor. The Board shall monitor the
transfers of interests in the Company to determine (i) if such interests are
being traded on an "established securities market" or a "secondary market (or
the substantial equivalent thereof)" within the meaning of Section 7704 of the
Code, and (ii) whether additional transfers of interests would result in the
Company being unable to qualify for at least one of the "safe harbors" set forth
in Regulations Section 1.7704-1 (or such other guidance subsequently published
by the Internal Revenue Service setting forth safe harbors under which interests
will not be treated as "readily tradable on a secondary market (or the
substantial equivalent thereof)" within the meaning of Section 7704 of the Code)
(the "Safe Harbors"). The Board shall take all steps reasonably necessary or
appropriate to prevent any trading of interests or any recognition by the
Company of transfers made on such markets and, except as otherwise provided
herein, to ensure that at least one of the Safe Harbors is met.
ARTICLE 8
CONVERSION AND EXCHANGE OF INTERESTS
8.1 Conversion of Preferred Interests. Each Member that holds Voting
Preferred Interests or Non-Voting Preferred Interests may, at the election of
such Member, convert all or any part of such Preferred Interests into an equal
number of Voting Common
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Interests or Non-Voting Common Interests, as applicable. If any Member elects to
convert Preferred Interests into Common Interests pursuant to this Paragraph
8.1, such Member shall deliver a written notice to the Company specifying the
number of Preferred Interests to be converted into Common Interests. Upon
receipt of such notice by the Company, the Board will take all actions as may be
necessary to reflect such conversion of Interests on the books and records of
the Company, including, without limitation, on Exhibit A attached hereto.
8.2 Restrictions On Conversion of Interests. No Member shall have the
right to convert (a) Common Interests into Preferred Interests, (b) Non-Voting
Preferred Interests into Voting Common Interests, (c) Non-Voting Preferred
Interests into Voting Preferred Interests or (d) Non-Voting Common Interests
into Voting Common Interests.
8.3 Corporate Conversion.
8.3.1 It is the intent of the Members that in the event the Board
determines to cause ZB.com or another Subsidiary of the Company to pursue a
public offering of equity securities which is expected to constitute an IPO
(the "Converting Subsidiary"), the Converting Subsidiary will be
reorganized as a corporation incorporated under the laws of the State of
Delaware in accordance with the provisions of this Paragraph 8.3. The
Members acknowledge that there is no specific date by which the Company
anticipates causing ZB.com or another Subsidiary of the Company to
consummate a Corporate Conversion (as defined below) and/or an IPO.
8.3.2 In connection with an IPO by the Converting Subsidiary, the
Board and each of the Members agree to take such actions as may be
reasonably necessary to cause the Converting Subsidiary to be reorganized
(by merger, conversion or otherwise) as, or its assets and liabilities to
be contributed to, a newly- formed Delaware corporation which, immediately
prior to such reorganization, has no material assets or liabilities (any
such transaction being referred to herein as a "Corporate Conversion"), and
that upon such Corporate Conversion, the Delaware corporation succeeding to
the Converting Subsidiary's assets and liabilities (the "Conversion
Corporation") shall succeed to and specifically assume all of the rights,
obligations, benefits and liabilities of the Converting Subsidiary and
shall be deemed the successor of the Converting Subsidiary for all purposes
under the Capital Contribution Agreement. Subject to Paragraph 8.3, upon
the occurrence of any such Corporate Conversion, the membership interests
of the Converting Subsidiary shall, to the extent feasible based on the
advice of the underwriters, be converted into, or exchanged for, on a
one-for-one basis, shares of super-voting common stock of the Conversion
Corporation; provided, however, that if the amount a holder would receive
upon a liquidation is less than the liquidation amount as set forth in the
operating agreement of the Conversion Corporation with respect to such
converted preferred interests and common interests of the Conversion
Corporation, then the Board of Directors of the Conversion Corporation
shall adjust the conversion ratio for the common interests to provide that
the holders thereof shall receive less than one share per converted common
interest to the extent necessary to preserve the amount that a holder of
the preferred interests would receive upon a liquidation of the Converting
Subsidiary.
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8.3.3 Conversion Procedures. The Company shall promptly notify
each Member of its intention to effect a Corporate Conversion of the
Converting Subsidiary, which notice shall specify the manner in which such
Corporate Conversion is to take place, together with a description of the
anticipated tax treatment and consequences of such Corporate Conversion.
8.3.4 The parties acknowledge and agree that the Corporate
Conversion should be accomplished in a tax free transaction, or if such tax
free transaction is not reasonably available, in the most tax efficient
manner possible. In the event that (i) any Member reasonably believes that
the structure selected by the Board to effect the Corporate Conversion
would result in the incurrence of tax liability by the Member in connection
with such Corporate Conversion and (ii) such Member believes that a
different structure for such Corporate Conversion would result in the
incurrence of lesser tax liability, then the Company agrees to act in good
faith and in the best interests of the Members in revising the proposed
structure of such Corporate Conversion so as to minimize such tax
liability.
8.3.5 Following notice of a proposed Corporate Conversion, the
Converting Subsidiary and each Member shall use their respective
commercially reasonable efforts to seek and obtain any required
governmental consents and approvals and to make all filings required under
the HSR Act (to the extent the Board or such Member reasonably determines
such filings are necessary in connection with the Corporate Conversion) and
cause the termination or expiration of the waiting period applicable
thereto; provided, that no Member shall be required, as a condition of the
receipt of any such consent or approval or expiration of any such waiting
period, to agree to dispose of any of its assets or any equity interest in
the Converting Subsidiary.
8.4 Exchange of Interests.
8.4.1 In the event of an IPO by ZB.com or another subsidiary of
the Company (the "Issuer"), each Member may, commencing 180 days after such
IPO, at the election of such Member, exchange all or any part of such
Member's Membership Interests (whether voting, non-voting, common or
preferred) for equity securities of the Issuer of the kind sold by the
Issuer in such offering which are held by (or are issuable upon conversion
of any securities held by) the Company (the "Issuer Securities"), subject
to the provisions of Paragraph 8.4.2. The number of Issuer Securities to be
received in exchange for such Member's Membership Interest shall be equal
to the Ownership Percentage represented by the Membership Interests to be
exchanged multiplied by the total number of Issuer Securities then held by
the Company. If any Member elects to exchange Membership Interests for
Issuer Securities pursuant to this Paragraph 8.4, such Member shall deliver
a written notice to the Company specifying the number of Membership
Interest to be exchanged. Upon receipt of such notice by the Company, the
Board will take all actions as may be necessary to reflect such exchange
(and the reduction of the exchanging Member's Ownership Percentage) on the
books and records of the Company, including, without limitation, on Exhibit
A attached hereto. Any Member electing to exchange Membership Interest for
Issuer Securities pursuant to this Paragraph 8.4 shall receive registration
rights with respect to such equity securities. The
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consummation of any exchange pursuant to this Paragraph 8.4 shall
be subject to receipt by the Company of all documents in a form reasonably
satisfactory to the Company which in the opinion of the Company's counsel
are necessary or advisable to complete such exchange.
8.4.2 Upon consummation of any exchange of Membership Interests
pursuant to Paragraph 8.4.1, the exchanging Member's Membership Interests
shall, to the extent exchanged, be canceled. If a Member has exchanged all
of its interests for Issuer Securities, then such Member shall withdraw
from the Company. Any such cancellation of Membership Interests and/or
withdrawal from the Company shall be acknowledged in writing in a form
reasonably acceptable to the Company by the applicable Member.
8.4.3 Notwithstanding any provision contained in Paragraph 8.4.1,
no Member shall have the right to exchange any of such Member's Membership
Interests for Issuer Securities if such exchange would result in the
Company owning less than 51% of the outstanding voting stock of the Issuer,
unless such Member certifies that the Issuer Securities to be received upon
such exchange will be sold by such Member within six months from the date
of such exchange or on such later date on which the Issuer Securities may
be sold pursuant to Rule 144 under the Securities Act of 1933, as amended.
In the event that more than one Member desires to exchange Membership
Interests pursuant to this Paragraph 8.4, and the result of such exchanges
would result in the Company owning less than 51% of the outstanding voting
stock of the Issuer, then the number of Membership Interests to be
exchanged by each Member shall be equal to the number of Membership
Interests which such Member desires to exchange multiplied by a fraction,
the numerator of which shall be the number of Membership Interests which
such Member desires to exchange and the denominator shall be the number of
Membership Interests which all Members desire to exchange.
8.4.4 In the event that any Member's acquisition of Issuer
Securities may not be effected because the waiting period under the HSR Act
has not expired, then such Member shall be entitled to request, instead of
the Issuer Securities, non- voting common stock of the Converting
Subsidiary ("Non-Voting Stock"); provided, however, that the terms of such
Non-Voting Stock shall provide that (i) such Non-Voting Stock would convert
(on a share for share basis) into Issuer Securities, upon the expiration of
the waiting period under the HSR Act or the Transfer to any third party
whose ownership of Issuer Securities does not require any consent, approval
or filing (or where such has been obtained), (ii) such Non-Voting Stock
would be subject to adjustments such that, upon conversion, a holder would
receive such cash, securities or other property as it would have been
entitled had such holder received Issuer Securities, (iii) the Conversion
Corporation would not effect any stock split, stock dividend or
recapitalization affecting the Issuer Securities unless a corresponding
stock split, stock dividend or recapitalization were effected with respect
to the Non-Voting Stock and (iv) the Issuer Securities and Non-Voting Stock
would otherwise have identical terms and conditions, except that the
holders of Non-Voting Stock would not be entitled to vote on matters
presented to stockholders except as otherwise provided under Delaware law.
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ARTICLE 9
DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY
9.1 Limitations. The Company may be dissolved, liquidated, and
terminated only pursuant to the provisions of this Article 9, and the parties
hereto do hereby irrevocably waive, to the fullest extent permitted by
applicable law, any and all other rights they may have to cause a dissolution of
the Company (including, without limitation, pursuant to Section 18-801(a)(3) of
the Act) or a sale or partition of any or all of the Company Assets.
9.2 Exclusive Causes. The following and only the following events
shall cause the Company to be dissolved:
(a) the occurrence of a Terminating Capital Transaction;
(b) by the election of a Majority in Interest;
(c) the entry of a decree of judicial dissolution under
Section 18-802 of the Act; or
(d) the termination of the legal existence of the last
remaining member of the Company or the occurrence of any other event
which terminates the continued membership of the last remaining member
of the Company in the Company in accordance with Paragraph 6.2.1(m)
unless the business of the Company is continued in a manner permitted
by this Agreement or the Act.
Any dissolution of the Company other than as provided in this Paragraph 9.2
shall be a dissolution in contravention of this Agreement.
9.3 Effect of Dissolution. The dissolution of the Company shall be
effective on the day on which the event occurs giving rise to the dissolution,
but the Company shall not terminate until it has been wound up and its assets
have been distributed as provided in Paragraph 9.5 of this Agreement.
Notwithstanding the dissolution of the Company, prior to the termination of the
Company, the business of the Company and the affairs of the Members, as such,
shall continue to be governed by this Agreement.
9.4 No Capital Contribution Upon Dissolution. Each Member shall look
solely to the assets of the Company for all distributions with respect to the
Company, its Capital Contribution thereto, its Capital Account and its share of
Net Profits or Net Losses, and shall have no recourse therefor (upon dissolution
or otherwise) against any other Member. Accordingly, if any Member has a deficit
balance in its Capital Account (after giving effect to all contributions,
distributions and allocations for all taxable years, including the year during
which the liquidation occurs), then such Member shall have no obligation to make
any Capital Contribution with respect to such deficit, and such deficit shall
not be considered a debt owed to the Company or to any other person for any
purpose whatsoever.
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9.5 Liquidation.
9.5.1 Upon dissolution of the Company, the Board shall act as the
"Liquidator" of the Company. The Liquidator shall liquidate the assets of
the Company, and after allocating (pursuant to Article 5 of this Agreement)
all income, gain, loss and deductions resulting therefrom, shall, subject
to the rights and preferences of any classes of interests approved by the
Board and issued by the Company from time to time, apply and distribute the
proceeds thereof as follows:
(a) First, to the payment of the obligations of
the Company, to the expenses of liquidation, and to the
setting up of any Reserves for contingencies which the Board
may consider necessary; and
(b) Thereafter, to the Members in proportion to
the positive Capital Account balances in the Members'
respective Capital Accounts determined after giving effect
to all contributions and distributions for all periods, and
after taking into account all Capital Account adjustments
for the Company taxable year during which the liquidation
occurs by the end of the taxable year in which such
liquidation occurs, or, if later, within 90 days after the
date of the liquidation.
9.5.2 Notwithstanding Paragraph 9.5.1 of this Agreement, in the
event that the Board determines that an immediate sale of all or any
portion of the Company Assets would cause undue loss to the Members, the
Board, in order to avoid such loss to the extent not then prohibited by the
Act, may either defer liquidation of and withhold from distribution for a
reasonable time any Company Assets except those necessary to satisfy the
Company's debts and obligations, or distribute the Company Assets to the
Members in kind.
ARTICLE 10
EXCLUSIVITY; NON-SOLICITATION
10.1 Exclusivity. Except through the Company and ZB.com, neither
Retail Sponsor nor ONRP will, directly or indirectly, establish or acquire any
equity interest in, or provide support or services to, any other online business
which (either alone or when combined with its Affiliates or sponsoring "bricks
and mortar" retailer), at the time such interest is acquired or such support or
services are agreed to be provided, derives a majority of its consolidated
revenues from the retail sale of (a) products in the Same Category, or (b)
products targeted to children age 12 and under and also offers products in the
Same Category if such products in the Same Category constitute more than 10% of
its consolidated revenues, unless such business agrees to
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limit its online offering of products in the same categories as those sold by
ZB.com to less than 10% of the total number of SKU's offered by such business to
its online customers, or (c) other products and also offers products in the Same
Category if such products in the Same Category constitute more than 20% of its
consolidated revenues, unless such business agrees to limit its online offering
of products in the same categories as those sold by ZB.com to less than 20% of
the total number of SKU's offered by such business to its online customers. The
Members acknowledge that the provisions of the preceding sentence are applicable
to Retail Sponsor and ONRP and their respective Subsidiaries but not to any
other Affiliate of either of them (to the extent that any such Affiliate is not
directly or indirectly controlled by ONRP with respect to any such investment or
services). The foregoing provisions shall not be deemed to prohibit Retail
Sponsor or any of its Subsidiaries from acquiring any other "bricks and mortar"
business which has an ownership interest in an online business which Retail
Sponsor would otherwise be prohibited from acquiring pursuant to the provisions
of this Paragraph; provided, however, that the exception provided in this
sentence shall only be operative if, following any such acquisition, any such
online business which has been so acquired is either (i) dissolved or otherwise
terminated or (ii) conducted exclusively through the Company or ZB.com.
10.2 Change of Business Model. The Company agrees that it will not,
and will not permit ZB.com or any of its other Subsidiaries to change its
primary business model to one other than a model primarily focused on the online
sale of products in the Same Category, without the prior written consent of each
of ONRP and the Retail Sponsor. ONRP agrees not to permit any other .com Company
to change its primary business model to a model that is primarily focused on the
online sale of products in the Same Category, without the prior written consent
of the Company.
10.3 Non-solicitation. For so long as it holds any Membership Interest
in the Company and for a one-year period thereafter, each of Retail Sponsor and
ONRP agrees that it shall not, directly or indirectly, hire, solicit or attempt
to solicit the services or business of any employee of the other party or
ZB.com, or any of the other Retailers or .com Companies, without the prior
written consent of the other party. ONRP will require each of the other
Retailers and .com Companies to enter into equivalent agreements with respect to
ZB.com and Retail Sponsor.
ARTICLE 11
MISCELLANEOUS
11.1 Appointment of Board as Attorney-in-fact.
11.1.1 Each Member, including each Additional Member, by its
execution of this Agreement, irrevocably constitutes and appoints the Board
or any individual Director to whom the Board has delegated specific
authority (only to the extent of such authority), as its true and lawful
attorney-in-fact with full power and authority in its name, place and stead
to execute, acknowledge, deliver, swear to, file and record at the
appropriate public offices such documents as may be necessary or
appropriate to carry out the provisions of this Agreement, including but
not limited to:
(a) All certificates and other instruments (including
counterparts of this Agreement), and all amendments thereto, which the
Board deems appropriate or convenient to form, qualify, continue or
otherwise operate the Company as a limited liability company (or other
entity in which the Members will have limited liability comparable to
that provided in the Act), in the
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jurisdictions in which the Company may conduct business or in which
such formation, qualification or continuation is, in the opinion of
the Board, necessary or desirable to protect the limited liability of
the Members.
(b) All amendments to this Agreement adopted in accordance
with the terms hereof, and all instruments which the Board deems
appropriate or convenient to reflect a change or modification of the
Company in accordance with the terms of this Agreement.
(c) All conveyances of Company Assets, and other instruments
which the Board reasonably deems necessary in order to complete a
dissolution, winding up and termination of the Company pursuant to
this Agreement.
11.1.2 The appointment by all Members of the Board or any
individual Director to whom the Board has delegated specific authority, as
attorney-in-fact shall be deemed to be a power coupled with an interest, in
recognition of the fact that each of the Members under this Agreement will
be relying upon the power of the Board to act as contemplated by this
Agreement in any filing and other action by it on behalf of the Company,
shall survive the Incapacity of any Person hereby giving such power, and
the transfer or assignment of all or any portion of the Membership Interest
of such Person in the Company, and shall not be affected by the subsequent
Incapacity of the principal; provided, however, that in the event of the
assignment by a Member of all of its Membership Interest in the Company,
the foregoing power of attorney of an assignor Member shall survive such
assignment only until such time as the Assignee shall have been admitted to
the Company as a Substitute Member and all required documents and
instruments shall have been duly executed, filed and recorded to effect
such substitution.
11.2 Amendments.
11.2.1 Each Additional Member and Substitute Member shall become
a signatory hereto by signing such number of counterpart signature pages to
this Agreement, a power of attorney to the Board, and such other
instruments, in such manner, as the Board shall determine. By so signing,
each Additional Member and Substitute Member, as the case may be, shall be
deemed to have adopted and to have agreed to be bound by all of the
provisions of this Agreement.
11.2.2 Other than amendments specifically authorized herein, no
amendment to this Agreement or to the operating agreement of any Subsidiary
of the Company may be made without the consent a Majority in Interest.
11.2.3 In addition to other amendments authorized herein,
amendments may be made to this Agreement from time to time by the Board,
without the consent of any Member: (a) to cure any ambiguity, to correct or
supplement any provision herein which may be inconsistent with any other
provision herein, or to make any other provisions with respect to matters
or questions arising under this Agreement that are not inconsistent with
the provisions of this Agreement; (b) to delete or add any provision of
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this Agreement required to be so deleted or added by any federal or state
official, which addition or deletion is deemed by such official to be for
the benefit or protection of all of the Members; and (c) to take such
actions as may be necessary (if any) to insure that the Company will be
treated as a partnership for federal income tax purposes.
11.2.4 In making any amendments, there shall be prepared and
filed by, or for, the Board such documents and certificates as may be
required under the Act and under the laws of any other jurisdiction
applicable to the Company.
11.3 Accounting and Fiscal Year. Subject to Code Section 448, the
books of the Company shall be kept on such method of accounting for tax and
financial reporting purposes as may be determined by the Board. The fiscal year
of the Company shall end on the Saturday nearest January 31st of each year.
11.4 Meetings. A meeting of the Members shall be held at least once a
year. At any time, and from time to time, the Board and/or a holder of at least
25% of the Voting Interests may call meetings of the Members. Each Member may
authorize any other Person (whether or not such other Person is a Member) to act
for it or on its behalf on all matters in which the Member is entitled to
participate. Each proxy must be signed by the Member or such Member's attorney-
in-fact.
11.4.1 Manner of Giving Notice.
(a) A notice of meeting shall specify the place, day and
hour of the meeting and any other information required by any
provision of the Act, or this Agreement.
(b) When a meeting is adjourned, it shall not be necessary
to give any notice of the adjourned meeting or of the business to be
transacted at an adjourned meeting, other than by announcement at the
meeting at which the adjournment is taken, unless the adjournment is
for more than 60 days or the Members or the Board fix a new record
date for the adjourned meeting in which event notice shall be given in
accordance with Paragraphs 6.9.2 or 11.5.3, as applicable.
11.4.2 Notice of Meetings of Directors.
Notice of every meeting of the Board shall be given to each
Director by telephone or in writing not less than two (2) nor more
than forty-five (45) days prior to the date of such meeting before the
time at which the meeting is to be held. Every such notice shall state
the time and place of the meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board need be
specified in a notice of the meeting.
11.4.3 Notice of Meetings of Members.
Written notice of every meeting of the Members shall be
given to each Member of record entitled to vote at the meeting at
least ten (10) days prior to the day named for a meeting called to
consider a merger, consolidation or sale of all or
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substantially all of the assets of the Company or five (5) days prior
to the day named for the meeting in any other case. If the Board
neglects or refuses to give notice of a meeting, the person or persons
calling the meeting may do so.
11.4.4 Waiver Notice.
(a) Whenever any written notice is required to be
given under the provisions of the Act or this Operating
Agreement, a waiver thereof in writing, signed by the person
or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed equivalent to the
giving of the notice. Neither the business to be transacted
at, nor the purpose of, a meeting need be specified in the
waiver of notice of the meeting.
(b) Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a
person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not
lawfully called or convened.
11.4.5 Exception to Requirement of Notice.
Whenever any notice or communication is required to be given to any
person under the provisions of the Act or this Operating Agreement or by the
terms of any agreement or other instrument or as a condition precedent to taking
any Company action and communication with that person is then unlawful, the
giving of the notice or communication to that person shall not be required.
11.4.6 Use of Conference Telephone and Similar Equipment.
Any Director may participate in any meeting of the Directors, and any
Member may participate in any meeting of the Members, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in person at the meeting.
11.4.7 Consent in Lieu of Meeting.
(a) Any action required or permitted to be taken at a
meeting of the Board or the Members may be taken without a meeting if,
prior or subsequent to the action, written consents describing the
action to be taken are signed by each Director or Member,
respectively, entitled to vote thereon.
(b) Any action required or permitted to be taken at a
meeting of the Board or Members may be taken without a meeting if,
prior or subsequent to the action, written consents describing the
action to be taken are signed by the minimum number of Directors or
Members that would be necessary to authorize the action at a meeting
at which all Directors or Members entitled to vote thereon were
present and voting. The consents shall be filed with the Directors.
Prompt notice of the taking of the Company action without a meeting by
less than
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unanimous written consent shall be given to those Members who have not consented
in writing.
11.4.8 Organization.
At every meeting of the Members or Board, the chairman, if there be
one, or, in the case of vacancy in office or absence of the chairman, one of the
following officers, if there be any, present in the order stated: the vice
chairman, the Chief Executive Officer, president, the vice presidents in their
order of rank and seniority, or a person chosen by vote of the Members or
Directors present, shall act as chairman of the meeting. The Secretary, if there
be one, or, in the absence of the secretary, an assistant secretary, if there be
one, or, in the absence of both the secretary and assistant secretaries, a
person appointed by the chairman of the meeting, shall act as secretary of the
meeting.
11.4.9 Quorum.
Five of the Directors of the Company then in office shall be necessary
to constitute a quorum for the transaction of business at any meeting of the
Board. A Majority in Interest shall be necessary to constitute a quorum for the
transaction of business at any meeting of the Members.
11.5 Entire Agreement. This Agreement and the Capital Contribution
Agreement constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof and fully supersedes any and all prior or
contemporaneous agreements or understandings between the parties hereto
pertaining to the subject matter hereof.
11.6 Further Assurances. Each of the parties hereto does hereby
covenant and agree on behalf of itself, its successors, and its assigns, without
further consideration, to prepare, execute, acknowledge, file, record, publish,
and deliver such other instruments, documents and statements, and to take such
other action as may be required by law or reasonably necessary to effectively
carry out the purposes of this Agreement.
11.7 Notices. Any notice, consent, payment, demand, or communication
required or permitted to be given by any provision of this Agreement shall be in
writing and shall be (a) delivered personally to the Person or to an officer of
the Person to whom the same is directed, or (b) sent by facsimile or registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows: if to the Company, to the Company at the address set forth in Paragraph
1.3 hereof, or to such other address as the Company may from time to time
specify by notice to the Members; if to a Member, to such Member at the address
set forth in Exhibit A, or to such other address as such Member may from time to
time specify by notice to the Company. Any such notice shall be deemed to be
delivered, given and received for all purposes as of: (i) the date so delivered,
if delivered personally, (ii) upon receipt, if sent by facsimile, or (iii) on
the date of receipt or refusal indicated on the return receipt, if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid and properly addressed.
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11.8 Tax Matters.
11.8.1 The Retail Sponsor shall be designated and shall operate
as "tax matters partner" (as defined in Code Section 6231), to oversee or
handle matters relating to the taxation of the Company until the end of the
full tax year after the date of this Agreement. For all subsequent tax
years of the Company, the "tax matters partner" shall be designated by the
Majority in Interest. The tax matters partner shall not extend the statute
of limitations on behalf of the Company, submit any written material to any
taxing authority, settle or offer to settle any controversy, select the
Company's choice of litigation forum in a tax controversy, or take any
other action in its capacity as a tax matters partner without the consent
of the Board. The tax matters partner shall keep the Board fully advised of
the progress of any audit and shall supply the Board with copies of any
written communications received from the Internal Revenue Service or other
taxing authority relating to any audit within ten (10) days of receipt
hereof, and shall at least ten (10) business days prior to submitting any
materials to the Internal Revenue Service, or other taxing authority,
provide such materials to the Board. The tax matters partner shall be
reimbursed by the Company for any reasonable expenses incurred in its
capacity as a tax matters partner.
11.8.2 The Member designated as "tax matters partner" may make
all elections for federal income and all other tax purposes (including,
without limitation, pursuant to Section 754 of the Code).
11.8.3 Income tax returns of the Company shall be prepared by
such certified public accountant(s) as the Board shall retain at the
expense of the Company.
11.9 Jurisdiction. Each Member hereby submits to the jurisdiction of
any state or federal court sitting in the state of Delaware in any action
arising out of or relating to this Agreement or the transactions contemplated
therein.
11.10 Governing Law. This Agreement, including its existence,
validity, construction, and operating effect, and the rights of each of the
parties hereto, shall be governed by and construed in accordance with the laws
of the State of Delaware without regard to otherwise governing principles of
conflicts of law.
11.11 Construction. This Agreement shall be construed as if all
parties prepared this Agreement.
11.12 Captions - Pronouns. Any titles or captions contained in this
Agreement are for convenience only and shall not be deemed part of the text of
this Agreement. All pronouns and any variations thereof shall be deemed to refer
to the masculine, feminine, neuter, singular or plural as appropriate.
11.13 Binding Effect. Except as otherwise expressly provided herein,
this Agreement shall be binding on and inure to the benefit of the Members,
their heirs, executors, administrators, successors and all other Persons
hereafter holding, having or receiving an interest in the Company, whether as
Assignees, Substitute Members or otherwise.
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11.14 Severability. In the event that any provision of this Agreement
as applied to any party or to any circumstance, shall be adjudged by a court to
be void, unenforceable or inoperative as a matter of law, then the same shall in
no way affect any other provision in this Agreement, the application of such
provision in any other circumstance or with respect to any other party, or the
validity or enforceability of the Agreement as a whole.
11.15 Confidentiality. Each party agrees that all Confidential
Information is the confidential property of the disclosing party. The party
receiving such Confidential Information shall: (a) limit access to any
Confidential Information of the other party received by it to its employees,
contractors, consultants and agents who have a need-to-know in connection with
the performance of such party's duties and obligations under this Agreement; (b)
advise its employees, contractors, consultants and agents having access to the
Confidential Information of the confidential nature thereof and of the
obligations set forth in this Agreement and similarly bind them in writing; (c)
safeguard all Confidential Information using a reasonable degree of care, but
not less than that degree of care used by it in safeguarding its own similar
information or material; and (d) not disclose any Confidential Information of
the other party received by it to third parties otherwise than in conformity
with the provisions of this Agreement. Confidential Information shall not
include information the receiving party can document (i) was or has become
readily publicly available without restriction through no fault of the receiving
party or its employees or agents; (ii) is received without restriction from a
third party lawfully in possession of such information and lawfully empowered to
disclose such information; or (iii) was rightfully in possession of the
receiving party without restriction prior to its disclosure by the other party.
A party may disclose Confidential Information of the other party to the extent
required to be disclosed under applicable law or by a governmental order,
decree, regulation, rule or process (provided that the receiving party gives
written notice to the disclosing party as far in advance as reasonably possible
prior to disclosure and the receiving party reasonably cooperates in seeking to
dispute such disclosure and/or receive confidential treatment for the disclosed
information). Each party acknowledges that the breach by any party of its
obligations pursuant to this Section 11.15 will result in irreparable injury to
the other parties, and in such event the exact amount of damages is now and will
be difficult to ascertain and the remedies at law for any such failure would not
be reasonable or adequate compensation. Accordingly, each Member agrees that, in
addition to any other remedy that may be available at law, in equity or
hereunder, the Company shall be entitled to injunctive relief, without posting a
bond or other security, to enforce or prevent any violation of this Paragraph
11.15 by it.
11.16 Counterparts. This Agreement may be executed in any number of
multiple counterparts, each of which shall be deemed to be an original copy and
all of which shall constitute one agreement, binding on all parties hereto.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
ONLINE RETAIL PARTNERS LLC
By:
---------------------------
Name:
Title:
ZANY BRAINY, INC.
By:
---------------------------
Name:
Title:
<PAGE>
EXHIBIT A
MEMBERS, CAPITAL CONTRIBUTIONS,
AND INTERESTS
Pre-Follow-On Subscription Table
<TABLE>
<CAPTION>
Gross Asset Value
Cash of Contributed Voting Common Non-Voting Common
Name and Address of Members Contribution Property Interests Interests
<S> <C> <C> <C> <C>
Online Retail Partners, LLC/1/ $5.0 million None. 500,000 None.
47 East 11th Street, 10th Floor
New York, NY 10003
Zany Brainy, Inc./2/ $5.0 million $6.667 million None. None.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn: Legal Department
Non-Voting
Voting Preferred Preferred Total Membership
Name and Address of Members Interests Interests Interests
Online Retail Partners, LLC/1/ None. None. 500,000
47 East 11th Street, 10th Floor
New York, NY 10003
Zany Brainy, Inc./2/ 500,000 666,667 1,166,667
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn: Legal Department
</TABLE>
POST-FOLLOW-ON SUBSCRIPTION TABLE
<TABLE>
<CAPTION>
Gross Asset Value
Cash of Contributed Voting Common Non-Voting Common
Name and Address of Members Contribution Property Interests Interests
<S> <C> <C> <C> <C>
Online Retail Partners, LLC/1/ $15.0 million None. 500,000 373,483
47 East 11th Street, 10th Floor
New York, NY 10003
Zany Brainy, Inc./2/ $5.0 million $6.667 million None. None.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn: Legal Department
Non-Voting
Voting Preferred Preferred Total Membership
Name and Address of Members Interests Interests Interests
Online Retail Partners, LLC/1/ None. None. 873,483
47 East 11th Street, 10th Floor
New York, NY 10003
Zany Brainy, Inc./2/ 500,000 666,667 1,166,667
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn: Legal Department
</TABLE>
- ----------
/1/ All notices pursuant to Paragraph 11.7 of this Agreement shall be sent to
this address along with copies to: Latham & Watkins, 633 West Fifth Street,
Suite 4000, Los Angeles, CA 90071, Attn: Thomas C. Sadler, Esq., Fascimile
No.: (213) 891-8763.
/2/ All notices pursuant to Paragraph 11.7 of this Agreement shall be sent to
this address along with copies to: Morgan, Lewis & Bockius LLP, One Oxford
Centre, 301 Grand Street, 32nd Floor, Pittsburgh, PA 15219, Attn: Peter
Watt-Morse, Esq., Fascimile No.: (412) 560-3399.
A-1
<PAGE>
CONTRIBUTION AND INTEREST PURCHASE AGREEMENT
by and among
ZANY BRAINY, INC.,
ONLINE RETAIL PARTNERS LLC
and
ZB HOLDINGS LLC
As of October 18, 1999
<PAGE>
This CONTRIBUTION AND INTEREST PURCHASE AGREEMENT (this "Agreement") is
entered into as of this 18th day of October, 1999 by and among Zany Brainy,
Inc., a Pennsylvania corporation ("Zany Brainy"), Online Retail Partners LLC, a
Delaware limited liability company ("ONRP"), and ZB Holdings LLC, a Delaware
limited liability company (the "Company"). Each of Zany Brainy and ONRP is
hereinafter referred to as a "Contributor" and together, the "Contributors."
RECITALS
A. Zany Brainy has agreed to enter into (i) a Services Agreement with
Zanybrainy.com LLC, a Delaware limited liability company ("ZB.com"), dated as of
the Closing Date (as defined herein), substantially in the form attached hereto
as Exhibit A (the "Services Agreement"), pursuant to which Zany Brainy will
provide ZB.com various transition and other services, (ii) a Trademark License
Agreement with ZB.com, dated as of the Closing Date, substantially in the form
attached hereto as Exhibit B (the "Trademark License Agreement"), pursuant to
which Zany Brainy will license various Zany Brainy trademarks to ZB.com for use
in ZB.com's web site business, (iii) a Supply Agreement with ZB.com, dated as of
the Closing Date, substantially in the form attached hereto as Exhibit C (the
"Supply Agreement"), pursuant to which Zany Brainy will procure products on
behalf of ZB.com for the purpose of selling such products on ZB.com's web site,
(iv) a Data Sharing/License Agreement with ONRP Services LLC ("ONRPS"), a
Delaware limited liability company and a wholly-owned subsidiary of ONRP, Zany
Brainy and ZB.com, dated as of the Closing Date, substantially in the form
attached hereto as Exhibit D (the "Data Sharing/License Agreement"), pursuant to
which each party will, to the extent permitted, share information regarding such
party's customers with the other parties, and (v) the Limited Liability Company
Agreement of ZB Holdings LLC with ONRP and the Company, dated as of the Closing
Date, substantially in the form attached hereto as Exhibit E (the "Operating
Agreement"). The foregoing agreements, together with the Web Site Services
Agreement (as defined below), shall be referred to herein collectively as the
"Transaction Agreements";
B. Zany Brainy has agreed to contribute (i) certain tangible and
intangible assets, including certain trademark and related licenses, as set
forth in the Trademark License Agreement, to the Company as set forth herein and
in the Transaction Agreements; (ii) $5.0 million of cash and (iii) 100% of the
membership interests in ZB.com, all in exchange for 500,000 Voting Preferred
Interests and 666,667 Non-Voting Preferred Interests (as such terms are defined
in the Operating Agreement) (together, the "Preferred Interests");
C. ONRPS has agreed to enter into a Web Site Services Agreement with
ZB.com, dated as of the Closing Date, substantially in the form attached hereto
as Exhibit F (the "Web Site Services Agreement"), pursuant to which ONRPS will
provide various web site development, hosting, marketing and consulting
services;
D. ONRP has agreed to contribute $5.0 million of cash to the Company in
exchange for 500,000 Voting Common Interests (as such term is defined in the
Operating Agreement)
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(the "Common Interests" and, together with the Preferred Interests, the
"Interests"); and
E. The Company has agreed to accept the foregoing contributions and has
agreed to issue Interests of the Company as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants, and agreements herein contained, and for
other good and valuable consideration mutually exchanged by the parties hereto,
the receipt and sufficiency of which are hereby acknowledged, Zany Brainy, ONRP
and the Company agree as follows:
AGREEMENT
SECTION 1 - CONTRIBUTION OF ASSETS
SECTION 1.1 Contribution by Zany Brainy.
(a) Cash Contribution. Upon the terms and subject to the conditions
set forth in this Agreement, Zany Brainy hereby agrees to transfer and deliver
to the Company, as an initial capital contribution, FIVE MILLION DOLLARS
($5,000,000) of cash (the "Zany Brainy Cash Contribution"). Zany Brainy agrees
to make the Zany Brainy Cash Contribution by wire transfer of immediately
available funds.
(b) Transfer of Contributed Assets. Upon the terms and subject to the
conditions set forth in this Agreement, Zany Brainy hereby assigns, transfers
and delivers to the Company, as an initial capital contribution, free and clear
of all Encumbrances, all tangible and intangible personal property and other
assets (including the ownership interest in ZB.com) identified in Schedule
1.1(b) (collectively, the "Contributed Assets").
(c) Excluded Assets. Except as expressly identified in Schedule
1.1(b), Zany Brainy is not contributing to the Company, and there shall not be
included in the Contributed Assets, any of the other assets of Zany Brainy.
Zany Brainy and the Company agree that they shall cooperate with each other
following the Closing Date to ensure that any monies received by either of them
following the Closing Date are apportioned as provided in this Agreement.
(d) Assumed Liabilities. Subject to the conditions of this Agreement,
the Company hereby assumes and agrees to pay, discharge or fulfill all of the
liabilities and obligations in respect of (i) the obligations expressly
identified in Schedule 1.1(d) and (ii) the Contributed Assets, to the extent
that such liability or obligations arise out of facts or circumstances occurring
on or after the Closing Date (the "Assumed Liabilities"). Notwithstanding
anything contained in this Agreement to the contrary, except for the Assumed
Liabilities, the Company is not assuming any liabilities of any nature, whether
accrued, absolute, contingent or otherwise, known or unknown, asserted or
unasserted. The liabilities which are not assumed by the Company under this
Agreement are hereinafter sometimes
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referred to as the "Excluded Liabilities." The assumption of said liabilities by
any party hereunder shall not enlarge any rights of third parties under
contracts or arrangements with the Company or Zany Brainy and nothing herein
shall prevent any party from contesting in good faith with any third party any
of said liabilities.
(e) Conveyance Instruments. In order to effectuate the contribution
of the Contributed Assets, Zany Brainy will, at the Closing, execute and
deliver, or cause to be executed and delivered, all such documents or
instruments of assignment, transfer or conveyance, in each case dated the
Closing Date (collectively, the "Conveyance Instruments"), as the parties shall
reasonably deem necessary or appropriate to vest in, transfer or confirm title
to the foregoing.
SECTION 1.2 Contribution by ONRP. Upon the terms and subject to the
conditions set forth in this Agreement, ONRP hereby agrees to transfer and
deliver to the Company, as an initial capital contribution, FIVE MILLION DOLLARS
($5,000,000) of cash (the "ONRP Cash Contribution"). ONRP agrees to make the
ONRP Cash Contribution by wire transfer of immediately available funds.
SECTION 1.3 Issuance of Interests by the Company in Consideration for
Contributions.
(a) Zany Brainy. In consideration for the Zany Brainy Cash
Contribution, Contributed Assets and Zany Brainy's willingness to enter into the
Transaction Agreements, upon the terms and subject to the conditions set forth
in this Agreement, on the Closing Date, the Company shall issue to Zany Brainy
500,000 Voting Preferred Interests and 666,667 Non-Voting Preferred Interests.
(b) ONRP. In consideration for the ONRP Cash Contribution and ONRP's
willingness to enter into the Operating Agreement, upon the terms and subject to
the conditions set forth in this Agreement, on the Closing Date, the Company
shall issue to ONRP 500,000 Voting Common Interests.
SECTION 1.4 Time and Place of Closing. The closing of the contributions
of assets and purchases and sales of the Interests provided for in this
Agreement (the "Closing") shall be held at the offices of Latham & Watkins
located at 885 Third Avenue, Suite 1000, New York, New York 10022, on October
20, 1999 (the "Closing Date") or at such other place or earlier or later date or
time as may be fixed by mutual agreement of all parties hereto. For purposes of
interpreting this Agreement, the Closing shall be deemed to have been effective
as of the close of business on the Closing Date.
SECTION 1.5 Further Assurances. Each party hereto shall execute and
deliver after the date hereof such instruments and take such other actions as
any other party may reasonably request in order to carry the intent of this
Agreement or to better evidence or effectuate the transactions contemplated
herein.
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SECTION 2 - CLOSING CONDITIONS
SECTION 2.1 The respective obligations of each party to effect this
Agreement shall be subject to the satisfaction or waiver, where permissible,
prior to or on the Closing Date, of the following conditions:
(a) ONRP shall have received cash proceeds of at least $60.0 million
from the issuance of equity interests in ONRP and/or other investments made by
third parties to fund Internet ventures;
(b) ONRP shall have advised Zany Brainy that it has entered into a
Contribution and Interest Purchase Agreement with each of Ulta Salon, Cosmetics
& Fragrance, Inc. and Dick's Sporting Goods, Inc. or, if such documents have not
been entered into, ONRP shall advise Zany Brainy of the status of such
documents; and
(c) All representations and warranties of the parties contained in
this Agreement shall be true and correct, in all material respects, as if made
on the Closing Date. In addition, all covenants of the parties contained herein
which are to be performed on or prior to the Closing Date shall have been
complied with in all material respects.
SECTION 3 - EVENTS OCCURRING ON THE CLOSING DATE
SECTION 3.1 Deliveries by Zany Brainy. On the Closing Date, Zany Brainy
shall deliver the following:
(a) Operating Agreement. An executed copy of the Operating Agreement,
substantially in the form attached hereto as Exhibit E.
(b) Services Agreement. An executed copy of the Services Agreement,
signed by Zany Brainy and ZB.com, substantially in the form attached hereto as
Exhibit A.
(c) Trademark License Agreement. An executed copy of the Trademark
License Agreement, signed by Zany Brainy and ZB.com, substantially in the form
attached hereto as Exhibit B.
(d) Supply Agreement. An executed copy of the Supply Agreement,
signed by Zany Brainy and ZB.com, substantially in the form attached hereto as
Exhibit C.
(e) Data Sharing/License Agreement. An executed copy of the Data
Sharing/License Agreement, signed by Zany Brainy and ZB.com, substantially in
the form attached hereto as Exhibit D.
(f) Web Site Services Agreement. An executed copy of the Web Site
Services Agreement, signed by ZB.com, substantially in the form attached hereto
as Exhibit F.
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(g) Funds. The Zany Brainy Cash Contribution by wire transfer of
immediately available funds.
(h) Contributed Assets. Transfer documents in form and substance
reasonably acceptable to ONRP relating to the Contributed Assets.
SECTION 3.2 Deliveries by ONRP. On the Closing Date, ONRP shall deliver
the following:
(a) Operating Agreement. An executed copy of the Operating Agreement,
substantially in the form attached hereto as Exhibit E.
(b) Data Sharing/License Agreement. An executed copy of the Data
Sharing/License Agreement, signed by ONRPS, substantially in the form attached
hereto as Exhibit D.
(c) Web Site Services Agreement. An executed copy of the Web Site
Services Agreement, signed by ONRPS, substantially in the form attached hereto
as Exhibit F.
(d) Funds. The ONRP Cash Contribution by wire transfer of immediately
available funds.
SECTION 3.3 Deliveries by the Company. On the Closing Date, the Company
shall deliver the following:
(a) Operating Agreement. An executed copy of the Operating Agreement,
substantially in the form attached hereto as Exhibit E.
SECTION 4 - REPRESENTATIONS AND WARRANTIES OF ZANY BRAINY
Zany Brainy represents and warrants to the Company as follows:
SECTION 4.1 Investment Status. Zany Brainy is an "accredited investor" as
such term is defined in Rule 501 under the Securities Act of 1933, as amended
(the "Securities Act"). Zany Brainy is purchasing the Preferred Interests for
its own account, for investment only and not with a view to, or any present
intention of, effecting a distribution of such securities or any part thereof
except pursuant to a registration or an available exemption under applicable
law. Zany Brainy acknowledges that its Preferred Interests have not been
registered under the Securities Act or the securities laws of any state or other
jurisdiction and cannot be disposed of unless they are subsequently registered
under the Securities Act and any applicable state laws or exemption from such
registration is available.
SECTION 4.2 Authority. Zany Brainy has full legal right, authority and
power to enter into this Agreement and each agreement, document and instrument
to be executed and
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delivered by or on behalf of Zany Brainy pursuant to or as contemplated by this
Agreement and to carry out the transactions and perform fully its obligations
contemplated hereby and thereby, and the execution, delivery and performance by
Zany Brainy of this Agreement and each such other agreement, document and
instrument have been duly authorized by all necessary action under Zany Brainy's
articles of incorporation, as amended, and by-laws. ZB.com has full legal right,
authority and power to enter into each agreement, document and instrument to be
executed and delivered by or on behalf of ZB.com pursuant to or as contemplated
by this Agreement and to carry out the transactions and perform fully its
obligations contemplated hereby and thereby, and the execution, delivery and
performance of ZB.com of each such agreement, document and instrument have been
duly authorized by all necessary action under ZB.com's certificate of formation
and the limited liability company agreement. This Agreement and each agreement,
document and instrument executed and delivered by Zany Brainy or ZB.com pursuant
to or as contemplated by this Agreement constitute, or when executed and
delivered will constitute, valid and binding obligations of Zany Brainy or
ZB.com, as applicable, enforceable in accordance with their respective terms
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and general principles of equity.
SECTION 4.3 No Prior Activity. ZB.com was formed for the purpose of
entering into the transactions contemplated hereby, has not engaged in any
activity before the date hereof other than in connection with the transactions
contemplated hereby and has not incurred any liabilities as of the date hereof,
except in connection with the transactions contemplated by this Agreement.
SECTION 4.4 Investment Banking; Brokerage Fees. Zany Brainy and ZB.com
have not incurred or become liable for any broker's or finder's fee, banking
fees or similar compensation relating to or in connection with this Agreement or
the transactions contemplated hereby.
SECTION 4.5 Non-Contravention. The execution, delivery and performance by
Zany Brainy of this Agreement and the related documents to be executed and
delivered by Zany Brainy or ZB.com, as applicable, do not: (i) violate or result
in a default (whether after the giving of notice, lapse of time or both) under
any contract or obligation to which Zany Brainy or ZB.com, as applicable, is a
party or by which Zany Brainy or ZB.com, as applicable, is bound (including,
without limitation, any contracts included in the Contributed Assets or the
Assumed Liabilities (the "Contributed Contracts")), or any provision of Zany
Brainy's articles of incorporation, as amended, or by-laws or ZB.com's
certificate of formation or its limited liability company agreement; (ii)
violate or result in a violation of, or constitute a default under, any
provision of any law, regulation or rule, or any order of, or any restriction
imposed by, any court or governmental agency applicable to Zany Brainy or
ZB.com; (iii) require from Zany Brainy or ZB.com any notice to, declaration or
filing with, or consent or approval of, any governmental authority or other
third party; (iv) accelerate any obligation under or give rise to a right of
termination or result in the loss of benefit under any indenture or loan or
credit agreement or any other material agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or
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arbitration award to which Zany Brainy or ZB.com is a party or by which the
property of Zany Brainy or ZB.com is bound or affected or result in the creation
or imposition of any mortgage, pledge, lien, security interest or other charge
or encumbrance on any of the assets or properties of Zany Brainy or ZB.com or
(v) result in the creation or imposition of any mortgage, pledge, lien, security
interest or other charge or encumbrance on any of the Contributed Assets, in
each of clauses (i) through (v) except as would not, individually or in the
aggregate, have a material adverse effect on Zany Brainy or ZB.com or the
Company.
SECTION 4.6 Organization and Good Standing. Zany Brainy is a corporation
duly organized, validly subsisting under the corporate laws of the Commonwealth
of Pennsylvania. Zany Brainy is duly licensed or qualified to transact business
as a foreign corporation and is in good standing in each jurisdiction in which
the nature of the business or the character of the properties owned or leased by
Zany Brainy requires such licensing or qualification, except where the failure
to so qualify would not have a material adverse effect on Zany Brainy or the
Company. ZB.com is a limited liability company duly formed and validly existing
under the laws of the State of Delaware. ZB.com is duly licensed or qualified to
transact business and is in good standing in each jurisdiction in which the
nature of the business or the character of the properties owned or leased by
ZB.com requires such licensing or qualification, except where the failure to so
qualify would not have a material adverse effect on ZB.com or the Company.
SECTION 4.7 ZB.com. ZB.com is a wholly-owned subsidiary of Zany Brainy.
Except as set forth on Schedule 4.7, there are no outstanding options, warrants,
calls, rights or any other agreements relating to the sale, issuance or voting
of any equity interests of ZB.com, or any securities or other instruments
convertible into, exchangeable for or evidencing the right to purchase any
equity interests of ZB.com.
SECTION 4.8 Contributed Assets. Zany Brainy has good and marketable title
free and clear of all claims to the Contributed Assets owned by Zany Brainy,
except for claims that would not, individually or in the aggregate, have a
material adverse effect on the Company or the value or usefulness of the
Contributed Assets. With respect to Contributed Assets leased by Zany Brainy as
lessee, all leases, conditional sale contracts, franchises or licenses pursuant
to which Zany Brainy may hold or use (or permit others to hold or use) such
Contributed Assets are valid and in full force and effect, and there is not
under any of such instruments any existing default or event of default or event
which with notice or lapse of time or both would constitute such a default,
except for such defaults that would not, individually or in the aggregate, have
a material adverse effect on the Company or the value or usefulness of the
Contributed Assets. Any tangible assets included in the Contributed Assets are
in good condition, ordinary wear and tear excepted, for property of comparable
type, age and usage. Except as otherwise set forth herein, the Contributed
Assets as identified in Schedule 1.1(b) are provided on an "as-is" basis and
Zany Brainy makes no representation or warranty, express or implied, at law or
in equity, including, without limitation, with respect to merchantability or
fitness for any particular purpose and any such other representations or
warranties are hereby expressly disclaimed.
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SECTION 4.9 Contributed Contracts. To Zany Brainy's knowledge, the
Contributed Contracts are valid and binding, are in full force and effect and
are enforceable in accordance with their respective terms. Zany Brainy has not
assigned, mortgaged, pledged, encumbered or otherwise hypothecated any of its
right, title and interest under the Contributed Contracts. Except as set forth
on Schedule 4.9, neither Zany Brainy nor, to the best knowledge of Zany Brainy,
any other party thereto is in violation of or in default in respect of any
Contributed Contract. No notice has been received by Zany Brainy claiming any
such violation or default by Zany Brainy or indicating the desire or intention
of any other party thereto to amend, modify, rescind or terminate the same.
SECTION 4.10 Litigation. Except as set forth on Schedule 4.10, there is no
(a) action, suit, claim or proceeding pending or, to the knowledge of Zany
Brainy, threatened, against or affecting the Contributed Assets (whether or not
Zany Brainy or ZB.com is a party or prospective party thereto), at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (b) arbitration proceeding relating to the Contributed Assets or (c)
governmental inquiry pending or, to the knowledge of Zany Brainy, threatened
against, involving or affecting the Contributed Assets. There are no outstanding
orders, writs, judgments, injunctions or decrees of any court, governmental
agency or arbitration tribunal against, involving or affecting, the Contributed
Assets.
SECTION 4.11 Intellectual Property.
(a) All intellectual property which is being transferred is identified
in Schedule 1.1(b).
(b) Zany Brainy owns, or has a license to use, all intellectual
property identified on Schedule 1.1(b). There are no claims or demands of any
other entity pertaining to any such intellectual property and no proceedings
have been instituted, or are pending or, to the knowledge of Zany Brainy,
threatened, which challenge the rights of Zany Brainy in respect thereof. Zany
Brainy has no knowledge of any infringement by others of any intellectual
property rights of Zany Brainy. To the knowledge of Zany Brainy, the operation
of the Site does not infringe any intellectual property rights of any other
entity. No proceeding charging Zany Brainy with infringement of any adversely
held intellectual property rights has been filed or, to the knowledge of Zany
Brainy, is threatened to be filed. To the knowledge of Zany Brainy, there exists
no unexpired patent or patent application which includes claims that would be
infringed by or otherwise adversely affect the operation of the Site.
(c) All patents, patent applications, trademark registrations,
trademark applications and registered copyrights identified on Schedule 1.1(b)
have been duly registered in, filed in or issued by the United States Patent and
Trademark Office, the United States Register of Copyrights, or the corresponding
offices of other jurisdictions as identified on Schedule 1.1(b), and have been
properly maintained and renewed in accordance with all applicable laws and
administrative regulations of the United States and each such jurisdiction.
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(d) All licenses or other agreements under which Zany Brainy is
granted intellectual property rights relating to the Site are listed in Schedule
1.1(b). All of said licenses or other agreements are in full force and effect,
there is no material default by Zany Brainy or, to the knowledge of Zany Brainy,
any other party thereto. To the knowledge of Zany Brainy, the licensors under
said licenses and other agreements have and had all requisite power and
authority to grant the rights purported to be conferred thereby. True and
complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to ONRP.
(e) Zany Brainy has taken all steps required in accordance with sound
business practice to establish and preserve its ownership of all intellectual
property rights listed on Schedule 1.1(b), except where failure to take such
steps would not have a material adverse effect on the operation of the Site.
Such practices include, without limitation, requiring professional and technical
employees to execute agreements under which such employees are required to
convey to Zany Brainy ownership of all inventions and developments conceived or
created by them in the course of their employment.
SECTION 4.12 Compliance with Law. Except as set forth in Schedule 4.12,
Zany Brainy is, to the knowledge of Zany Brainy, in compliance with all, and is
not in violation of any, law, ordinance, order, decree, rule or regulation of
any governmental agency or authority applicable to the Contributed Assets, the
violation of or noncompliance with which could have a material adverse effect on
the Contributed Assets.
SECTION 5 - REPRESENTATIONS AND WARRANTIES OF ONRP
ONRP represents and warrants to the Company as follows:
SECTION 5.1 Investment Status. ONRP is an "accredited investor" as such
term is defined in Rule 501 under the Securities Act. ONRP is purchasing the
Common Interests for its own account, for investment only and not with a view
to, or any present intention of, effecting a distribution of such securities or
any part thereof except pursuant to a registration or an available exemption
under applicable law. ONRP acknowledges that its Common Interests have not been
registered under the Securities Act or the securities laws of any state or other
jurisdiction and cannot be disposed of unless they are subsequently registered
under the Securities Act and any applicable state laws or exemption from such
registration is available.
SECTION 5.2 Authority. ONRP has full legal right, authority and power to
enter into this Agreement and each agreement, document and instrument to be
executed and delivered by or on behalf of ONRP pursuant to or as contemplated by
this Agreement and to carry out the transactions and to perform fully its
obligations contemplated hereby and thereby, and the execution, delivery and
performance by ONRP of this Agreement and each such other agreement, document
and instrument have been duly authorized by all necessary action under ONRP's
certificate of formation and the Amended and Restated Limited Liability Company
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Agreement, dated as of September 28, 1999, of ONRP (the "ONRP LLC Agreement").
This Agreement and each agreement, document and instrument executed and
delivered by ONRP pursuant to or as contemplated by this Agreement constitute,
or when executed and delivered will constitute, valid and binding obligations of
ONRP enforceable in accordance with their respective terms subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally,
and general principles of equity.
SECTION 5.3 Investment Banking; Brokerage Fees. ONRP has not incurred or
become liable for any broker's or finder's fee, banking fees or similar
compensation relating to or in connection with this Agreement or the
transactions contemplated hereby.
SECTION 5.4 Non-Contravention. The execution, delivery and performance by
ONRP of this Agreement and the related documents to be executed and delivered by
ONRP do not: (i) violate or result in a default (whether after the giving of
notice, lapse of time or both) under any contract or obligation to which ONRP is
a party or by which ONRP is bound, or any provision of ONRP's certificate of
formation or the ONRP LLC Agreement; (ii) violate or result in a violation of,
or constitute a default under, any provision of any law, regulation or rule, or
any order of, or any restriction imposed by, any court or governmental agency
applicable to ONRP; (iii) require from ONRP any notice to, declaration or filing
with, or consent or approval of, any governmental authority or other third
party; or (iv) accelerate any obligation under or give rise to a right of
termination or result in the loss of benefit under any indenture or loan or
credit agreement or any other material agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which ONRP is a party or by which
the property of ONRP is bound or affected, or result in the creation or
imposition of any mortgage, pledge, lien, security interest or other charge or
encumbrance on any of the assets or properties of ONRP, in each of clauses (i)
through (iv) except as would not, individually or in the aggregate, have a
material adverse effect on ONRP or the Company.
SECTION 5.5 Organization and Good Standing. ONRP is a Delaware limited
liability company duly formed and validly existing under the laws of the State
of Delaware. ONRP is duly licensed or qualified to transact business in each
jurisdiction in which the nature of the business or the character of the
properties owned or leased by ONRP requires such licensing or qualification,
except where the failure to so qualify would not have a material adverse impact
on ONRP or the Company.
SECTION 6 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each of the Contributors as follows:
SECTION 6.1 Organization and Good Standing. The Company is a limited
liability company duly formed and validly existing under the laws of the State
of Delaware. The Company is duly licensed or qualified to transact business in
each jurisdiction in which the nature of the business or the character of the
properties owned or leased by the Company
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requires such licensing or qualification, except where the failure to so qualify
would not have a material adverse impact on the Company.
SECTION 6.2 Authorization and Enforceability. The Company has full, legal
right, authority and power to enter into this Agreement and each agreement,
document and instrument to be executed and delivered by or on behalf of the
Company pursuant to or as contemplated by this Agreement and to carry out the
transactions and to perform fully its obligations contemplated hereby and
thereby, and the execution, delivery and performance by the Company of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary action under the Company's certificate of formation
and the Operating Agreement. This Agreement and each agreement, document and
instrument executed and delivered by the Company pursuant to or as contemplated
by this Agreement constitute, or when executed and delivered will constitute,
valid and binding obligations of the Company enforceable in accordance with
their respective terms subject to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and general principles of equity.
Upon consummation of the transactions contemplated hereby, all of the Interests
issued pursuant to this Agreement (i) will have been duly authorized and validly
issued to each of the Contributors, (ii) will be fully paid and nonassessable,
and (iii) will have been issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
SECTION 6.3 No Prior Activity. The Company was formed for the purpose of
entering into the transactions contemplated hereby, has not engaged in any
activity before the date hereof other than in connection with the transactions
contemplated hereby and has not incurred any liabilities as of the date hereof,
except in connection with the transactions contemplated by this Agreement.
SECTION 6.4 Investment Banking; Brokerage. The Company has not incurred
or become liable for any broker's or finder's fee, banking fees or similar
compensation relating to or in connection with this Agreement or the
transactions contemplated hereby.
SECTION 6.5 Capital Structure. As of the date hereof, the Board of
Directors of the Company has authorized the issuance of 873,483 Common Interests
(including 373,483 Common Interests to be issued in connection with the Follow-
On Subscription (as defined in the Operating Agreement)) and 1,166,667 Preferred
Interests.
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SECTION 7 - RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING
SECTION 7.1 Survival of Warranties. Each of the representations,
warranties, agreements, covenants and obligations herein or in any schedule,
exhibit, certificate or financial statement delivered by any party to the other
party incident to the transactions contemplated hereby are material, shall be
deemed to have been relied upon by the other party and shall survive the Closing
for the applicable surviving period set forth below regardless of any
investigation and shall not merge in the performance of any obligation by either
party hereto. Each of the representations and warranties set forth in this
Agreement shall survive the Closing for a period of two (2) years.
SECTION 7.2 Collection of Assets. Subsequent to the Closing, the Company
shall have the right and authority to collect all receivables (accrued after the
Closing) and other items transferred, sublicensed or assigned to it by Zany
Brainy hereunder and Zany Brainy agrees that it will promptly transfer,
sublicense or assign to the Company from time to time, any property that Zany
Brainy may receive with respect to any claims, contracts, licenses, leases,
commitments, sales orders, purchase orders, receivables or any other items
accrued in connection with the Contributed Assets after the Closing.
SECTION 7.3 Expenses. Each party shall pay its own costs and expenses
incurred or to be incurred by it in negotiating and preparing this Agreement and
the other documents contemplated hereby, and in carrying out and completing the
transactions contemplated by this Agreement and such other documents.
SECTION 7.4 Notice of Default. Promptly upon the occurrence of, or
promptly upon any party hereto becoming aware of the impending or threatened
occurrence of, any event which would cause or constitute a breach or default, or
would have caused or constituted a breach or default had such event occurred or
been known to such party prior to the date hereof, of any of the
representations, warranties or covenants of such party contained in or referred
to in this Agreement or in any Schedule or Exhibit referred to in this
Agreement, such party shall give detailed written notice thereof to each of the
other parties hereto and shall use its best efforts to prevent or promptly
remedy the same.
SECTION 7.5 Confidentiality. Each party agrees that all non-public
information, including, without limitation, data, customer lists or other
customer-specific or marketing information, customer buying patterns,
algorithms, know-how, ideas and all business, technical, pricing, cost and
financial information, provided to the other party and any other information
marked or disclosed as being confidential information that is obtained by the
other party (the "Confidential Information") is the confidential property of the
disclosing party. The party receiving such Confidential Information shall: (a)
limit access to any Confidential Information of the other party received by it
to its employees, contractors, consultants and agents who have a need-to-know in
connection with the performance of such party's duties and obligations under
this Agreement; (b) advise its employees, contractors, consultants and agents
having access to the Confidential Information of the confidential nature thereof
and of the obligations set forth in
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this Agreement and similarly bind them in writing; (c) safeguard all
Confidential Information using a reasonable degree of care, but not less than
that degree of care used by it in safeguarding its own similar information or
material; and (d) not disclose any Confidential Information of the other party
received by it to third parties otherwise than in conformity with the provisions
of this Agreement. Confidential Information shall not include information the
receiving party can document (i) was or has become readily publicly available
without restriction through no fault of the receiving party or its employees or
agents; (ii) is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information; or (iii) was rightfully in possession of the receiving party
without restriction prior to its disclosure by the other party. A party may
disclose Confidential Information of the other party to the extent required to
be disclosed under applicable law or by a governmental order, decree,
regulation, rule or process (provided that the receiving party gives written
notice to the disclosing party as far in advance as reasonably possible prior to
disclosure and the receiving party reasonably cooperates in seeking to dispute
such disclosure and/or receive confidential treatment for the disclosed
information). Each party acknowledges that the breach by any party of its
obligations pursuant to this Section 7.5 will result in irreparable injury to
the other parties, and in such event the exact amount of damages is now and will
be difficult to ascertain and the remedies at law for any such failure would not
be reasonable or adequate compensation. Accordingly, notwithstanding Section
10.4, each party agrees that in the event of a breach by any party of this
Section 7.5, the other parties shall be entitled to injunctive relief.
SECTION 8 - INDEMNIFICATION.
SECTION 8.1 Indemnification by Zany Brainy. Zany Brainy agrees to
indemnify and hold the Company and its subsidiaries and affiliates and persons
serving as officers, directors, partners or employees thereof (individually, a
"Zany Brainy Indemnified Party" and, collectively, the "Zany Brainy Indemnified
Parties") harmless from and against any damages, liabilities, losses, taxes,
fines, penalties, costs, and expenses (including, without limitation, reasonable
fees of counsel) of any kind or nature whatsoever (whether or not arising out of
third-party claims and including all amounts paid in investigation, defense or
settlement of the foregoing) which may be sustained or suffered by any of them
arising out of or based upon any of the following matters:
(a) any breach of any representation or warranty of Zany Brainy under
this Agreement or in any certificate, schedule or exhibit delivered pursuant
hereto, or by reason of any claim, action or proceeding asserted or instituted
growing out of any matter or thing constituting a breach of such representations
or warranties;
(b) any other breach of any covenant of Zany Brainy under this
Agreement or in any certificate, schedule or exhibit delivered pursuant hereto,
or by reason of any claim, action or proceeding asserted or instituted growing
out of any matter or thing constituting a breach of such covenants; or
(c) any Excluded Liabilities.
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SECTION 8.2 Limitations on Indemnification by Zany Brainy.
Notwithstanding the foregoing, the right of the Zany Brainy Indemnified Parties
to indemnification under Section 8.1 shall be subject to the following
provisions:
(a) No indemnification shall be payable pursuant to Section 8.1 above
to any Zany Brainy Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.3 shall exceed $500,000 in the aggregate,
whereupon the full amount of such claims shall be recoverable in accordance with
the terms hereof; and
(b) The maximum aggregate liability of Zany Brainy, and the maximum
amount of damages which may be recovered by the Zany Brainy Indemnified Parties
from Zany Brainy pursuant to Section 8.1 shall not exceed FIVE MILLION DOLLARS
($5,000,000).
SECTION 8.3 Indemnification by ONRP. ONRP agrees to indemnify and hold
the Company and its subsidiaries and affiliates and persons serving as officers,
directors, partners or employees thereof (individually, an "ONRP Indemnified
Party" and, collectively, the "ONRP Indemnified Parties") harmless from and
against any damages, liabilities, losses, taxes, fines, penalties, costs, and
expenses (including, without limitation, reasonable fees of counsel) of any kind
or nature whatsoever (whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing) which may be sustained or suffered by any of them arising out of or
based upon any of the following matters:
(a) any other breach of any representation or warranty of ONRP under
this Agreement or in any certificate, schedule or exhibit delivered pursuant
hereto, or by reason of any claim, action or proceeding asserted or instituted
growing out of any matter or thing constituting a breach of such representations
or warranties; or
(b) any other breach of any covenant of ONRP under this Agreement or
in any certificate, schedule or exhibit delivered pursuant hereto, or by reason
of any claim, action or proceeding asserted or instituted growing out of any
matter or thing constituting a breach of such covenants.
SECTION 8.4 Limitations on Indemnification by ONRP. Notwithstanding the
foregoing, the right of the ONRP Indemnified Parties to indemnification under
Section 8.3 shall be subject to the following provisions:
(a) No indemnification shall be payable pursuant to Subsection 8.3
above to any ONRP Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.3 shall exceed $500,000 in the aggregate,
whereupon the full amount of such claims shall be recoverable in accordance with
the terms hereof; and
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(b) The maximum aggregate liability of ONRP, and the maximum amount of
damages which may be recovered by the ONRP Indemnified Parties from ONRP
pursuant to Section 8.3 shall not exceed FIVE MILLION DOLLARS ($5,000,000).
SECTION 8.5 Indemnification by the Company. The Company agrees to
indemnify and hold each of the Contributors and their respective subsidiaries
and affiliates and persons serving as officers, directors, partners or employees
thereof (individually, a "Company Indemnified Party" and, collectively, the
"Company Indemnified Parties") harmless from and against any damages,
liabilities, losses, taxes, fines, penalties, costs, and expenses (including,
without limitation, reasonable fees of counsel) of any kind or nature whatsoever
(whether or not arising out of third-party claims and including all amounts paid
in investigation, defense or settlement of the foregoing) which may be sustained
or suffered by any of them arising out of or based upon any of the following
matters:
(a) any breach of any representation or warranty of the Company under
this Agreement or in any certificate, schedule or exhibit delivered pursuant
hereto, or by reason of any claim, action or proceeding asserted or instituted
growing out of any matter or thing constituting a breach of such representations
or warranties;
(b) any breach of any other covenant of the Company under this
Agreement or in any certificate, schedule or exhibit delivered pursuant hereto,
or by reason of any claim, action or proceeding asserted or instituted growing
out of any matter or thing constituting a breach of such covenants; or
(c) any Assumed Liabilities.
SECTION 8.6 Limitations on Indemnification by the Company.
Notwithstanding the foregoing, the right of the Company Indemnified Parties to
indemnification under Section 8.5 shall be subject to the following provisions:
(a) no indemnification shall be payable pursuant to Section 8.5 above
to any Company Indemnified Party, unless the total of all claims for
indemnification pursuant to Section 8.5 shall exceed $500,000 in the aggregate,
whereupon the full amount of such claims shall be recoverable in accordance with
the terms hereof; and
(b) the maximum aggregate liability of the Company, and the maximum
amount of damages which may be recovered by the Company Indemnified Parties from
the Company pursuant to Section 8.5 shall not exceed FIVE MILLION DOLLARS
($5,000,000).
SECTION 8.7 Notice; Defense of Claims. An indemnified party may make
claims for indemnification hereunder by giving written notice thereof to the
indemnifying party within the period in which indemnification claims can be made
hereunder. If indemnification is sought for a claim or liability asserted by a
third party, the indemnified party shall also give written notice thereof to the
indemnifying party promptly after it receives notice of the claim or liability
being asserted (and in any event within 15 calendar days after the service of
the
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citation or sermons), but the failure to do so shall not relieve the
indemnifying party from any liability except to the extent that it is prejudiced
by the failure or delay in giving such notice. Such notice shall summarize the
bases for the claim for indemnification and any claim or liability being
asserted by a third party. Within 20 days after receiving such notice the
indemnifying party shall give written notice to the indemnified party stating
whether it disputes the claim for indemnification and whether it will defend
against any third party claim or liability at its own cost and expense. The
indemnifying party shall be entitled to direct the defense against a third party
claim or liability with counsel selected by it (subject to the consent of the
indemnified party, which consent shall not be unreasonably withheld) as long as
the indemnifying party is conducting a good faith and diligent defense. The
indemnified party shall at all times have the right to fully participate in the
defense of a third party claim or liability at its own expense directly or
through counsel; provided, however, that if the named parties to the action or
proceeding include both the indemnifying party and the indemnified party and the
indemnified party is advised in writing by the indemnifying party's counsel that
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the indemnified party may engage
separate counsel at the expense of the indemnifying party. If no such notice of
intent to dispute and defend a third party claim or liability is given by the
indemnifying party, or if such good faith and diligent defense is not being or
ceases to be conducted by the indemnifying party, the indemnified party shall
have the right, at the expense of the indemnifying party, to undertake the
defense of such claim or liability (with counsel selected by the indemnified
party), provided, however, that such claim or liability shall not be compromised
or settled without the written consent of the indemnifying party, which consent
shall not be unreasonably withheld. If the indemnified party settles or
compromises such claim or liability without the prior written consent of the
indemnifying party, the indemnifying party will bear no liability hereunder for
or with respect to such claim or liability. In the event the indemnified party
assumes the defense of the claim or liability, the indemnified party will keep
the indemnifying party reasonably informed of the progress of any such defense,
compromise or settlement. If the third party claim or liability is one that by
its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available such information and assistance as the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense, at the expense of the indemnifying party.
SECTION 9 - CERTAIN DEFINITIONS
"Agreement" shall have the meaning set forth in the Preamble.
"Assumed Liabilities" shall have the meaning set forth in Section 1.1(d).
"Closing" shall have the meaning set forth in Section 1.4.
"Closing Date" shall have the meaning set forth in the Preamble.
"Common Interests" shall have the meaning set forth in the Preamble.
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"Company" shall have the meaning set forth in the Preamble.
"Company Indemnified Party" shall have the meaning set forth in Section
8.5.
"Confidential Information" shall have the meaning set forth in Section 7.5.
"Contributed Assets" shall have the meaning set forth in Section 1.1(b).
"Contributed Contracts" shall have the meaning set forth in Section 4.5.
"Contributor" shall have the meaning set forth in the Preamble.
"Conveyance Instruments" shall have the meaning set forth in Section
1.1(e).
"Data Sharing/License Agreement" shall have the meaning set forth in the
Preamble.
"Encumbrances" means title defects, liens, pledges, claims, rights of first
refusal, options, charges, security interests, mortgages, or other encumbrances
of any nature whatsoever.
"Excluded Liabilities" shall have the meaning set forth in Section 1.1(d).
"Interests" shall have the meaning set forth in the Preamble.
"New IP Assets" shall have the meaning set forth in Section 4.8.
"ONRP" shall have the meaning set forth in the Preamble.
"ONRP Cash Contribution" shall have the meaning set forth in Section 1.2.
"ONRP Indemnified Party" shall have the meaning set forth in Section 8.3.
"ONRP LLC Agreement" shall have the meaning set forth in Section 5.2.
"ONRPS" shall have the meaning set forth in the Preamble.
"Operating Agreement" shall have the meaning set forth in the Preamble.
"Preferred Interests" shall have the meaning set forth in the Preamble.
"Securities Act" shall have the meaning set forth in Section 4.1.
"Services Agreement" shall have the meaning set forth in the Preamble.
"Supply Agreement" shall have the meaning set forth in the Preamble.
"Trademark License Agreement" shall have the meaning set forth in the
Preamble.
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"Transaction Agreements" shall have the meaning set forth in the Preamble.
"Web Site Services Agreement" shall have the meaning set forth in the
Preamble.
"Zany Brainy" shall have the meaning set forth in the Preamble.
"Zany Brainy Cash Contribution" shall have the meaning set forth in Section
1.1(a).
"Zany Brainy Indemnified Party" shall have the meaning set forth in Section
8.1.
"ZB.com" shall have the meaning set forth in the Preamble.
SECTION 10 - MISCELLANEOUS
SECTION 10.1 The Bulk Sales Laws. The Company waives compliance by Zany
Brainy with the provisions of any applicable bulk sales, fraudulent conveyance
or other law for the protection of creditors in connection with the transfer of
the Contributed Assets under this Agreement, and Zany Brainy agrees to indemnify
and hold the Company harmless against any claim made against the Company by any
creditor of the Company as a result of a failure to comply with any such laws.
SECTION 10.2 Sales and Transfer Taxes. The Company shall pay the cost of
all sales and use and transfer taxes arising out of the contributions of Zany
Brainy to the Company set forth in Section 1.1 and Zany Brainy shall reimburse
the Company for fifty percent (50%) of such sales and use and transfer taxes.
SECTION 10.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (without regard
to its conflicts of law doctrines).
SECTION 10.4 Dispute Resolution. All disputes, claims, or controversies
arising out of or relating to this Agreement or the negotiation, validity or
performance hereof that are not resolved by mutual agreement shall be resolved
solely and exclusively by binding arbitration to be held in Delaware before a
single arbitrator who is reasonably acceptable to each of the parties. Each of
the parties hereto irrevocably and unconditionally consents to the exclusive
jurisdiction of Delaware to resolve all disputes, claims or controversies
arising out of or relating to this Agreement or the negotiation, validity or
performance hereof, and further consents to the jurisdiction of the courts of
Delaware for the purposes of enforcing the arbitration provisions of Section
10.4 of this Agreement.
The parties covenant and agree that they will participate in the
arbitration in good faith and that they will share equally its costs, except as
otherwise provided below. The arbitrator may in his or her discretion assess
costs and expenses (including the reasonable legal fees and expenses of the
prevailing party) against any party to a proceeding. Any party unsuccessfully
refusing to comply with an order of the arbitrators shall be liable for costs
and
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expenses, including attorneys' fees, incurred by the other party in enforcing
the award. The provisions of this Section 10.4 shall be enforceable in any court
of competent jurisdiction.
SECTION 10.5 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument and shall become a binding Agreement when
the counterparts have been signed by each of the parties and delivered to the
other party.
SECTION 10.6 Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.7 Entire Agreement. This Agreement, including the exhibits,
schedules, and other documents and instruments referred to herein, embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement supersedes all prior agreements
and understandings between the parties with respect to such subject matter.
SECTION 10.8 Severability. If any one or more provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision had never
been contained herein.
SECTION 10.9 Modifications and Amendments. The terms and provisions of
this Agreement may be modified or amended only by written agreement executed by
all parties hereto.
SECTION 10.10 Schedules. All schedules attached hereto are hereby
incorporated in and made a part as if set forth in full herein.
SECTION 10.11 No Reliance on Other Information. Except for the
representations and warranties contained in this Agreement and in the other
documents executed and delivered in connection with the execution and delivery
of this Agreement, no party or other person acting for any of them makes any
other representation or warranty, express or implied, with respect to the
transactions contemplated hereby, and the parties hereby disclaim any such
representation or warranty, whether oral or written, whether by a party to this
Agreement or any of their respective representatives or affiliates or any other
person.
SECTION 10.12 Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when received if personally delivered; when transmitted, if
transmitted by telecopy, electronic or digital transmission method; the day
after it is sent if sent for next day delivery to a domestic address by a
recognized overnight delivery service. All notices to a party will be
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sent to the addresses set forth below or to such other address or person as such
party may designate by notice to each other party hereunder:
TO ZANY BRAINY: Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attn.: Legal Department
Facsimile No.: (610) 278-7804
With a copy to: Morgan, Lewis & Bockius LLP
One Oxford Centre
301 Grand Street, 32nd Floor
Pittsburgh, PA 15219
Attn.: Peter Watt-Morse, Esq.
Facsimile No.: (412) 560-3399
TO ONRP: Online Retail Partners LLC
47 East 11th Street, 10th Floor
New York, NY 10003
Attn.: Henry Nasella
Facsimile No.: (212) 331-1106
With a copy to: Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attn.: Thomas C. Sadler, Esq.
Facsimile No.: (213) 891-8763
TO COMPANY: At such address as the Company may specify in
writing to the other parties from time to time.
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
(Signature Page Follows)
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
ZANY BRAINY, INC.
By:
---------------------------
Name:
Title:
ONLINE RETAIL PARTNERS LLC
By:
---------------------------
Name:
Title:
ZB HOLDINGS LLC
By: ONLINE RETAIL PARTNERS LLC,
as sole member
By:
-----------------------------
Name:
Title:
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