<PAGE>
As filed with the Securities and Exchange Commission on May 23, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
Zany Brainy, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2663337
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2520 Renaissance Boulevard
King of Prussia, PA 19406
(610) 278-7800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------
KEITH C. SPURGEON
Chief Executive Officer
2520 Renaissance Boulevard
King of Prussia, PA 19406
(610) 278-7800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
STEPHEN M. GOODMAN, ESQUIRE
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, Pennsylvania 19103-2921
(215) 963-5000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================================
Proposed Proposed
Title of Class of Securities Amount to be Maximum Offering Maximum Aggregate Amount of
to Be Registered Registered (1) Price Per Share (2) Offering Price (2) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 10,542,724 Shares $ N/A $ 29,392,223 $ 7,760
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the maximum number of shares to be issued in connection with the
merger, calculated as the product obtained by multiplying (a) an exchange
ratio of 1.233 shares of the registrant's common stock for each share of
Noodle common stock, par value $.01 per share, by (b) 8,550,465, the sum
of (i) the aggregate number of shares of Noodle common stock outstanding on
May 19, 2000 and (ii) the aggregate number of shares of Noodle common
stock issuable pursuant to outstanding options.
(2) Estimated solely for the purposes of calculating the registration fee
required by Section 6(b) of the Securities Act, and calculated pursuant to
Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(1) under the
Securities Act, the proposed maximum aggregate offering price of the
registrant's common stock was calculated in accordance with Rule 457(c)
under the Securities Act as: (a) $3.4375, the average of the high and low
prices per share of Noodle common stock on May 19, 2000 as reported on the
Nasdaq National Market, multiplied by (b) 8,550,465, the maximum number of
shares of Noodle common stock to be acquired in the merger.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
================================================================================
<PAGE>
ZANY BRAINY, INC.
2520 Renaissance Boulevard
King of Prussia, PA 19406
__________________________
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD ON _______, 2000
__________________________
NOTICE IS HEREBY GIVEN that an annual meeting of shareholders of Zany Brainy,
Inc. will be held on _________, 2000, at 10:00 a.m., local time, at 2520
Renaissance Boulevard, King of Prussia, PA 19406, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of April 21, 2000, among Zany Brainy,
Inc., Noodle Kidoodle, Inc. and Night Owl Acquisition, Inc. A
copy of the merger agreement is attached to this document as
Appendix I.
2. To elect seven directors, each for a one-year term and until
the election and qualification of his successor.
3. To consider and transact such other business as may properly come
before the meeting of shareholders or any adjournment or
postponement thereof.
If you were a shareholder of record at the close of business on _________,
2000, you may vote at the annual meeting. A list of the shareholders entitled to
vote at the annual meeting will be available for inspection at Zany's offices
during normal business hours for the ten days prior to the meeting, and at the
time and place of the meeting.
The board of directors of Zany recommends that shareholders vote FOR the
approval of the merger agreement and for each of the seven nominees for
director. The affirmative vote of at least a majority of the votes cast by
Zany's shareholders is required for approval of the merger agreement. Directors
will be elected by plurality vote.
<PAGE>
You are cordially invited to attend the annual meeting. It is important
that your shares be represented, whether or not you plan to attend the meeting
in person. Accordingly, please complete, date, sign and return the enclosed
proxy card in the enclosed postage prepaid envelope. You may revoke your proxy
in writing or in person at any time before the meeting in accordance with the
instructions contained in this document. If your proxy card is signed, dated and
returned without specifying your choice, the shares will be voted as recommended
by the Zany board of directors.
By Order of the Board of Directors
/s/ Keith C. Spurgeon
Keith C. Spurgeon
Chairman and Chief Executive Officer
King of Prussia, Pennsylvania
__________, 2000
<PAGE>
NOODLE KIDOODLE, INC.
6801 Jericho Turnpike, Suite 100
Syosset, NY 11791
--------------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
TO BE HELD ON ______________, 2000
--------------------------
A special meeting of shareholders of Noodle Kidoodle, Inc. will be held on
__________, 2000, at ____ a.m., local time, at
______________________________________________, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of April 21, 2000, among
Zany Brainy, Inc., Noodle Kidoodle, Inc. and Night Owl
Acquisition, Inc. A copy of the merger agreement is attached to
this document as Appendix I.
2. To consider and transact such other business as may properly come
before the special meeting of shareholders or any adjournment or
postponement thereof.
If you were a shareholder of record at the close of business on
____________, 2000, you may vote at the special meeting. A list of the
shareholders entitled to vote at the special meeting will be available for
inspection at Noodle's offices during normal business hours for the ten days
prior to the meeting, and at the time and place of the meeting.
The board of directors of Noodle recommends that shareholders vote FOR the
approval and adoption of the merger agreement. The affirmative vote of at least
a majority of the outstanding shares of Noodle common stock is required for
approval and adoption of the merger agreement.
You are cordially invited to attend the special meeting. It is important
that your shares be represented, whether or not you plan to attend in person.
Accordingly, please complete, date, sign and return the enclosed proxy card in
the enclosed postage prepaid envelope. You may revoke your proxy in writing or
in person at any time before the special meeting of shareholders in accordance
with the instructions contained in this document. If your proxy card is signed,
dated and returned without specifying your choice, the shares will be voted as
recommended by the Noodle board of directors.
By Order of the Board of Directors
/s/ Stanley Greenman
Stanley Greenman
Chairman and Chief Executive Officer
Syosset, New York
__________, 2000
<PAGE>
[Zany Logo] Zany Brainy, Inc. [Noodle Logo]
Noodle Kidoodle, Inc.
Joint Proxy Statement/Prospectus
Merger Proposed - Your Vote is Important
The respective boards of directors of Zany Brainy, Inc. and Noodle
Kidoodle, Inc. have agreed to a merger that they believe will enhance the growth
of their existing businesses.
This joint proxy statement/prospectus provides you with detailed
information about the merger agreement and the merger for you to consider in
connection with your vote on the merger agreement. This joint proxy
statement/prospectus also serves as a prospectus of Zany to provide information
to Noodle shareholders in connection with their receipt of Zany common stock in
the merger. You may also obtain information about Zany and Noodle from the
documents that Zany and Noodle have filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
Please see "Risk Factors" beginning on page ___ of this joint proxy
statement/prospectus for a description of risks associated with the
merger.
If we complete the merger, a wholly-owned subsidiary of Zany will merge
into Noodle. Noodle will be the surviving corporation and will retain its
separate corporate existence as a subsidiary of Zany. Noodle shareholders will
receive 1.233 shares of Zany common stock for each share of Noodle common stock
that they own, plus cash in lieu of any fractional shares. Each Noodle stock
option to purchase shares of Noodle common stock will also be converted into an
option exercisable for the number of shares of Zany common stock determined in
accordance with the exchange ratio. Zany shareholders will continue to own their
existing shares. Immediately after the merger, the former shareholders of Noodle
will hold ________ shares of Zany common stock representing approximately 30% of
the then outstanding Zany common stock. This information is based on the number
of shares of Zany and Noodle common stock outstanding on ____________, 2000.
Zany common stock is listed on the Nasdaq National Market. Zany's Nasdaq
symbol is "ZANY." Noodle common stock also is listed on the Nasdaq National
Market. Noodle's Nasdaq symbol is "NKID." Zany has applied to list the Zany
common stock to be issued to the Noodle shareholders on the Nasdaq National
Market, and this listing is a condition to the consummation of the merger.
The merger cannot be completed unless the Zany shareholders approve the
merger agreement and the Noodle shareholders adopt the merger agreement.
Approval of the merger agreement by the Zany shareholders requires the
affirmative vote of at least a majority of the votes cast by Zany's
shareholders. Adoption of the merger agreement by the Noodle shareholders
requires the affirmative vote of holders of a majority of Noodle's outstanding
common stock.
We have scheduled meetings for our shareholders to vote on these matters.
The dates, times and places of the shareholder meetings are as follows:
<PAGE>
FOR ZANY SHAREHOLDERS: FOR NOODLE SHAREHOLDERS:
_________, 2000 _______________, 2000
10:00 a.m., local time _____ a.m., local time
Zany Brainy, Inc. [Address]
2520 Renaissance Boulevard
King of Prussia, PA 19406
Whether or not you plan to attend the meetings, please take the time to
vote by completing the enclosed proxy card and mailing it to us as soon as
possible. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will be counted as a vote in favor of the merger. If
you are a Zany shareholder and you fail to return your card, you will not be
counted in determining whether a quorum is present for the vote and you will not
have voted either for or against the merger. If you are a Noodle shareholder and
you fail to return your card, the effect will be a vote against the merger.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the merger or the Zany common stock to be
issued in the merger or determined whether this document is accurate or
adequate. Any representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated _______________, 2000 and is
first being mailed to shareholders of Zany and Noodle on or about
______________, 2000.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................................ 6
SUMMARY....................................................................................... 9
RISK FACTORS.................................................................................. 18
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............................................... 26
SHAREHOLDER MEETINGS.......................................................................... 27
Times and Places; Purposes................................................................ 27
Record Date; Voting Rights; Votes Required for Approval................................... 27
Proxies................................................................................... 28
THE MERGER.................................................................................... 29
Background of the Merger.................................................................. 29
Recommendation of the Zany Board of Directors; Zany's Reasons for the Merger.............. 32
Recommendation of the Noodle Board of Directors; Noodle's Reasons for the Merger.......... 33
Opinions of Financial Advisors............................................................ 36
Certain Material United States Federal Income Tax Consequences of the Merger.............. 49
Employee Matters.......................................................................... 50
Governmental and Regulatory Approvals..................................................... 51
Anticipated Accounting Treatment.......................................................... 52
Resales of Zany Common Stock.............................................................. 52
INTERESTS OF NOODLE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER............................ 53
Interests of Noodle Management in the Zany Board of Directors after the Merger........... 53
Employment Agreements.................................................................... 53
Indemnification and Insurance............................................................ 55
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION................................... 55
Market Price Data........................................................................ 55
Dividend Policies........................................................................ 56
THE MERGER AGREEMENT.......................................................................... 57
General.................................................................................. 57
Closing Matters.......................................................................... 57
Conversion of Shares; Treatment of Stock Options......................................... 57
Exchange of Stock Certificates........................................................... 58
Representations and Warranties........................................................... 58
Covenants................................................................................ 60
Conditions to Obligations to Effect the Merger........................................... 64
Additional Conditions to Obligations of Zany............................................. 65
Additional Conditions to Obligations of Noodle........................................... 65
Termination; Termination Fees and Expenses............................................... 66
Amendment and Waiver..................................................................... 68
DESCRIPTION OF ZANY CAPITAL STOCK............................................................. 69
Common Stock............................................................................. 69
Preferred Stock.......................................................................... 69
Common Stock Warrants.................................................................... 69
Indemnification of Directors and Officers................................................ 69
Limitation of Liability.................................................................. 70
Registration Rights...................................................................... 70
Transfer Agent........................................................................... 70
COMPARISON OF THE RIGHTS OF THE HOLDERS OF NOODLE COMMON STOCK AND ZANY COMMON STOCK.......... 71
Dividend Rights.......................................................................... 71
Number and Election of Directors......................................................... 72
Fiduciary Duties of Directors............................................................ 72
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Liability of Directors................................................................... 73
Indemnification of Directors and Officers................................................ 74
Annual Meetings.......................................................................... 75
Special Meetings......................................................................... 75
Action by Shareholders Without a Meeting................................................. 75
Shareholder Proposals.................................................................... 76
Charter Amendments....................................................................... 76
Amendments to Bylaws..................................................................... 77
Mergers and Major Transactions........................................................... 77
Dissenters' Rights of Appraisal.......................................................... 78
Anti-Takeover Provisions................................................................. 80
Dissolution.............................................................................. 81
Shareholder Rights Plan.................................................................. 82
THE COMBINED COMPANY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.................... 83
SELECTED CONSOLIDATED FINANCIAL DATA OF ZANY.................................................. 88
ZANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS... 90
BUSINESS OF ZANY.............................................................................. 95
SELECTED CONSOLIDATED FINANCIAL DATA OF NOODLE................................................ 101
NOODLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 103
BUSINESS OF NOODLE............................................................................ 107
ELECTION OF DIRECTORS OF ZANY................................................................. 111
SECURITIES OWNERSHIP OF ZANY=S EXECUTIVE OFFICERS AND DIRECTORS............................... 115
EXECUTIVE COMPENSATION OF ZANY................................................................ 117
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 123
LEGAL MATTERS................................................................................. 124
EXPERTS....................................................................................... 124
FUTURE SHAREHOLDER PROPOSALS.................................................................. 124
WHERE YOU CAN FIND MORE INFORMATION........................................................... 125
Appendix I Agreement and Plan of Merger
Appendix II Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
Appendix III Opinion of PaineWebber Incorporated
</TABLE>
4
<PAGE>
Zany has supplied all information contained in this document relating to Zany,
and Noodle has supplied all of the information relating to Noodle.
Zany and Noodle have not authorized anyone to give you any information or to
make any representations about the merger and other transactions discussed in
this document other than those contained herein. If you are given any
information or representations about these matters that is not discussed in this
document, you must not rely on that information.
This document is not an offer to sell or a solicitation of an offer to buy
securities anywhere or to anyone where or to whom it would be unlawful to offer
or sell securities under applicable law.
The delivery of this document or the common stock of Zany offered by this
document does not, under any circumstances, mean that there has not been a
change in the affairs of Zany or Noodle since the date of this document. It
also does not mean that information in this document is correct after this date.
5
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why do Zany and Noodle want to merge?
A. The merger will provide a strategic and complementary fit between the
existing businesses of Zany and Noodle. The combined company will have
greater resources and a greater opportunity to successfully compete in the
specialty toy retailing industry than either company would have on its own.
The merger provides opportunities for meaningful cost savings, efficiencies
and revenue growth that also should allow the combined company to be more
competitive in its markets.
For more detailed reasons for the merger, see pages ___ through ___.
Q: Why are the Zany board of directors and the Noodle board of directors
recommending that I vote for adoption of the merger agreement?
A. In reaching a decision to approve the merger agreement and the merger and to
recommend adoption of the merger agreement by shareholders, the respective
boards of directors of Zany and Noodle consulted with its management, as well
as financial and legal advisors, and considered the terms of the proposed
merger agreement. In addition, the Zany board of directors considered each of
the items set forth on pages ___ to ____, and the Noodle board of directors
considered each of the items set forth on pages ____ to ____. Based on those
consultations and considerations, the Zany board of directors and the Noodle
board of directors each unanimously approved the merger agreement and the
merger, and believe that the terms of the merger agreement and the merger are
advisable and fair to, and in the best interests of, Zany and Noodle and
their respective shareholders.
Q: What will Noodle common shareholders receive in the merger?
A. The merger will result in the exchange of each outstanding share of Noodle
common stock for 1.233 shares of Zany common stock. Noodle shareholders will
not receive any fractional shares. Instead, they will receive cash in an
amount equal to the closing price of a share of Zany common stock on the date
the merger becomes effective multiplied by the appropriate fraction.
Q: Will Zany shareholders receive any shares as a result of the merger?
A. No. Zany shareholders will continue to hold the Zany shares they own at the
time of the merger.
Q: What if the merger is not completed?
A. If the merger is not completed, Noodle will continue to operate as an
independent company. Noodle or Zany may be required to pay the other a
termination fee under the merger agreement if the merger is not completed for
certain reasons.
Q: Where can I get information regarding Zany, Noodle and the merger?
A. We urge you to read and consider the information contained in this joint
proxy statement/prospectus, including its appendices. You also may want to
review the documents referenced under "Where You Can Find More Information."
Q: Will the merger dilute the ownership of Zany shareholders?
A. Yes. The issuance of shares of Zany common stock to Noodle shareholders will
dilute the ownership of existing Zany shareholders. Immediately after the
merger, the former shareholders of Noodle will hold approximately 30% of the
outstanding Zany common stock. This is based on the number of shares of Zany
and Noodle common stock outstanding on __________, 2000.
Q: Who will manage Zany after the merger?
A. At the effective time of the merger, the board of directors of Zany will be
expanded from seven to eight directors to include Stanley Greenman, the
current Chairman and Chief Executive Officer of Noodle. The executive
officers of the combined company will be the executive officers of Zany
immediately prior to the effective time. Mr. Greenman and Stewart Katz, the
President of Noodle, will not continue as executive officers of the combined
company, but each of them will enter into a six-month employment agreement
with Zany at the effective time.
6
<PAGE>
Q: Who may vote at the meeting?
A. All Zany shareholders of record as of the close of business on _________,
2000 may vote at the Zany annual meeting. If you are a Zany shareholder, you
are entitled to one vote per share of Zany common stock that you own on the
record date.
All Noodle shareholders of record as of the close of business on __________,
2000 may vote at the Noodle special meeting. If you are a Noodle shareholder,
you are entitled to one vote per share of Noodle common stock that you own on
the record date.
Q: What am I being asked to vote upon in connection with the merger?
A. Both Zany and Noodle shareholders are being asked to vote for the approval
and adoption of the merger agreement.
Q: What do I need to do now?
A. After reviewing this document, indicate on your proxy card how you want to
vote, sign it and mail it in the enclosed postage prepaid return envelope as
soon as possible so that the proxyholder may vote your shares at your
shareholder meeting.
Q: When are the shareholder meetings?
A. The annual meeting for Zany shareholders will take place on _________, 2000,
and the special meeting for Noodle shareholders will take place on
__________, 2000.
Q: How will my shares be voted if I return a blank proxy card?
A. If you sign and send in your proxy card and do not indicate how you want to
vote, we will count your proxy as a vote in favor of the proposals submitted
at your shareholder meeting.
Q: What will be the effect if I do not vote on the merger proposal?
A. If you are a Zany shareholder and you abstain from voting or do not vote your
shares by proxy or in person, you will not be counted in determining whether
a quorum is present for the vote and you will not have voted either for or
against adoption of the merger agreement. If you are a Noodle shareholder
and you abstain from voting or do not vote your shares by proxy or in person,
it will have the same effect as a vote against adoption of the merger
agreement.
Q: Can I vote my shares in person?
A. Yes. If you hold your shares as the record holder and not in street name,
you may attend your shareholder meeting and vote your shares in person,
rather than signing and mailing your proxy card.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A. Your broker will vote your shares on the merger proposal only if you instruct
your broker how to vote. Your broker will send you directions on how you can
instruct your broker to vote. If you do not instruct your broker, your
shares will not be voted.
Q: Can I revoke my proxy and change my vote?
A. Yes. You may change your vote in one of three ways at any time before your
proxy is voted at the meeting. First, you may send a written notice stating
that you would like to revoke your proxy. Second, you may complete and
submit a new, later dated proxy. Third, you may attend the meeting and vote
in person. If you choose either of the first two methods, you must submit
your notice of revocation or your new proxy to the Secretary of Zany or
Noodle, as the case may be.
Q: Should I send in my stock certificates now?
A. No. After we complete the merger, we will send Noodle shareholders written
instructions on how to exchange their stock certificates. Zany shareholders
will retain their stock certificates after the merger.
Q: When do you expect to complete the merger?
A. We currently expect to complete the merger late in the second fiscal quarter
of 2000 or early in the third fiscal quarter of 2000. However, it is possible
that factors outside the control of the parties could require us to complete
the merger at a later time. Subject to certain exceptions, either Zany or
Noodle can terminate the merger
7
<PAGE>
agreement if we do not complete the merger by October 31, 2000.
Q: What are the tax consequences of the merger to Noodle and Zany shareholders?
A. The exchange of shares by Noodle shareholders will be tax-free to them for
U.S. federal income tax purposes, except for taxes payable on any gain
recognized as a result of receiving cash in lieu of fractional shares of Zany
common stock. The merger will have no tax consequences to Zany shareholders.
A summary of the material federal income tax consequences of the merger is
included in the section "The Merger--Certain Material United States Federal
Income Tax Consequences of the Merger" on page ___.
Q: Am I entitled to appraisal rights in connection with the merger?
A. No. Neither Zany shareholders nor Noodle shareholders will have appraisal
rights.
Q: Who can help answer your questions?
A. If you have more questions about the merger or if you need additional copies
of this joint proxy statement/prospectus or the enclosed proxy, you should
contact:
Zany Brainy, Inc.:
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Legal Department
Telephone Number: (610) 278-7800
Noodle Kidoodle, Inc.:
6801 Jericho Turnpike, Suite 100
Syosset, NY 11791
Attention: President
Telephone Number: (516) 677-0500
8
<PAGE>
SUMMARY
This summary highlights selected information about Zany, Noodle and the
merger. It does not contain all of the information that is important to you.
To understand the merger fully and for a more complete description of the legal
terms of the merger, you should carefully read this entire joint proxy
statement/prospectus and the documents attached as appendices. We have included
page references parenthetically to direct you to a more complete description of
the topics presented in this summary. Both Zany and Noodle's fiscal years end
on the Saturday nearest to January 31. However, please note that Zany calls the
fiscal year ended January 29, 2000 "fiscal 1999" but Noodle calls this same
period "fiscal 2000."
The Parties to the Merger
Zany Brainy, Inc. (page __)
2520 Renaissance Boulevard
King of Prussia, PA 19406
(610) 278-7800
Zany Brainy is a specialty retailer of high quality toys, games, books and
multimedia products for kids up to 12 years of age. As of May 15, 2000, Zany
had 107 retail stores in 27 states and also sells its merchandise through
catalogs with toll-free ordering. In addition, Zany has extended its brand to
the worldwide web, through its joint venture, at www.zanybrainy.com.
Zany was incorporated in Pennsylvania in 1991 under the name Children's Concept,
Inc. and, in March 1999, changed its name to Zany Brainy, Inc.
Noodle Kidoodle, Inc. (page __)
6801 Jericho Turnpike, Suite 100
Syosset, NY 11791
(516) 677-0500
Noodle Kidoodle is a specialty retailer of a broad assortment of educationally
oriented, creative and non-violent children's products. As of May 15, 2000,
Noodle operated 60 stores in 15 states.
Noodle was founded in 1946 and did business under the name Greenman Bros. Inc.
until it changed its name to Noodle Kidoodle, Inc. in December 1995. Since
January 1996, Noodle has been incorporated in Delaware.
Reasons for the Merger (page __)
The boards of directors of Zany and Noodle believe that the respective
businesses of Zany and Noodle provide a strategic and complementary fit and that
there will be significant combination benefits as the retail operations of the
two companies are combined.
To review the background and reasons for the merger in greater detail, see pages
___ through ___. To review the risks relating to the merger, see pages ___
through ___.
The Merger
If we complete the merger, Noodle will merge with a subsidiary of Zany and will
become a wholly-owned subsidiary of Zany. The merger is subject to conditions
and rights of termination described in this document and in the merger
agreement. We have attached the merger agreement as Appendix I to this joint
proxy statement/prospectus. It is the legal document governing the merger. We
encourage you to read the merger agreement.
What Noodle Shareholders Will Receive in the Merger (page __)
If we complete the merger, each Noodle shareholder will receive 1.233 shares of
Zany common stock for each share of Noodle common stock owned by that Noodle
shareholder. We sometimes refer to this number of shares as the exchange ratio.
Zany will not issue any fractional shares. Instead, each Noodle shareholder
will receive cash in lieu of a fractional share of Zany common stock.
Example:
. If a Noodle shareholder currently owns 100 shares of Noodle common stock, he
will receive 123 shares of Zany common stock, and a check for the market
value of the 0.3 fractional share.
Following the merger, current Noodle shareholders will own approximately 30% of
the outstanding shares of Zany.
9
<PAGE>
Determinations of Board of Directors and Recommendations to Shareholders (page
__)
Zany. The Zany board of directors has unanimously approved the merger and the
merger agreement. The Zany board of directors recommends that the Zany
shareholders vote for the proposal to approve and adopt the merger agreement.
Noodle. The Noodle board of directors has unanimously approved the merger and
the merger agreement and believes that it is in the best interests of the Noodle
shareholders to merge with Night Owl Acquisition, Inc. and become a wholly-owned
subsidiary of Zany. The Noodle board of directors recommends that the Noodle
shareholders vote for the proposal to approve and adopt the merger agreement.
Opinions of Financial Advisors (page __)
In deciding to approve the merger, we considered opinions from our respective
financial advisors as to the fairness of the exchange ratio from a financial
point of view to Zany and to the Noodle shareholders as of the date of these
opinions. Zany received an opinion from Donaldson, Lufkin & Jenrette Securities
Corporation, or DLJ, and Noodle received an opinion from PaineWebber
Incorporated. Each of these opinions describes the bases and assumptions on
which it was rendered. The opinions are attached as Appendix II and Appendix III
to this joint proxy statement/ prospectus. We encourage you to read and consider
these opinions.
The Meetings (page __)
The annual meeting of the Zany shareholders will be held at 2520 Renaissance
Boulevard, King of Prussia, PA 19406 on _________, 2000, at 10:00 a.m. local
time.
At the Zany meeting, holders of Zany common stock will consider and vote upon
the merger agreement and the merger and upon the election of Zany directors.
Approval of the merger proposal requires the approval of the majority of the
votes cast by Zany's shareholders.
The special meeting of the Noodle shareholders will be held at
_________________, on _______, 2000, at _________, local time.
At the Noodle meeting, holders of Noodle common stock will consider and vote
upon the merger agreement and the merger. Approval of the merger agreement and
the merger requires the approval of the majority of the outstanding shares of
Noodle common stock.
Federal Income Tax Considerations (page __)
A condition of the merger is that each of Zany and Noodle receive an opinion
from its outside counsel that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended. This treatment means that the merger will be tax-free to the Noodle
shareholders except to the extent of any cash received in lieu of fractional
shares of Zany common stock.
You should consult your tax advisor for a full understanding of the tax
consequences of the merger applicable to you.
Anticipated Accounting Treatment (page __)
Zany and Noodle expect for the merger to be accounted for as a "pooling of
interests." This means that Zany will restate its consolidated financial
statements for prior periods at the effective time of the merger to include the
assets, liabilities, shareholders' equity and results of operations of Noodle as
if Noodle and Zany had been combined for financial and accounting
purposes since the beginning of the periods presented.
Conditions to the Merger (page __)
The completion of the merger depends on the satisfaction or waiver of a number
of conditions, including the following:
. approval of the merger agreement and the related transactions by the Zany
shareholders and the Noodle shareholders;
. expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended;
. absence of any court order, law or governmental action prohibiting the
merger;
. listing on the Nasdaq National Market of the Zany stock to be issued to
Noodle shareholders in the merger;
. receipt of opinions of counsel to Zany and Noodle that the merger will
qualify as a tax-free reorganization;
. receipt of letters from the independent public accountants of Zany, dated
approximately as of the effective date of this joint proxy
statement/prospectus and as of the closing date of
10
<PAGE>
the merger, that the independent public accountants concur with the opinion
of Zany's management that the merger will qualify for pooling of interests
accounting treatment;
. receipt of letters from the independent public accountants of Noodle, dated
approximately as of the effective date of this joint proxy
statement/prospectus and as of the closing date of the merger, that no
condition exists that would preclude Noodle's ability to be a party in a
business combination to be accounted for as a pooling of interests;
. accuracy of representations and warranties of each party except for such
inaccuracies which, individually or in the aggregate, would not have a
material adverse effect; and
. receipt of some consents to the merger.
Termination of the Merger Agreement (page __)
The boards of directors of both Zany and Noodle can agree to terminate the
merger agreement at any time. Either company can also terminate if, among other
things:
. the merger is not consummated on or before October 31, 2000;
. a governmental authority permanently prohibits the merger;
. the other party breaches any of its obligations, representations or
warranties under the agreement and this breach would result in a material
adverse effect, as defined in the merger agreement;
. a change or event occurs that has or is reasonably expected to have a
material adverse effect on the other party;
. the Zany shareholders or the Noodle shareholders do not approve the merger;
. 30 days has passed since all of the conditions to the merger have been
satisfied and the merger has not been completed;
. the board of directors of the other party withdraws or modifies its approval
or recommendation of the merger agreement in any adverse manner; or
. the financial advisor to the other party withdraws its fairness opinion.
Zany may terminate the merger agreement if the Noodle board:
. does not recommend the merger to Noodle shareholders;
. recommends to the Noodle shareholders an Acquisition Proposal (as defined in
the merger agreement) other than by Zany;
. fails to recommend against the tender by Noodle shareholders of their shares
in a tender offer or exchange offer that has been commenced or with respect
to which an offer to purchase or a registration statement has been filed; or
. resolves to take any of these actions.
Zany may also terminate the merger agreement if Noodle enters into, authorizes,
recommends or proposes a merger, a sale of all or a substantial portion of its
assets or a sale of beneficial ownership of securities representing 15% or more
of Noodle's voting power.
Noodle may terminate the merger agreement if it accepts a Superior Proposal (as
defined on page __ of this joint proxy statement/prospectus) or has changed its
recommendation of the merger and in either case it has complied with its
obligations under the merger agreement regarding no solicitations.
Termination Fees
Noodle has agreed to pay Zany a termination fee of $2.25 million plus the
reimbursement of up to $1 million of Zany's expenses if (a) Zany terminates the
merger agreement for one of the following reasons:
. the merger is not completed within 30 days following the fulfillment of the
conditions to closing;
. Noodle breaches its non-solicitation obligations under the merger agreement;
or
. the Noodle board does not recommend the merger to Noodle shareholders or
withdraws or modifies its approval or recommendation of the merger agreement
in any adverse manner, recommends to the Noodle shareholders an acquisition
proposal (as defined in the merger agreement) other than by Zany, fails to
recommend against the tender by Noodle shareholders of their shares in a
tender
11
<PAGE>
offer or exchange offer that has been commenced or with respect to which an
offer to purchase or a registration statement has been filed, or resolves to
take any of these actions;
and (b) either prior to termination an acquisition proposal for Noodle is
outstanding or within one year following termination Noodle enters into an
agreement for or consummates an acquisition proposal.
In addition, Noodle will pay Zany the termination fee and expenses if (a) Noodle
terminates the merger agreement for the following reasons:
. Noodle has accepted a superior proposal or changed its recommendation of the
merger and in either case has complied with its non-solicitation
obligations; or
. PaineWebber has withdrawn its fairness opinion;
and (b) either prior to termination an acquisition proposal for Noodle is
outstanding or within one year following termination Noodle enters into an
agreement for or consummates an acquisition proposal.
Zany has agreed to pay Noodle a termination fee of $2.25 million plus the
reimbursement of up to $1 million of Noodle's expenses if the merger agreement
is terminated for one of the following reasons:
. Noodle terminates because the merger is not completed within 30 days
following the fulfillment of the conditions to closing;
. Noodle terminates because the Zany board withdraws or modifies its approval
or recommendation of the merger agreement in any adverse manner or resolves
to take that type of action; or
. Zany terminates because DLJ withdraws its fairness opinion.
Stock Exchange Listing of Zany Common Stock
(page __)
It is a condition to the completion of the merger that Zany common stock issued
to Noodle shareholders in the merger be authorized for listing on the Nasdaq
National Market.
Delisting and Deregistration of Noodle Common Stock
(page __)
If the merger is completed, Noodle common stock will be delisted from the Nasdaq
and will be deregistered under the Securities Exchange Act of 1934, as amended.
Absence of Appraisal Rights (page __)
Noodle common stock is listed on the Nasdaq National Market, and the Zany common
stock to be received by the Noodle shareholders also will be listed on the
Nasdaq National Market. As a result, Noodle and Zany shareholders will not be
entitled to appraisal rights under Delaware or Pennsylvania law, respectively.
Interests of Noodle Directors and Executive Officers in the Merger (page __)
Noodle shareholders should note that certain executive officers and directors
who are also shareholders of Noodle have interests in the merger that are in
addition to those of Noodle shareholders.
These interests include the following:
. Stanley Greenman, Chairman and Chief Executive Officer of Noodle, will
become a director of Zany.
. Mr. Greenman and Stewart Katz, President and Chief Operating Officer of
Noodle, will be entitled to receive severance payments under the existing
employment agreements with Noodle of $____ and $____, respectively.
. Messrs. Greenman and Katz will enter into employment agreements with Zany
for terms of six months, which provide for base salaries of $257,500 and
$232,500, respectively. At the end of the six month term, Messrs. Greenman
and Katz will receive stay bonuses of $225,000 and $200,000, respectively,
and a lump sum payment of $350,000 and $325,000, respectively, in
consideration of the continuation of a non-compete for a period of one year
after they cease to perform services for Zany. At the end of the term of
their employment, Messrs. Greenman and Katz will each enter into consulting
agreements with Zany for terms of two years, in which they will agree to
provide consulting services to Zany and will agree not to compete with Zany
for a period of time for consulting fees of $125,000 each.
12
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF ZANY
Zany provides the following financial information to aid you in your analysis
of the financial aspects of the merger. You should read the following summary
selected consolidated financial data of Zany in conjunction with the
Consolidated Financial Statements of Zany and the notes, "Selected Historical
Consolidated Financial Information of Zany" and "Zany Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this joint proxy statement/prospectus.
When reading this data, you should be aware that:
. All fiscal years presented include 52 weeks of operations, except the
fiscal year ended February 3, 1996, which includes 53 weeks.
. A store becomes comparable in the 14th full month of store operations.
. Sales per square foot and average sales per store are based on stores
opened for the entire period.
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---- ---- ----- ---- ----
(in thousands, except per share, number of stores and sales per square foot data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................................. $54,372 $92,563 $123,345 $168,471 $241,194
Gross profit.............................................. 13,400 23,358 33,893 50,318 75,244
Selling, general and administrative expenses.............. 21,110 28,732 33,581 46,376 63,592
Operating income (loss)................................... (7,710) (5,374) 312 3,942 11,652
Net income (loss)......................................... (7,828) (6,023) (153) 8,999(a) 6,904
Net income (loss) per common share:
Basic................................................... $ (1.55) $ (1.19) $ (0.03) $ 1.67(a) $ 0.44
Diluted (b)............................................. (1.55) (1.19) (0.03) 0.51(a) 0.33
Weighted average shares outstanding:
Basic................................................... 5,065 5,068 5,085 5,373 15,834
Diluted (b)............................................. 5,065 5,068 5,085 17,770 21,211
Store Data:
Number of stores at end of the period..................... 31 43 52 75 103
Total square feet at end of the period.................... 387 538 630 868 1,159
Comparable store sales increase........................... 0.3% 4.3% 9.1% 9.9% 4.0%
Sales per square foot..................................... $ 202 $ 183 $ 203 $ 227 $ 227
Average sales per store................................... 2,382 2,286 2,523 2,746 2,625
Operating Data:
Gross profit margin....................................... 24.6% 25.2% 27.5% 29.9% 31.2%
Operating margin (loss)................................... (14.2) (5.8) 0.3 2.3 4.8
Capital expenditures...................................... $ 7,377 $ 6,276 $ 6,420 $ 7,309 $ 13,612
Depreciation and amortization............................. 2,115 3,713 5,017 6,859 8,698
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At January 29, 2000
-------------------
<S> <C>
Balance Sheet Data:
Inventories...................................................... $ 71,020
Working capital.................................................. 66,470
Total assets..................................................... 143,726
Capitalized lease obligations, less current portion.............. 3,855
Total shareholders' equity....................................... 98,697
</TABLE>
_________
(a) Net income for the fiscal year ended January 30, 1999 includes an income
tax benefit of $6,187 due to the $7,166 benefit recorded for Zany's net
operating loss carryforward, partially offset by income tax expense of
$979. The $7,166 tax benefit represents net income per basic and diluted
common share of $1.33 and $0.40, respectively.
(b) Stock options, warrants and preferred stock convertible into common stock
were excluded from the calculation of diluted net loss per common share for
the fiscal year ended February 3, 1996 through the fiscal year ended
January 31,1998 as they were anti-dilutive due to the losses in each of
those periods.
14
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF NOODLE
Noodle provides the following financial information to aid you in your
analysis of the financial aspects of the merger. You should read the following
summary selected consolidated financial data of Noodle in conjunction with the
Consolidated Financial Statements of Noodle and the notes and "Noodle
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Selected Historical Consolidated Financial Information of
Noodle" included elsewhere in this joint proxy statement/prospectus. All fiscal
years presented include 52 weeks of operations, except the fiscal year ended
February 3, 1996, which includes 53 weeks.
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---------- ---------- ---------- ----------- ---------
(in thousands, except per share and number of stores data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................................ $ 32,143 $59,410 $81,664 $107,886 $135,038
Gross profit............................................. 12,318 22,868 31,276 42,481 52,268
Selling, general and administrative expenses............. 17,680 31,124 33,552 38,804 49,356
Provision for restructuring operations................... 500 -- -- -- --
Operating income (loss).................................. (5,862) (8,256) (2,276) 3,677 2,912
Net income (loss) from:
Continuing operations.................................. $ (5,272) $(7,492) $(1,918) $ 3,752 $ 9,683(a)
Discontinued operations................................ (9,059) -- -- -- 1,550
Cumulative effect of a change in accounting principle.. -- -- -- -- (195)
-------- ------- ------- -------- --------
Net income (loss).................................... $(14,331) $(7,492) $(1,918) $ 3,752 $ 11,038
======== ======= ======= ======== ========
Net income (loss) per common share from continuing
operations:
Basic.................................................. $ (0.99) (1.00) (0.25) 0.49 $ 1.27(a)
Diluted................................................ $ (0.99) (1.00) (0.25) 0.49 1.25(a)
Net income (loss) per common share:
Basic.................................................. (2.69) (1.00) (0.25) 0.49 1.45(a)
Diluted................................................ (2.69) (1.00) (0.25) 0.49 1.42(a)
Weighted average shares outstanding:
Basic.................................................. 5,320 7,488 7,580 7,588 7,603
Diluted................................................ 5,498 7,601 7,587 7,722 7,761
Operating Data:
Number of stores at end of the period.................. 22 31 32 42 58
Gross profit margin.................................... 38.3% 38.5% 38.3% 39.4% 38.7%
Operating margin (loss)................................ (18.2)% (13.9)% (2.8)% 3.4% 2.2%
Capital expenditures (continuing operations)........... 8,877 9,397 1,664 7,318 9,835
Depreciation and amortization.......................... 1,028 1,926 2,490 2,932 3,787
</TABLE>
At January 29, 2000
-------------------
Balance Sheet Data:
Inventories........................................... $33,610
Working capital....................................... 15,300
Total assets.......................................... 72,882
Long-term obligations, less current portion........... 689
Total shareholders' equity............................ 48,700
- ----------------
15
<PAGE>
(a) The fiscal year ended January 29, 2000 includes a net income tax benefit of
$7,271 due to the recognition of Noodle's deferred tax asset which
represents net income per basic and diluted common share of $0.96 and
$0.94, respectively.
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth certain summary pro forma combined financial
data for Zany and Noodle. The pro forma amounts included in the table below
assume the consummation of the merger and are based on the "pooling of
interests" method of accounting. The following table should be read in
conjunction with the historical financial statements of Zany and Noodle and the
pro forma financial data included herein under the caption "Unaudited Pro Forma
Combined Financial Statements."
The pro forma amounts below are presented for informational purposes only and
are not necessarily indicative of the results of operations of the combined
company that would have actually occurred had the merger been consummated as of
February 2, 1997 or of the financial condition of the combined company had the
merger been consummated as of January 29, 2000 or of the future results of
operations or financial condition of the combined company. The pro forma
information does not reflect any synergies anticipated as a result of the
merger, in particular the elimination of costs associated with Noodle's status
as a public company and other administrative savings. There can be no
assurances that such synergies will be realized.
Zany and Noodle estimate that they will incur direct transaction costs of
approximately $3.0 million, net of tax, associated with the merger, which will
be charged to operations in the quarter in which the merger is consummated. In
addition, it is expected that following the merger, the combined company will
incur additional expenses, which are currently estimated to be in the range of
$10.0 to $13.0 million, net of tax, associated with the merger and integrating
the operations of the two companies. Merger and integration expenses are not
reflected in these unaudited pro forma combined financial statements.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Net Sales............................................................... $205,009 $276,357 $376,232
Gross Profit............................................................ 51,096 77,404 108,380
Selling, general and administrative expenses............................ 52,833 69,813 92,931
Operating income (loss)................................................. (1,737) 7,591 15,449
Net income (loss) from continuing operations............................ (1,844) 12,733(a) 17,136(b)
Net income (loss) from continuing operations per common share:
Basic................................................................ (.13) .86(a) .68(b)
Diluted.............................................................. (.13) .47(a) .56(b)
Weighted average shares outstanding:
Basic................................................................ 14,431 14,729 25,208
Diluted.............................................................. 14,440 27,291 30,780
Operating Data:
Gross profit margin..................................................... 24.9% 28.0% 28.8%
Operating margin (loss)................................................. (0.8)% 2.7% 4.1%
Capital expenditures.................................................... 8,084 14,627 23,447
Depreciation and amortization........................................... 7,507 9,791 12,485
January 29, 2000
-----------------
Balance Sheet Data:
Inventories............................................................. $106,304
Working capital......................................................... 82,101
Total assets............................................................ 219,508
Long-term debt and capitalized lease obligations, less
current portion........................................................ 4,544
Total shareholders' equity.............................................. 145,397
</TABLE>
(a) Includes a tax benefit of $7,166 recorded by Zany due to the recognition of
their deferred tax asset representing net income per pro forma basic and diluted
share of $0.49 and $0.26, respectively.
(b) Includes a tax benefit of $7,271 recorded by Noodle due to the recognition
of their deferred tax asset representing net income per pro forma basic and
diluted share of $0.29 and $0.24, respectively.
17
<PAGE>
COMPARATIVE PER SHARE INFORMATION
Zany's common stock is listed on the Nasdaq National Market. On April 20,
2000, the last full trading day on the Nasdaq prior to the public announcement
of the proposed merger, Zany's common stock closed at $4.2812 per share. On May
__, 2000, Zany's common stock closed at $____ per share.
Noodle's common stock is listed on the Nasdaq National Market. On April 20,
2000, the last full trading day on the Nasdaq prior to the public announcement
of the proposed merger, Noodle's common stock closed at $4.25 per share. On May
__, 2000, Noodle's common stock closed at $____ per share.
We have set forth below consolidated net income (loss) and book value per
share data of Zany and Noodle on an historic basis and for Zany, on a pro forma
basis giving effect to the acquisition of Noodle and on a pro forma basis per
Noodle equivalent share. The Noodle equivalent share pro forma data was computed
by multiplying the Zany pro forma combined information by 1.233, the exchange
ratio in the merger.
You should read the information set forth below in conjunction with the
audited consolidated financial statements of Noodle and Zany, and the Unaudited
Pro Forma Combined Financial Statements contained elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
At or for the Fiscal Year Ended
--------------------------------------------------
<S> <C> <C> <C>
January 31, January 30, January 29,
1998 1999 2000
------ ----- --------
Zany Historical
Income (loss) from continuing operations per share:
Basic.................................................................. $(0.03) $1.67(3) $0.44
Diluted................................................................ (0.03) 0.51(3) 0.33
Book value per share (1)................................................. 2.36 2.90 4.55
Noodle Historical
Income (loss) from continuing operations per share:
Basic.................................................................. $(0.25) $0.49 $1.27(4)
Diluted................................................................ (0.25) 0.49 1.25(4)
Book value per share (1)................................................. 4.46 4.95 6.40
Zany Unaudited Pro Forma Combined (2)
Income (loss) from continuing operations per share:
Basic.................................................................. $ (.13) $0.86(3) $0.68(4)
Diluted................................................................ (.13) 0.47(3) 0.56(4)
Book value per share (1)................................................. Not Computed Not Computed 4.68
Noodle Pro Forma Per Share Equivalent
Income (loss) from continuing operations per share:
Basic.................................................................. $ (.16) $1.07 $0.84
Diluted................................................................ (.16) 0.58 0.69
Book value per share (1)................................................. Not Computed Not Computed 5.77
</TABLE>
______________
(1) The historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of each
period including all shares of Zany preferred stock on an as-converted basis.
The pro forma combined book value per share is computed by dividing pro forma
shareholders' equity by the pro forma number of shares of common stock
outstanding as of January 29, 2000.
(2) Zany and Noodle estimate that they will incur combined direct transaction
costs of approximately $3.0 million, net of tax, associated with the merger,
which will be charged to operations upon consummation of the merger. The pro
forma and equivalent pro forma combined book value per share data gives effect
to the estimated direct transaction costs as if such costs had been incurred as
of January 29, 2000. The pro forma combined book value per share data does not
include additional expenses, which are currently estimated to be in the range of
$10.0 to 13.0 million, net of tax, associated with the merger and integration of
the operations of the two companies. Merger and integration expenses are not
reflected in the pro forma combined income per share data.
(3) Includes a tax benefit of $7,166 million recorded by Zany due to the
recognition of its deferred tax asset representing historical net income per
basic and diluted common share of $1.33 and $0.40, respectively, and net income
per pro forma basic and diluted common share of $0.49 and $0.26, respectively.
(4)Includes a tax benefit of $7,271 million recorded by Noodle due to the
recognition of its deferred tax asset representing historical net income per
basic and diluted common share of $0.96 and $0.94, respectively, and net income
per pro forma basic and diluted common share of $0.29 and $0.24, respectively.
18
<PAGE>
RISK FACTORS
In making your determination as to how to vote on the merger proposal, you
should consider the following factors:
Risks Relating to the Merger
Zany may not be able to integrate the operations of Noodle and realize the
potential benefits of the merger
Integration of the personnel, operations and information systems of Zany and
Noodle will present significant challenges. The integration of managers and
other employees from each company will result in changes affecting employees and
the operations of both companies. Differences in management approach and
corporate culture may strain employee relations. The success of the merger will
also depend on the ability of Zany and Noodle to integrate business strategies,
information systems and operations in general. If Zany and Noodle are not able
to integrate these strategies, systems and operations quickly and efficiently,
Zany may not achieve the anticipated financial benefits of the merger.
Even if Zany is able to successfully integrate Noodle into its operations, the
integration process will be costly and may distract Zany from the operation of
its business
Integration of the personnel, operations and information systems of Zany and
Noodle will be time consuming and costly. Zany management will need to spend
considerable amounts of time on the integration of the two companies. In
addition, the integration of the two companies will be costly and there may be
unanticipated expenses that arise. The time and money required to successfully
integrate the two companies may cause Zany's financial results to suffer.
As a result of the merger the combined company will incur transaction, merger
and integration costs that may exceed our estimates and significant
consolidation and integration expenses that we cannot accurately estimate at
this time
We estimate that, as a result of the merger, the combined company will incur
transaction, merger and integration costs of approximately $13.0 million to
$16.0 million, net of tax, including, among other expenses, investment banking,
legal and accounting fees, and contractual incentive benefits. In addition, we
expect that we will incur significant consolidation and integration expenses
which we cannot accurately estimate at this time. We expect that the combined
company will charge the majority of such costs and expenses to operations in
fiscal 2000. The amount of the transaction costs is a preliminary estimate and
is subject to change. Actual transaction costs may substantially exceed our
estimates and, when combined with the expenses incurred in connection with the
consolidation and integration of our companies, could have an adverse effect on
the financial condition and operating results of the combined company.
Brand integration is critical to the success of the merger and if the brands are
not properly integrated, Noodle customers may not continue to shop at the former
Noodle stores upon completion of the merger
Upon completion of the merger, it is likely that the former Noodle stores will
have Zany signage and other elements of the Zany brand. Effective introduction
of the Zany brand to Noodle customers and the integration of Zany's and
Noodle's brands is critical to the success of the merger. If the brand
introduction and integration is not successful, Noodle customers may not accept
the Zany stores and may choose to shop elsewhere. This could hurt the financial
results at the former Noodle stores and Zany's financial performance overall.
The exchange ratio for Zany common stock to be received in the merger is fixed
and will not be adjusted in the event of any change in stock price
Upon completion of the merger, each share of Noodle common stock will be
exchanged for 1.233 shares of Zany common stock. This conversion number is
fixed and will not be adjusted as a result of any change in the price of Zany
common stock. Any change in the price of Zany common stock will affect the
value of the consideration that Noodle shareholders receive in the merger.
Because the merger will be completed only after all the conditions to the merger
are satisfied or waived, there is no way to be sure that the price of Zany
common stock on the date of the Zany and the Noodle shareholder meetings will be
the same as its price at the time the merger is completed. The price of Zany
common stock at the time that the merger is completed may be higher or lower
than its price on the date of this document or the date of the Zany and Noodle
shareholders' meetings. You are encouraged to obtain current market quotations
for Zany common stock.
Zany shareholders will be diluted by the merger
The merger will dilute the ownership position of the present shareholders of
Zany. Based on the number of shares of Noodle common stock outstanding as of
__________, 2000, Zany will issue to Noodle shareholders approximately
___________ shares of Zany common stock in the merger. As a result, Noodle
shareholders will hold approximately 30% of the Zany common stock outstanding
after the completion of the merger, based on the common stock of Zany and Noodle
outstanding as of __________, 2000.
19
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Risks Relating to Zany
Zany's business is highly seasonal, and its annual results are highly dependent
on the success of the Christmas selling season
Seasonal shopping patterns affect Zany's business. A significant portion of
Zany's sales occurs in the fourth quarter, coinciding with the Christmas holiday
shopping season. Therefore, Zany's results of operations for the entire year
depend largely on its fourth quarter results. In fact, since its inception,
Zany has never been profitable in any quarter other than the fourth quarter of
any fiscal year, and Zany expects this trend to continue. Factors that could
cause Zany's sales and profitability to suffer include:
. the availability of and customer demand for particular products;
. the timing of new store openings;
. adverse weather conditions;
. unfavorable economic conditions;
. the inability to hire adequate temporary personnel;
. the inability to maintain appropriate inventory levels; and
. a late Thanksgiving, which reduces the number of days between Thanksgiving
and Christmas.
Zany generally prefers to open new stores in the first three quarters of the
year. The failure to open stores on schedule may particularly impair Zany's
results because of its dependence on the Christmas holiday shopping season.
If Zany is not able to implement its store expansion program, Zany's growth will
suffer
Zany's growth depends in large part on its ability to open and profitably
operate new stores in both existing and new geographic markets. Zany's ability
to open and operate new stores will depend on a number of factors, including its
ability to:
. identify suitable sites;
. negotiate acceptable leases at attractive rents;
. access adequate capital to fund store expansion;
. construct and open stores on schedule; and
. locate, hire, train and retain competent managers.
Zany's continued growth is dependent, in part, on its ability to increase
sales at existing stores. Zany's overall profitability will suffer if the
opening of new stores in existing markets draws business from Zany's existing
stores. Zany also plans to open many of its new stores in markets where it does
not currently have a presence. The opening of stores in new geographic markets
could present competitive and operational challenges different from those Zany
currently faces or previously faced in entering existing geographic markets.
For example, Zany may incur higher costs related to advertising, administration
and distribution as it enters these new markets. In addition, Zany may not gain
market acceptance, or establish its brand, in new geographic markets, which
would impair Zany's financial results.
Zany may not have sufficient management, operational, distribution, financial
and information systems resources to accommodate its planned growth. Zany's
expansion strategy also presents some cultural risks, including the ability to
maintain Zany's product mission, customer service commitment
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and quality control as Zany becomes larger. Finally, if Zany's new stores do not
perform as expected, Zany may curtail its store expansion, which would impair
Zany's financial growth and profitability.
Zany's comparable store sales will fluctuate
Changes in Zany's comparable store sales results could cause the price of
Zany's common stock to fluctuate. A number of factors have historically
affected, and will continue to affect, Zany's comparable store sales results,
including:
. competition;
. Zany's new store openings;
. general regional and national economic conditions;
. consumer trends and preferences;
. changes in Zany's co-tenants;
. new product introductions and changes in Zany's product mix;
. timing and effectiveness of promotional events;
. introduction of and continued demand for popular and fad products; and
. weather.
Additional financing may not be available when needed or may only be available
on terms that could adversely affect Zany's business and shareholders
Zany may need additional financing to support its growth or to respond to
competitive pressures or unanticipated events. Additional financing, if needed,
may not be available on satisfactory terms or at all. Any additional equity
financing may cause dilution to existing investors. Any debt financing may
result in additional restrictions on Zany's spending or ability to pay
dividends.
Restrictive loan covenants may limit Zany's ability to take various corporate
actions
Zany's credit facility contains covenants that require Zany to satisfy ongoing
financial requirements and that limit Zany's ability to borrow additional money,
pay dividends, divest assets and make additional corporate investments. If Zany
is unable to meet any of its debt service obligations or comply with these
covenants, Zany's lenders can accelerate Zany's debt. If that were to occur and
Zany were unable to obtain alternative financing, Zany's long-term viability
could be impaired.
Zany's operations, and ZanyBrainy.com's operations, could be disrupted if
information systems fail
Zany's business depends on the efficient and uninterrupted operation of its
computer and communications software and hardware systems. Zany regularly makes
investments to upgrade, enhance and replace its systems. Zany must
appropriately expand the capacity of its information systems to accommodate its
anticipated growth or its operations could suffer.
In addition, continued customer access to www.zanybrainy.com, Zany's
Internet joint venture, is important for the success of ZanyBrainy.com and the
perception of the Zany brand. The ZanyBrainy.com Website may experience
occasional system interruptions that make the Website unavailable or prevent
ZanyBrainy.com from efficiently fulfilling orders. These interruptions may
reduce the volume of goods sold, the attractiveness of products and services
offered and damage Zany's reputation. Additional software and hardware may be
necessary to upgrade the systems and network
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infrastructure of the ZanyBrainy.com Website to accommodate increased traffic
and sales volume. Zany cannot accurately project the rate or timing of any
increases in traffic or sales volume on the Website and, therefore, the
integration and timing of these upgrades are uncertain.
Zany has no formal disaster recovery plan to prevent delays or other
complications arising from information systems failure. Zany's business
interruption insurance may not adequately compensate Zany for losses that may
occur.
Risks associated with Zany's investment in its joint venture, ZanyBrainy.com
ZanyBrainy.com is not currently profitable and has incurred significant losses
since its inception. It is likely that ZanyBrainy.com will continue to incur
losses for the foreseeable future. While Online Retail Partners, Zany's joint
venture partner, has agreed to take all losses of ZanyBrainy.com up to the
extent of their capital account, any losses beyond that will require Zany to
recognize losses up to the amount of its investment. Zany would also have to
recognize losses if its investment were to become materially impaired, up to the
amount of Zany's investment. Zany recently contributed an additional $6.8
million to ZanyBrainy.com which brings Zany's total investment to $11.8
million.
ZanyBrainy.com will need additional financing in order to continue to operate,
as well as to avoid recognition of losses and impairment of Zany's investment.
Additional financing may not be available on satisfactory terms or at all. In
the event ZanyBrainy.com is unable to raise additional capital, Zany expects to
commence incurring losses during the first half of fiscal year 2000. In
addition, any additional equity financing could reduce Zany's equity ownership
in ZanyBrainy.com.
Technology, customer functionality requirements and preferences change rapidly
in the online commerce industry. ZanyBrainy.com may not be able to adapt
quickly enough to these changing customer requirements and industry standards.
Failure to adapt on a cost-effective and timely basis or the emergence of new
industry standards and practices could impair the value of Zany's investment in
ZanyBrainy.com.
ZanyBrainy.com will require substantial participation of Zany's management and
affiliates for certain resources. There is also a risk that selling Zany's
products on the Internet could divert customers from Zany's stores and depress
existing store sales.
Zany is dependent on executive management and other personnel
Zany believes that its continued growth and profitability depend on the
continued employment of its management team. If one or more members of its
executive management team were unable or unwilling to continue in their present
positions, Zany's profitability could suffer. Zany does not carry key person
life insurance on any member of its executive management team.
Zany's growth and profitability also depend on hiring and retaining quality
managers and sales associates in its stores. Competition for personnel,
particularly for employees with retail expertise, is intense. Additionally,
Zany's ability to maintain consistency in the quality of customer service in its
stores is critical to its operations. If Zany is unable to hire and retain
sales associates capable of providing a high level of customer service, Zany's
brand and reputation could be damaged. This could cause Zany's sales to
decline.
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Zany competes with many retailers
Competition from mass market retailers and discounters, which have greater
brand recognition and financial and other resources
Many mass market retailers and discounters, such as Toys "R" Us, Wal-Mart and
Target, have much greater brand recognition and greater financial, marketing and
other resources than Zany. Zany could be at a disadvantage in responding to
these competitors' merchandising and pricing strategies, advertising campaigns
and other initiatives. Several of these competitors, including Toys "R" Us,
have launched successful Internet shopping sites that compete with
ZanyBrainy.com and Zany's stores. In addition, an increase in focus on the
specialty retail market or the sale by these competitors of more products
similar to Zany's could cause Zany to lose market share.
Competition from smaller format, specialty educational and creative toy
retailers, whose growth can impair Zany's sales growth
Zany's direct competitors are smaller format, specialty educational and
creative toy and game retailers. These retailers are continuing to expand and
could impede Zany's ability to increase its sales.
Competition from non-toy specialty retailers, which compete with Zany's
children's book and software businesses and could limit Zany's ability to
expand in these categories
Non-toy specialty retailers, such as Barnes & Noble and Best Buy, are
competing with Zany's children's book and software businesses. Zany believes
that some of these competitors have exclusivity restrictions in their leases
that restrict co-tenants from selling similar products. Such restrictions could
hinder Zany's expansion strategy by limiting Zany's ability to sell some
products at those sites.
Competition from Internet-only retailers, which may have a cost advantage and
reach a broader market
Zany faces growing competition from Internet-only retailers, such as eToys and
Amazon.com. They may enjoy an overall operating cost advantage.
With respect to all of Zany's competitors, sales and profitability could
suffer if:
. new competitors enter markets in which Zany is currently operating;
. Zany's competitors implement aggressive pricing strategies;
. Zany's competitors expand their operations;
. Zany's suppliers sell their products directly or enter into exclusive
arrangements with Zany's competitors; or
. Zany's competitors adopt innovative store formats, retail sales methods or
merchandising strategies that are similar to Zany's.
If Zany's suppliers and distributors do not provide sufficient quantities of
Zany's products, Zany's sales and profitability will suffer
Products supplied to Zany by its top twenty suppliers represented slightly
over half of Zany's purchases in the fiscal year ended January 29, 2000. Zany's
dependence on its principal suppliers involves risk, and if there is a
disruption in supply from a principal supplier or distributor, Zany may be
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unable to obtain the merchandise it desires to sell. While no one supplier
represented greater than 10% of net purchases in the fiscal year ended January
29, 2000, a disruption in the operations of any of Zany's key suppliers could
cause a decline in sales. Zany's sales also could decline if key specialty
suppliers sell more products through mass-market retailers. Many of Zany's
suppliers currently provide it with incentives, such as return privileges,
volume purchasing allowances and cooperative advertising. A reduction or
discontinuation of these incentives could reduce Zany's profits.
If a shipment of products that Zany imports is interrupted or delayed, inventory
levels and sales could decline
Zany does not own or operate any manufacturing facilities. Instead, it buys
all of its products from manufacturers and distributors. In the fiscal year
ended January 29, 2000, Zany imported approximately 9% of its purchases,
including most of its private label products, directly from foreign
manufacturers. In addition, Zany believes that a significant portion of the
products that it purchases from domestic suppliers is manufactured abroad. Zany
anticipates that its dependence on foreign-sourced merchandise will increase.
Zany is subject to the following risks inherent in relying on foreign
manufacturers:
. the inability to return products;
. fluctuations in currency exchange rates;
. economic and political instability;
. transportation delays;
. restrictive actions by foreign governments;
. the laws and policies of the United States affecting importation of goods,
including duties, quotas and taxes;
. foreign trade and tax laws;
. foreign labor practices;
. trade infringement claims; and
. increased liability as importer of record.
Interruptions or delays in Zany's imports could cause shortages in product
inventory and a decline in Zany's sales unless it secures alternative supply
arrangements. Even if Zany could locate alternative sources, their products may
be of lesser quality or more expensive than those Zany currently purchases.
Zany's sales could also suffer if its suppliers experience similar problems with
foreign manufacturers.
If Zany is unable to predict or react to changes in consumer demand, it may lose
customers and sales may decline
Zany's success depends on its ability to anticipate and respond in a timely
manner to changing consumer demand and preferences. Zany's products must appeal
to a broad range of consumers whose preferences cannot be predicted with
certainty and are subject to change. If Zany misjudges the market for its
merchandise, it may overstock certain products and be forced to take significant
inventory markdowns, which may have a negative impact on Zany's profitability,
or return overstocked products to vendors, which may have a negative impact on
Zany's relationships with its vendors.
It is also common in the toy industry for some popular products, such as
Pokemon and Beanie Babies, to achieve high sales, but for unpredictable periods
of time. In the fiscal year ended January 29, 2000, Pokemon and Beanie Babies
represented over 7% and over 4% of Zany's sales, respectively. Consumer demand
for these popular products or others could decrease significantly and without
warning. If Zany is unable to identify new products that will enjoy strong
consumer demand, it may lose customers and sales
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may decline. The introduction of new products may also depress sales of existing
products. In addition, a decrease in the demand for popular products may
negatively affect comparable store sales. Moreover, because Zany sells only
those products that conform to Zany's product mission, Zany may choose not to
sell some products that its customers desire and thus lose potential sales.
Zany may be unable to protect its intellectual property, which could impair its
brand and reputation
Zany's efforts to protect its proprietary rights may be inadequate. Zany
regards its intellectual property, particularly its trademark for "Zany Brainy,"
as important to its marketing strategy. To protect Zany's proprietary rights,
Zany relies generally on copyright, trademark and trade secret laws,
confidentiality agreements with employees and third parties and license
agreements with consultants and suppliers. However, a third party could,
without authorization, copy or otherwise appropriate information from Zany.
Employees, consultants and others who participate in development activities
could breach their confidentiality agreements, and Zany may not have adequate
remedies for any such breach. Zany's failure or inability to protect its
proprietary rights could materially decrease their value, and Zany's brand and
reputation could be impaired.
Zany may be exposed to product liability lawsuits and other claims if it fails
to comply with government and toy industry safety standards
Children can sustain injuries from toys. Zany may be subject to claims or
lawsuits resulting from such injuries. There is a risk that claims or
liabilities may exceed Zany's insurance coverage. Moreover, Zany may be unable
to retain adequate liability insurance in the future. Zany is subject to
regulation by the Consumer Product Safety Commission and similar state
regulatory agencies. If it fails to comply with government and toy industry
safety standards, Zany may be subject to claims, lawsuits, fines and adverse
publicity.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this joint proxy statement/prospectus contains
forward-looking statements. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "expect," "anticipate," "estimate," and similar words, although
some forward-looking statements are expressed differently. Forward-looking
statements address, among other things:
. future expectations;
. projections of future results of operations or of financial
conditions; or
. other "forward-looking" information.
Zany and Noodle believe it is important to communicate their expectations
to their shareholders. However, there may be events in the future that Zany and
Noodle are unable to accurately predict or which they do not fully control that
could cause actual results to differ materially from those expressed or implied
by their forward-looking statements, including:
. our inability to manage our growth, open new stores on a timely
basis and expand in new and existing markets;
. our inability to integrate the operations, brand, personnel and
information systems of Noodle or realize the business synergies
expected from the merger;
. changes in general economic and business conditions and in the
specialty retail or toy industry in particular;
. actions by our competitors;
. unanticipated costs of the merger;
. the recognition of losses by Zany in connection with its
investment in ZanyBrainy.com or any impairment of Zany's
investment in ZanyBrainy.com;
. the level of demand for our products;
. changes in our business strategies; and
. other factors discussed under "Risk Factors."
We disclaim any obligation or intent to update any such factors or forward-
looking statements to reflect future events or developments.
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SHAREHOLDER MEETINGS
Both Zany and Noodle will hold meetings of their shareholders. Our boards
of directors are providing you with this joint proxy statement/prospectus to
solicit your proxy for use at the meetings.
Times and Places; Purposes
Zany Annual Meeting. Zany will hold its annual meeting at 2520 Renaissance
Boulevard, King of Prussia, PA 19406 on _________, 2000, starting at 10:00 a.m.,
local time. At the Zany meeting, the shareholders of Zany will consider and
vote upon:
. the merger agreement;
. the election of directors; and
. such other matters as may properly come before the Zany meeting.
Noodle Special Meeting. Noodle will hold a special meeting of its
shareholders at the offices of _________________, on _____________, 2000,
starting at ____ a.m., local time. At the Noodle meeting, Noodle shareholders
will consider and vote upon:
. the merger agreement; and
. such other matters as may properly come before the Noodle
meeting.
Record Date; Voting Rights; Votes Required for Approval
Zany. The Zany board has set the close of business on _________, 2000 as
the Zany record date. Only holders of record of shares of Zany common stock on
_________, 2000 are entitled to notice of and to vote at the Zany annual
meeting. On the Zany record date, there were _____________ shares of Zany common
stock outstanding and entitled to vote at the Zany meeting. These shares were
held by approximately ____ shareholders of record.
At the Zany annual meeting:
. each record holder of common stock is entitled to one vote per
share;
. the presence in person or by proxy of the holders of a majority
of the outstanding shares is necessary to constitute a quorum;
and
. approval and adoption of the merger agreement requires the
approval of a majority of the votes cast by Zany shareholders.
Noodle. The Noodle board has set the close of business on _________, 2000
as the Noodle record date. Only holders of record of shares of Noodle common
stock on ___________, 2000 are entitled to receive notice of and to vote at the
Noodle meeting. On the Noodle record date, there were ________ shares of Noodle
common stock outstanding and entitled to vote at the Noodle meeting.
At the Noodle special meeting:
. each record holder of common stock is entitled to one vote per
share;
. the presence in person or by proxy of the holders of a majority
of the issued and outstanding shares of Noodle common stock is
necessary to constitute a quorum; and
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. approval and adoption of the merger agreement requires the
approval of a majority of the outstanding shares of Noodle common
stock.
Proxies
. Completed Proxies. If you complete and return a proxy and your company
receives the proxy prior to or at your meeting, your proxy will be voted in
accordance with your instructions.
. Proxies with No Instructions. If you execute and return a proxy but do not
provide instructions as to your vote, your proxy will be voted FOR approval
and adoption of the merger agreement and, in the case of the Zany annual
meeting, FOR the nominees for election to the Zany Board of Directors.
. Proxies Marked Abstain. If you execute and return a proxy marked ABSTAIN,
your proxy will count for purposes of determining whether there is a quorum
and for purposes of determining the voting power and number of shares
entitled to vote at the meetings but the shares will not be voted. Due to
differences in the corporate laws of Pennsylvania and Delaware, proxies
marked ABSTAIN will be treated differently with respect to the Zany merger
proposal and the Noodle merger proposal as follows:
<TABLE>
<CAPTION>
Zany Shareholder Proxy Marked ABSTAIN: Noodle Shareholder Proxy Marked ABSTAIN:
------------------------------------- ----------------------------------------
<S> <C>
Under Pennsylvania law, a proxy Under Delaware law, adoption of the
marked ABSTAIN is not considered a merger agreement requires the affirmative vote
cast vote. Approval of the merger of a majority of the shares outstanding.
agreement requires the affirmative Accordingly, proxies marked ABSTAIN will
vote of a majority of the votes cast at have the effect of a vote against the
the meeting. Accordingly, proxies marked merger agreement.
ABSTAIN will have no effect on the
approval of the merger agreement.
</TABLE>
. Broker Non-Votes. Brokers holding shares in street name for beneficial
owners must vote those shares according to specific instructions they
receive from the owners. A "broker non-vote" occurs on a matter when a
broker is not permitted to vote on that matter without instruction from the
beneficial owner of the shares and no instruction is given. Shares
represented by "broker non-votes" will be counted for purposes of
determining whether there is a quorum at the meetings. Broker non-votes
will have the same effect as a proxy marked ABSTAIN as follows:
Zany Broker Non-Votes: Noodle Broker Non-Votes:
---------------------- ------------------------
Broker non-votes will have no Broker non-votes will have the
effect on the approval of the effect of a vote against the merger
merger agreement. agreement.
. Other Business. We are not aware of any business for consideration at the
meetings other than as described in this joint proxy statement/prospectus.
However, if matters are properly brought before the meetings, then the
persons appointed as proxies will have the discretion to vote or act
thereon according to their best judgment.
. Revocation. You may revoke your proxy at any time prior to its use. To
revoke your proxy, you must deliver to the secretary of Zany or Noodle, as
the case may be, a signed notice of revocation or you must deliver a later-
dated proxy changing your vote. In addition, you may choose to attend your
meeting and vote in person. Please realize that simply attending the
meeting will not, in itself, constitute the revocation of your proxy.
. Costs of Solicitation. Each company will pay the costs associated with
soliciting proxies from its shareholders. To ensure sufficient
representation at our meetings, we may request by telephone or telegram the
return of your proxy card. Please assist us by returning your proxy card
without delay.
Please do not send your stock certificates with your proxy card. The
exchange agent will mail a separate transmittal form with instructions for the
surrender of stock certificates for Noodle common stock to former Noodle
shareholders as soon as practicable after the completion of the merger.
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THE MERGER
Background of the Merger
Keith Spurgeon, the Chairman and Chief Executive Officer of Zany, and
Stanley Greenman, the Chairman and Chief Executive Officer of Noodle, met twice
between August 1996 and October 1996 to discuss a potential business combination
of their companies. By the beginning of 1997, Messrs. Greenman and Spurgeon
determined not to pursue further discussions at that time.
In September 1999, while attending a toy industry conference in New York,
Messrs. Spurgeon and Greenman met again. On September 15, 1999, Messrs.
Greenman and Spurgeon met and expressed their interest in exploring the
possibility of a business combination between the two companies. Mr. Greenman
informed Mr. Spurgeon that given the importance of the fourth quarter to the
year-end results of both companies they should defer their discussions to a
later date.
On October 26, 1999, Mr. Spurgeon telephoned Mr. Greenman to again express
his interest in a transaction between Zany and Noodle and suggested that they
hold further discussions.
On October 29, 1999, Noodle management met telephonically with
representatives from PaineWebber to discuss the basis for negotiating a
potential transaction with Zany and requested PaineWebber to explore such a
transaction.
At a meeting of the Noodle board of directors on November 16, 1999,
PaineWebber reviewed with the board of directors a proposal for a merger between
Noodle and Zany. Representatives of PaineWebber reported that they had spoken
informally with DLJ regarding a possible merger transaction between Zany and
Noodle. PaineWebber noted that a business combination with Zany would have many
benefits for Noodle and its shareholders, including a premium for Noodle
shareholders (based on the closing prices of Noodle and Zany on November 15,
1999), continued ownership by Noodle shareholders in the combined company and
business synergies and cost savings due to the combination. PaineWebber
recommended that Noodle consider and proceed with negotiations for a potential
transaction with Zany. Following PaineWebber's presentation, the board of
directors discussed a potential merger with Zany, including the process and
timing of a transaction and a possible exchange ratio. Following this
discussion, the board of directors agreed to direct management to further
explore a merger with Zany, with a focus on negotiating a favorable exchange
ratio for Noodle shareholders, and authorized management to retain PaineWebber
to act as financial advisor to the board of directors.
At a meeting of the Noodle board of directors on January 11, 2000,
management reported to the board of directors that they had negotiated an
engagement letter with PaineWebber. Management also noted that they had made no
further progress regarding a transaction with Zany. The board of directors
decided that it was in the best interests of Noodle and its shareholders for the
board of directors to form a special committee to assist management in the
structuring and negotiation of a transaction with Zany. The board of directors
established a special committee consisting of Messrs. Barry Ridings, Robert
Stokvis and Lester Greenman.
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On January 20, 2000, Noodle formally engaged PaineWebber to act as its
financial adviser with respect to the merger.
At a regular meeting of the Zany board of directors held on January 26,
2000, Mr. Spurgeon reported on his prior discussions with Stanley Greenman. The
board of directors considered a possible transaction with Noodle. After
extensive discussion, the board of directors authorized Zany management, working
with DLJ, to suggest to Noodle a merger transaction in which Noodle's
shareholders would receive 25% of Zany's outstanding shares subject to a number
of conditions, including completion of due diligence, execution of a definitive
merger agreement and receipt of board of directors, shareholder and regulatory
approval.
Pursuant to the Zany board of directors' authorization, on January 31,
2000, DLJ, on behalf of Zany, sent to PaineWebber, on behalf of Noodle, a letter
proposing a merger of Zany and Noodle in which Noodle shareholders would own 25%
of the combined company. In addition, the letter stated that Zany would attempt
to structure the transaction as tax-free to Noodle shareholders and that it
would be accounted for as a pooling of interests.
On February 1, 2000, representatives of PaineWebber met with Noodle
management and the Noodle special committee to discuss Zany's written offer. On
February 4, 2000, Noodle management and the Noodle special committee (other than
Lester Greenman) met again to continue to discuss the exchange ratio for a
merger and the ownership of the combined company. Management and the special
committee also discussed the effects of a merger with Zany on Noodle's employees
and potential severance issues.
On February 15, 2000, Mr. Spurgeon and Stanley Greenman met to discuss the
offer. At that time, Mr. Greenman informed Mr. Spurgeon that the exchange ratio
would have to be higher in order for his board of directors to authorize him to
continue discussions.
In a special meeting of the Zany board of directors held on February 25,
2000, Mr. Spurgeon updated the board of directors on his discussions with Mr.
Greenman, including Mr. Greenman's comments regarding the proposed exchange
ratio. Mr. Spurgeon then reviewed with the board of directors management's
analysis, including business synergies and potential consolidation cost savings
due to the combination and the benefits thereof, regarding the merger in the
event that Noodle shareholders owned 30% of the outstanding Zany shares after
the merger was completed. After extensive discussion, the board of directors
unanimously authorized Mr. Spurgeon to continue his discussions with Noodle and
to pursue a merger with Noodle that would provide for Noodle shareholders to own
30% of the combined company's outstanding shares after completion of the merger.
On February 25, 2000, Messrs. Spurgeon and Greenman agreed that an exchange
ratio that would result in Noodle shareholders owning 30% of the combined
company at the completion of the merger would be an acceptable basis for further
discussion. This preliminary agreement was subject to completion of due
diligence reviews by both companies, negotiation of a merger agreement,
including composition of the board of directors and management of the combined
company, review and analysis by each company and its financial advisor and
review, analysis and approval by the Zany board of directors and the Noodle
board of directors.
On February 28, 2000, Zany and Noodle executed a mutual Confidentiality
Agreement relating to the exchange of confidential information by the two
companies.
30
<PAGE>
On March 6, 2000, senior management of both companies, along with their
legal representatives, met in New York. The parties discussed possible
transaction and organizational structures, as well as other facets of a merger
transaction, including due diligence and preliminary negotiations regarding
representations and warranties, protective devices and board of directors
composition.
During March 2000, each company held numerous discussions with their
respective financial advisors, outside legal counsel and accounting firms
regarding various matters relating to the proposed transaction. At the same
time, the companies and their respective advisers began their due diligence
reviews and began negotiating the terms of a definitive merger agreement.
During March 2000, Noodle management and the special committee met or spoke
frequently to discuss the status of negotiations with Zany and the issues
arising during negotiations.
On April 3, 2000, Zany formally engaged DLJ to act as its exclusive
financial advisor with respect to the merger.
During April 2000, the companies and their respective advisors met or spoke
frequently to continue to negotiate the terms of the definitive merger agreement
and completed their due diligence reviews.
During April 2000, Noodle management and the special committee met or spoke
frequently to discuss the status of negotiations with Zany and the issues
arising during negotiations.
On April 14, 2000, the Zany board of directors met to consider the merger
agreement and the related transactions. At that meeting, DLJ reviewed the
financial terms of the merger and rendered its oral opinion, subsequently
confirmed by delivery of a written opinion as of April 21, 2000, to the effect
that as of that date, based upon and subject to the assumptions, limitations and
qualifications set forth in its written opinion, the proposed exchange ratio was
fair to Zany from a financial point of view. Following DLJ's presentation of its
opinion, the board of directors considered the terms and provisions of the draft
merger agreement, including a review of the material terms that remained under
negotiation. After general discussion, and consideration of the factors
described under "- Recommendations of the Zany Board of Directors; Zany's
Reasons for the Merger," the Zany board of directors concluded that the merger
was in the best interests of Zany and its shareholders and unanimously approved
the merger agreement and the transactions contemplated by the merger agreement.
On April 14, 2000, the Noodle board of directors met to consider the merger
agreement. PaineWebber reviewed the financial terms of the merger. Following its
financial presentation, PaineWebber rendered its oral opinion, that, subject to
a reduction in the amount of the termination fee then proposed by Zany and its
advisors, as of that date and based on and subject to the matters described in
the written opinion, the proposed exchange ratio was fair from a financial point
of view to the Noodle shareholders. Following PaineWebber's presentation of its
opinion, the board of directors considered the terms and provisions of the draft
merger agreement, including the amount of the termination fee, the severance
arrangements for Noodle employees and management, the definition and use of the
term "material adverse effect" and the condition to closing that Zany be able to
account for the transaction as a pooling of interests. The board of directors
authorized management to continue negotiating to resolve as many issues as
possible.
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During the week of April 17, 2000, the companies and their respective
advisors continued to negotiate the terms of the definitive merger agreement.
On April 19, 2000, the Noodle board of directors met telephonically to
again consider the merger agreement. Management reported that substantial
progress had been made: the proposed termination fee had been reduced to $2.25
million, the severance arrangements were almost complete, the term "material
adverse effect" had been defined to their satisfaction, and they had agreed to
accept the condition regarding pooling-of-interests accounting. Following
management's report, PaineWebber rendered its oral opinion, which was
subsequently confirmed in writing, that as of that date and based on and subject
to the matters described in the written opinion, the proposed exchange ratio was
fair from a financial point of view to the Noodle shareholders. Following a
general discussion, and upon consideration of the factors described under a"-
Noodle's Reasons for the Merger; Recommendations of the Noodle Board," the
Noodle board of directors concluded that the merger was fair to, and in the best
interests of the Noodle shareholders and unanimously approved the merger
agreement and the transactions contemplated by the merger agreement.
Recommendation of the Zany Board of Directors; Zany's Reasons for the Merger
The Zany board of directors has determined that the merger is in the best
interests of Zany and its shareholders and believes that the merger will allow
Zany and Noodle to combine their resources to create a more competitive company
in the specialty toy retailing industry. Accordingly, the Zany board of
directors has unanimously approved the merger agreement. In reaching its
determination, the Zany board of directors consulted with Zany's management, as
well as its financial and legal advisors, and considered the following material
factors:
. a common vision of operating the premier retailer of specialty and
educational children's products;
. the strength and depth of management;
. that the combined company would be nearly 1.6 times that of Zany in
terms of revenues and would have approximately 160 stores in 34
states;
. the opportunity to obtain cost and operating efficiencies, including
increased purchasing power;
. the opportunity that a larger and more geographically diverse combined
company may have to further strengthen the Zany brand presence; and
. the opportunity to achieve more efficient utilization of assets,
management and personnel.
The Zany board of directors also evaluated the following positive and
negative factors:
. presentations from, and discussions with, senior management,
representatives of its outside legal counsel and its independent
accounting firm, and representatives of DLJ regarding the business,
financial, accounting and legal due diligence;
. current industry, economic and market conditions, including the trend
toward consolidation in the retail industry;
. the competitive importance of market position, geographic diversity,
size and adequacy of financial resources;
. the challenges of combining the businesses of the two organizations
and the risk of diverting management resources from other
opportunities and operational matters for an extended period of time,
which the board considered negative factors;
. the financial performance, results of operations and prospects of both
companies separately and as combined;
. the ability of Zany to achieve meaningful cost savings and
efficiencies after the companies are combined;
. the terms of the merger agreement;
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. current and historical market valuations of the two companies; and
. the fairness opinion of DLJ.
As a result of the foregoing considerations, Zany's board of directors
determined that the potential benefits of the merger outweighed the benefits of
remaining alone. The Zany board of directors believes that the combined company
would have a far greater opportunity than Zany alone to compete in the
specialty toy retailing industry.
In view of the variety of factors considered in connection with its
evaluation of the merger, the Zany board of directors did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination.
In addition, many of the factors contain elements that may effect the
fairness of the merger in both a positive and negative way. Except as described
above, the Zany board of directors, as a whole, did not attempt to analyze each
factor separately to determine how it impacted the fairness of the merger.
Consequently, individual members of the Zany board of directors may have given
different weights to different factors and may have viewed different factors as
affecting the determination of fairness differently.
The Zany board of directors recommends that Zany shareholders vote in favor of
the merger proposal at the Zany annual shareholder meeting.
Recommendation of the Noodle Board of Directors; Noodle's Reasons for the Merger
At its meeting on April 19, 2000, the Noodle board of directors:
. determined that the merger agreement and the merger with Zany are in
the best interests of Noodle and its shareholders;
. approved and adopted the merger agreement;
. directed that the merger and the merger agreement be submitted for
consideration by the Noodle shareholders; and
. resolved to recommend that the Noodle shareholders vote FOR approval
and adoption of the merger and the merger agreement.
In the course of reaching its decision to approve the merger agreement, the
Noodle board of directors consulted with Noodle's management, as well as its
outside legal counsel and its financial advisors, and considered the following
material factors:
(1) information concerning the financial performance and condition,
results of operations, assets, prospects and businesses of each
of Noodle and Zany as separate entities and on a combined basis,
including:
. the revenues of the companies, their complementary
businesses and the potential for cost savings and revenue
enhancement;
. the recent and historical stock price performance of Noodle
and Zany common stock; and
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. the expectation that the merger would create a larger, more
competitive company that will have the opportunity to
enhance shareholder value in ways that are unlikely to be
achieved by Noodle alone;
(2) the strategic nature of the transaction, which combines Zany's
and Noodle's complementary businesses, and creates a broader
company with greater resources, enhanced future operating
flexibility and increased opportunity for growth;
(3) the potential benefits to be derived from a combination of the
two companies, including potential cost savings and efficiencies
that would result from the merger;
(4) the current industry, economic and market conditions and trends,
including the likelihood of continuing consolidation and the size
and financial resources of competitors in the specialty toy
retailing industry generally;
(5) the opportunity for the Noodle shareholders to participate in a
larger company and as shareholders of the combined company, to
benefit from future growth of the combined company;
(6) the fact that the exchange ratio would enable Noodle shareholders
to own approximately 30% of the outstanding stock of the combined
company;
(7) the analyses and presentations prepared by PaineWebber and the
written opinion of PaineWebber to the effect that, as of April
19, 2000, and subject to the matters set forth in its opinion,
the exchange ratio was fair from a financial point to the Noodle
shareholders (which opinion is described below, under "Opinions
of Financial Advisors - Opinion of Financial Advisor to the
Noodle Board");
(8) the fact that the exchange ratio represented a premium of
approximately 6.4% over Noodle's closing price on April 18, 2000,
the last trading day before the Noodle board meeting, based on
Zany's trading price on the same date;
(9) Zany's requirement that the merger be accounted as a pooling-of-
interests, which results in combined financial statements
prepared on a basis consistent with the underlying view that
shareholder interests in the two companies have simply been
combined;
(10) the ability to complete the merger as a reorganization for United
States federal income tax purposes in which Noodle shareholders
generally would not recognize any gain or loss, except for any
gain or loss recognized in connection with cash received for
fractional shares of the combined company's common stock;
(11) the ability to consummate the merger, including the conditions to
the merger requiring:
. the accuracy of Noodle's representations and warranties,
except that they would be deemed accurate unless the breach
or breaches of those representations and warranties would
reasonably be expected to have a material adverse effect;
. the absence of any litigation that is reasonably likely to
have a material adverse effect on Noodle; and
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<PAGE>
. that Zany receive prior to closing letters from its and Noodle's
independent public accountants regarding the qualification of
the merger for pooling of interest accounting treatment.
(12) the provision of the merger agreement which defines a material
adverse effect to be a fact, condition, event, development or
occurrence that has an adverse effect of $2.5 million or more on a
party;
(13) the terms of the merger agreement regarding third-party proposals,
including Noodle's ability to terminate the merger agreement to
accept a superior proposal;
(14) the provisions of the merger agreement that provide for a termination
fee of $2.25 million, plus up to $1 million of expenses, to be paid
to Zany by Noodle under certain circumstances;
(15) the provisions of the merger agreement that provide for a termination
fee of $2.25 million plus up to $1 million of expenses to be paid to
Noodle by Zany under certain circumstances;
(16) the ability to successfully integrate the operations of the two
companies, and the risk associated with the integration;
(17) the possible adverse impact of the merger with Zany on some of
Noodle's employees; and
(18) the interests that certain executive officers and directors of Noodle
may have with respect to the merger in addition to their interests as
Noodle shareholders generally. See "Interests of Noodle Directors and
Executive Officers in the Merger."
In view of the variety of factors and the amount of information considered,
Noodle's board of directors did not find it practicable to, and did not,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The determination was made after
consideration of all of the factors as a whole. In addition, individual members
of Noodle's board of directors may have given different weights to different
factors.
Noodle's board of directors considered all these factors in reaching the
conclusions and recommendations described above. These factors generally had a
positive impact and Noodle's board viewed them as advantages or opportunities,
with the following exceptions:
. the 6.4% premium to be received by Noodle shareholders, described in clause
(8) above, was not very high, but the Noodle board felt that the low
premium was outweighed by the other benefits of the transaction, including,
in particular, the fact that Noodle shareholders would own approximately
30% of the combined company, described in clause (6) above;
. the closing conditions regarding the absence of any breach of Noodle's
representations and warranties except where a breach would not have a
material adverse effect and the absence of litigation that would have a
material adverse effect and Zany's requirement that the merger be accounted
for as a pooling-of-interests, described in clauses (9) and (11) above,
caused the Noodle board to question the certainty of consummation of the
merger. However, the board of
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directors felt that this uncertainty was small because the merger agreement
quantified a material adverse effect as having an adverse effect of $2.5
million or more, described in clause (12) above, and the board of directors
believed that such an adverse effect was unlikely. In addition, the board
of directors felt this uncertainty was outweighed by the other benefits of
the transaction.
. The Noodle board of directors was uncomfortable with a $2.25 million
termination fee plus up to $1 million of expenses, described in clause (14)
above, which could be payable to Zany under certain circumstances, but the
board decided that any serious competing acquiror would not be deterred by
this fee and the board's discomfort was further outweighed by the other
benefits of the transaction, including, in particular, the fact that Zany
could be obligated to pay Noodle a $2.25 million termination fee plus up to
$1 million of expenses under certain circumstances, described in clause
(15) above;
. the Noodle board of directors believed that the integration of Noodle's
business and operations with Zany's business and operations, described in
clause (16) above, could be a risk, although one which the board felt could
be managed successfully, particularly in light of the fact that Stanley
Greenman and Stewart Katz would be employed by Zany for six months after
completion of the merger to assist with integration and would serve as
consultants to Zany for two years after that (see "Interests of Noodle
Directors and Executive Officers in the Merger");
. the possible adverse effect of the merger on some of Noodle's employees,
described in clause (18) above, which the Noodle board of directors
believed would be negative but not uniformly so, and which the board of
directors believed was outweighed by the other benefits of the transaction
and by a severance plan agreed to by the parties for some Noodle employees;
and
. the fact that some Noodle executive officers and directors have interests
in the merger in addition to their interests as Noodle shareholders,
described in clause (18) above, which the Noodle board of directors
considered to be neutral in its evaluation.
For additional information concerning the matters discussed above, and the
conclusions reached, at various meetings of Noodle's board held between November
1999 and April 19, 2000, see "Background of the Merger."
The Noodle board of directors believes that the merger is fair to, advisable
and in the best interests of the Noodle shareholders and has unanimously
approved and adopted the merger agreement and the transactions contemplated by
the merger agreement. The Noodle board of directors unanimously recommends that
the Noodle shareholders vote for the approval and adoption of the merger
agreement.
Opinions of Financial Advisors
Opinion of Financial Advisor to the Zany Board of Directors.
Zany asked DLJ, in its role as financial advisor to Zany, to render an opinion
to the Zany board of directors as to the fairness, from a financial point of
view, to Zany of the exchange ratio. On April 14, 2000, DLJ delivered to the
Zany board of directors its oral opinion,
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<PAGE>
subsequently confirmed in writing on April 21, 2000 to the effect that, as of
that date, and based on and subject to the assumptions, limitations and
qualifications set forth in its written opinion, the exchange ratio was fair to
Zany from a financial point of view.
The full text of DLJ's written opinion dated April 21, 2000 is attached as
Appendix II to this joint proxy statement/prospectus. The description of DLJ's
opinion set forth in this document is qualified in its entirety by reference to
the full text of such opinion. Shareholders of Zany are urged to read the DLJ
opinion in its entirety for a description of the assumptions made, matters
considered and the qualifications and limitations of the review undertaken by
DLJ in rendering its opinion. DLJ has consented to its opinion being set forth
in Appendix II and to references being made under the headings "Summary" and
"The Merger" in this joint proxy statement/prospectus.
DLJ prepared its opinion for the Zany board of directors. The opinion
addresses only the fairness to Zany from a financial point of view, as of the
date thereof, of the exchange ratio. DLJ expressed no opinion as to the prices
at which the common stock of Zany or Noodle would actually trade at any time.
DLJ's opinion did not address the relative merits of the merger and the other
business strategies considered by the Zany board nor did it address the Zany
board's decision to proceed with the merger. DLJ's opinion did not constitute a
recommendation to any shareholder as to how such shareholder should vote on the
proposed transaction.
Zany selected DLJ as its financial advisor because DLJ is an internationally
recognized investment banking firm that has substantial experience providing
strategic advisory services. DLJ was not retained as an advisor or agent to the
shareholders of Zany or any other person. As part of its investment banking
business, DLJ is regularly engaged in the valuation of businesses and securities
in connection with mergers, acquisitions, underwritings, sales and distributions
of listed and unlisted securities, private placements and valuations for
corporate and other purposes. Zany did not impose any restrictions or
limitations upon DLJ with respect to the investigations made or the procedures
followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ, among other things:
. reviewed the merger agreement draft dated April 18, 2000 and assumed the
final form of the merger agreement would not vary in any respect material
to DLJ's analysis;
. reviewed financial and other information that was publicly available or
furnished to it by Zany and Noodle, including information provided during
discussions with their respective managements (including certain financial
projections of Zany for the period beginning January 30, 2000 and ending
January 26, 2002 prepared by the management of Zany and certain financial
projections of Noodle for the period beginning January 30, 2000 and ending
January 26, 2002 prepared by Noodle's management);
. compared certain financial and securities data of Zany and Noodle with
various other companies whose securities are traded in public markets;
. reviewed the historical stock prices and trading volumes of the common
stock of Zany and Noodle;
. reviewed prices paid in certain other business combinations; and
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<PAGE>
. conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to DLJ or identified to DLJ by Zany
and Noodle, or their respective representatives, or that was otherwise reviewed
by DLJ, and assumed that Zany was not aware of any information prepared by it or
its other advisors that might be material to DLJ's opinion that had not been
made available to DLJ. DLJ relied upon and assumed the achievement of the
estimates provided by the management of Zany of the operating synergies
achievable as a result of the merger. With respect to the financial projections
for Zany and Noodle referred to above, DLJ relied on representations that the
projections were reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of Zany and Noodle as to the
future operating and financial performance of Zany and Noodle, respectively. DLJ
expressed no opinion with respect to these projections or the assumptions upon
which they were based. DLJ did not assume any responsibility for making any
independent evaluation of the assets or liabilities, or for making any
independent verification of the information reviewed by DLJ. DLJ relied on
advice of counsel to Zany that for federal income tax purposes, the merger will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
DLJ's opinion was necessarily based on economic, market, financial and other
conditions as they existed on, and on the information made available to DLJ as
of, the date of its opinion. DLJ states in its opinion that, although subsequent
developments may affect the conclusion reached in its opinion, DLJ does not have
any obligation to update, revise or reaffirm its opinion.
Summary of Financial Analyses Performed by DLJ. The following is a summary of
----------------------------------------------
the financial analyses performed by DLJ in connection with its presentation to
the Zany board of directors on April 14, 2000 which was updated for purposes of
delivering its written opinion as of April 21, 2000. The information summarized
in the tables which follow should be read in conjunction with the accompanying
text. No company or transaction used in the analyses that follow is directly
comparable to Zany or Noodle or the contemplated transaction. In addition,
mathematical analysis such as determining the average or median is not in itself
a meaningful method of using selected company or transaction data. The analyses
performed by DLJ are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by the
analyses. The implied exchange ratios estimated pursuant to the Comparable
Publicly Traded Company Analysis and the Precedent Merger and Acquisition
Transaction Analysis summarized below were each based on: (i) 21,681,606 shares
of Zany common stock outstanding, options outstanding to purchase 3,159,004
shares of Zany common stock at a weighted average exercise price of $5.64 and
warrants outstanding to purchase 15,000 shares of Zany common stock at a
weighted average exercise price of $4.00; and (ii) 7,605,640 shares of Noodle
common stock outstanding and options outstanding to purchase 935,675 shares of
Noodle common stock at a weighted average exercise price of $4.87.
Common Stock Trading History. DLJ examined the historical closing prices of
----------------------------
Zany common stock from June 3, 1999 to April 20, 2000. During this time period,
Zany common stock reached a high of $14.06 per share and a low of $3.88 per
share. DLJ also examined the historical closing prices of Noodle common stock
from April 19, 1999 to April 20, 2000. During this time period, Noodle common
stock reached a high of $8.00 per share and a low of $3.91 per share.
Comparable Publicly Traded Company Analysis. DLJ analyzed the market values
-------------------------------------------
and trading multiples of selected publicly traded small capitalization specialty
retailing and toy retailing companies that DLJ believed are reasonably
comparable to Noodle in certain respects. These comparable companies consisted
of:
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Small Capitalization Specialty Retailers:
. bebe stores, inc.
. The Children's Place Retail Stores, Inc.
. David's Bridal, Inc.
. Guitar Center, Inc.
Toy Retailers:
. Toys "R" Us, Inc.
. Zany Brainy, Inc.
In examining these comparable companies, DLJ calculated the enterprise value
of each company as a multiple of its respective: (i) LTM sales; (ii) LTM EBITDA;
and (iii) LTM EBIT. The enterprise value of a company is equal to the value of
its fully diluted common equity plus debt and the liquidation value of
outstanding preferred stock, if any, minus cash and the value of certain other
assets, including minority interests in other entities. LTM is defined as the
last twelve-month period for which financial data for the company at issue has
been reported. EBITDA is defined as earnings before interest expense, taxes,
depreciation and amortization. EBIT is defined as earnings before interest
expense and taxes. DLJ also calculated: (i) the market price of each company as
a multiple of projected calendar year 2000 and 2001 earnings per share, or EPS;
and (ii) the projected calendar year 2000 and 2001 price earnings, or PE,
multiple of each company as a percentage of each company's five year EPS growth
rate multiplied by 100. All historical data was derived from publicly available
sources and all projected data was obtained from First Call where available.
DLJ's analysis of the comparable companies yielded the following multiple
ranges, averages exclude the high and low multiples:
LTM LTM LTM 2000 2001
Sales EBITDA EBIT Price/EPS Price/EPS
----- ------ ---- --------- ---------
High........ 1.2x 10.4x 12.8x 15.1x 12.2x
Low......... 0.3 2.8 3.0 6.6 5.5
Average..... 0.7 6.3 8.4 11.6 8.7
Median...... 0.6 6.2 8.1 11.6 9.0
2000 2001
PE/Growth Rate PE/Growth Rate
-------------- --------------
High................ 105.2% 96.3%
Low................. 33.5 23.0
Average............. 46.1 35.3
Median.............. 43.9 32.7
Based on an analysis of this data and projected results of Noodle for
comparable periods, DLJ estimated a value per share of Noodle common stock
ranging from approximately $3.68 to $6.61. This analysis also yielded an implied
exchange ratio ranging from 0.860x to 1.543x based on Zany's April 20,
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2000 stock price of $4.28, compared to the proposed Zany exchange ratio of
1.233x.
Precedent Merger and Acquisition Transaction Analysis. DLJ reviewed selected
-----------------------------------------------------
acquisitions involving companies in the specialty retailing industry that DLJ
believed are reasonably comparable to the merger. These transactions consisted
of:
Target / Acquiror:
. Babbages, Etc. LLC / Barnes & Noble, Inc.
. Al's and Grand Auto Supply, Inc., a subsidiary of PACCAR Inc. / CSK Auto
Corporation
. Trak Auto Corporation / HalArt L.L.C.
. Men's Center, Inc. / The Men's Wearhouse, Inc.
. Club Monaco Inc. / Polo Ralph Lauren Corporation
. St. John Knits, Inc. / Investor Group
. Chief Auto Parts Inc. / AutoZone, Inc.
. Farah Incorporated / Tropical Sportswear Int'l Corporation
. Hi-Lo Automotive, Inc. / O'Reilly Automotive, Inc.
In examining these acquisitions, DLJ calculated the enterprise value of the
acquired company implied by each of these transactions as a multiple of LTM
sales, LTM EBITDA and LTM EBIT. DLJ's analysis of these comparable acquisitions
yielded the following multiple ranges, average excludes the high and low
multiples:
LTM LTM LTM
Sales EBITDA EBIT
----- ------ ----
High.......... 1.8x 15.7x 37.2x
Low........... 0.3 6.0 9.3
Average....... 0.7 9.7 12.3
Median........ 0.6 10.0 19.5
Based on an analysis of this data and Noodle's historical and projected
operating results, DLJ estimated a value per share of Noodle's common stock
ranging from $5.97 to $7.70. This analysis also yielded an implied relative
exchange ratio ranging from 1.393x to 1.800x based on Zany's April 20, 2000
stock price of $4.28, compared to the proposed Zany exchange ratio of 1.233x.
Contribution Analysis. DLJ analyzed the relative contributions of Zany and
---------------------
Noodle to the pro forma combined company. For the fiscal years ended January 30,
1999 and January 29, 2000, DLJ analyzed the respective contributions of each
company's revenues, EBITDA, store count, total assets and book value of equity.
For the fiscal years ended February 3, 2001 and February 2, 2002, DLJ analyzed
the respective contributions of each company's projected revenues, EBITDA and
store count based on projections and assumptions provided by the management of
Zany and Noodle. On a fully-diluted basis, Zany will own 70.0% of the combined
company. DLJ's analysis of Zany's contribution to the combined company resulted
in the following percentages:
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January 30, January 29, February 3, February 2,
1999 2000 2001 2002
----------- ----------- ----------- -----------
Revenue.................. 61.0% 64.1% 64.5% 65.7%
EBITDA................... 63.0 75.5 73.0 74.7
Store Count.............. 64.1 64.0 65.3 64.8
Total Assets............. 58.6 66.4 NA NA
Book Value of Equity..... 56.2 67.0 NA NA
Pro Forma EPS Accretion/Dilution Analysis. Using projections and assumptions
-----------------------------------------
provided by the management of Zany and Noodle, DLJ compared the fiscal year
ended January 26, 2002 EPS of Zany and Noodle on a stand-alone basis to the
fiscal year ended January 26, 2002 pro forma EPS of the combined company after
the merger. This analysis showed that with synergies, the merger would be
accretive to EPS for Zany shareholders in fiscal 2001.
The summary set forth above does not purport to be a complete description of
the analyses DLJ performed but describes the material elements of such analyses
DLJ performed in connection with the preparation of its fairness opinion. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Each of the analyses conducted
by DLJ was carried out in order to provide a different perspective on the
transaction and to add to the total mix of information available. DLJ did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ considered the
results of the analyses in light of each other and ultimately reached its
opinion based on the results of all analyses taken as a whole. DLJ did not place
any particular reliance or weight on any individual analysis, but instead
concluded that its analyses, taken as a whole, supported its determination.
Accordingly, notwithstanding the separate factors summarized above, DLJ has
indicated to Zany that it believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by those analyses.
Engagement Letter. Pursuant to the terms of an engagement agreement dated
-----------------
April 3, 2000, Zany (1) has paid DLJ (a) a retainer fee of $50,000 and (b) a fee
of $400,000 when DLJ delivered its initial opinion and (2) will pay DLJ $750,000
in connection with the consummation of the merger. The fees previously paid to
DLJ pursuant to clause (1) of the first sentence of this paragraph will be
deducted from any fee to which DLJ is entitled upon consummation of the merger.
In addition, Zany agreed to reimburse DLJ, upon request by DLJ
from time to time, for all out-of-pocket expenses (including the reasonable fees
and expenses of counsel) incurred by DLJ in connection with its engagement
thereunder and to indemnify DLJ and certain related persons against certain
liabilities in connection with its engagement, including liabilities under U.S.
federal securities laws. DLJ and Zany negotiated the terms of the fee
arrangement.
Other Relationships. In the ordinary course of business, DLJ and its
-------------------
affiliates may own or actively trade the securities of Zany and Noodle for their
own accounts and for the accounts of their customers and, accordingly, may at
any time hold a long or short position in Zany or Noodle securities. DLJ has
performed investment banking and other services for Zany in the past, including
acting as Zany's lead manager for its 1999 initial public offering and placement
agent for its 1996 private placement, and has
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been compensated for such services. In addition, Yves Sisteron, an officer of
certain affiliates of DLJ, is also a member of Zany's board of directors.
Opinion of Financial Advisor to the Noodle Board.
Noodle retained PaineWebber to act as its financial advisor in connection with
the merger. At a meeting of the Noodle board of directors held on April 14,
2000, PaineWebber delivered its oral opinion, to the effect that, as of that
date, and based upon its review and assumptions and subject to the limitations
summarized below, the exchange ratio is fair, from a financial point of view, to
the holders of Noodle common stock. PaineWebber subsequently confirmed its oral
opinion by delivery of its written opinion on April 19, 2000. The following is a
summary of the report presented on April 14, 2000 by PaineWebber to the Noodle
board of directors in connection with the rendering of its opinion on April 19,
2000.
The full text of the PaineWebber opinion, dated April 19, 2000, which sets
forth the assumptions made, procedures followed, matters considered and
limitations on the review undertaken, is attached as Appendix III to this joint
proxy statement/prospectus. You should read the PaineWebber opinion carefully
and in its entirety. This summary of the PaineWebber opinion is qualified in its
entirety by reference to the full text of the PaineWebber opinion.
The PaineWebber opinion was prepared at the request and for the information of
the Noodle board of directors and does not constitute a recommendation to any
holder of Noodle common stock as to how any such shareholder should vote with
respect to the merger.
Noodle selected PaineWebber as its financial advisor in connection with the
merger because PaineWebber is a prominent investment banking and financial
advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
PaineWebber has consented to its opinion being set forth in Appendix III, and
to references being made to PaineWebber under the headings "Prospectus Summary"
and "The Merger" in this document.
In arriving at its opinion, PaineWebber, among other things:
. reviewed Noodle's Annual Reports, Forms 10-K and related financial
information for the past four fiscal years, as well as Noodle's draft Form
10-K and unaudited financial statements for the fiscal year ending January
29, 2000;
. reviewed financial information included in Zany's audited financial
statements for the past four fiscal years, as well as Zany's financial
information that has been publicly available since Zany's initial public
offering in June 1999 and Zany's draft Form 10-K and unaudited financial
statements for the fiscal year ended January 29, 2000;
. reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of Noodle and Zany,
furnished to PaineWebber by Noodle and Zany, respectively;
. conducted discussions with members of senior management of Noodle and Zany
concerning their respective businesses and prospects;
. reviewed the historical market prices and trading activity for the shares
of Noodle's common stock and the shares of Zany's common stock and compared
them with that of certain publicly traded companies which PaineWebber
deemed relevant;
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. compared the financial position and results of operations of Noodle and
Zany with that of certain companies that PaineWebber deemed to be relevant;
. compared the proposed financial terms of the transactions contemplated by
the merger agreement with the financial terms of certain other mergers and
acquisitions that PaineWebber deemed to be relevant;
. reviewed a draft of the merger agreement dated April 18, 2000; and
. reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as
PaineWebber deemed necessary, including its assessment of general economic,
market and monetary conditions.
In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information publicly available or supplied or otherwise
communicated to PaineWebber by or on behalf of Noodle and Zany, and PaineWebber
did not assume any responsibility to independently verify such information. With
respect to the financial forecasts examined by PaineWebber, PaineWebber assumed,
with Noodle's and Zany's consent, that they were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgment of the
management of Noodle and Zany, respectively, as to the future performance of
Noodle and Zany, respectively. PaineWebber also relied upon assurances of the
management of Noodle and Zany that they were unaware of any facts that would
make the information or financial forecasts provided to PaineWebber incomplete
or misleading. PaineWebber was not engaged to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Noodle or Zany, nor was PaineWebber furnished with any such
evaluations or appraisals. PaineWebber also assumed the following with Noodle's
consent:
. the merger will be accounted for under the pooling-of-interests method of
accounting;
. the merger will qualify as a tax free reorganization; and
. all material liabilities (contingent or otherwise, known or unknown) of
Noodle and Zany were as set forth in the consolidated financial statements
of Noodle and Zany, respectively.
The PaineWebber opinion was based upon economic, monetary and market
conditions existing on the date of the PaineWebber opinion. Furthermore,
PaineWebber expressed no opinion as to the price or trading ranges at which
Noodle common stock or Zany common stock will trade after the date of the
PaineWebber opinion.
The PaineWebber opinion does not address the relative merits of the merger
and any other transactions or business strategies that may have been discussed
by the Noodle board of directors as alternatives to the merger, or the decision
of the Noodle board of directors to proceed with the merger. Noodle did not
place any limitations upon PaineWebber with respect to the procedures followed
or factors considered in rendering its opinion. PaineWebber was not requested
to, and did not, solicit third party indications of interest in acquiring all or
any portion of Noodle.
The following paragraphs summarize the significant analyses performed by
PaineWebber in arriving at its opinion.
Exchange Ratio Analysis. PaineWebber calculated exchange ratios based on the
-----------------------
trading price relationship between one share of Noodle common stock and one
share of Zany common stock. PaineWebber reviewed the Noodle/Zany exchange ratio
on April 13, 2000 and averages over periods prior to April 13, 2000 as set
forth in the following table:
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Trading Period Exchange Ratio
-------------- --------------
Current (4/13/00)........................ 1.08x
30 Day Average........................... 1.05
60 Day Average........................... 0.91
120 Day Average.......................... 0.73
Since Zany IPO (6/3/99) High............. 1.21
Since Zany IPO (6/3/99) Low.............. 0.38
Since Zany IPO (6/3/99) Average.......... 0.63
Contribution Analysis. PaineWebber analyzed the relative contribution of
----------------------
Noodle and Zany for the following periods:
. latest twelve months ended January 29, 2000; and
. projected fiscal year ending February 3, 2001.
<TABLE>
<CAPTION>
Analysis Noodle Contribution to Combined Equity
-------- ---------------------------------------
<S> <C>
Latest twelve months revenue.............................................. 35.9%
Latest twelve months earnings before interest, taxes,
depreciation and amortization ("EBITDA").................................. 26.5
Latest twelve months earnings before interest
and taxes ("EBIT")........................................................ 23.8
Latest twelve months net income........................................... 22.0
Projected fiscal year 2000 revenue........................................ 35.5
Projected fiscal year 2000 EBIT........................................... 24.8
Projected fiscal year 2000 net income..................................... 18.8
</TABLE>
The contribution analysis for the fiscal year ending February 3, 2001 was
based on projections provided by the respective managements of Noodle and Zany.
PaineWebber noted that, after the closing of the transaction, Noodle will own
approximately 30.0% of the fully-diluted shares of the combined entity. The
results of this contribution analysis are not necessarily indicative of the
contribution that the respective businesses may make in the future.
Noodle Selected Comparable Public Company Analysis. Using publicly available
--------------------------------------------------
information, PaineWebber compared selected historical and projected financial,
operating and stock market performance data of Noodle to the corresponding data
of certain publicly traded companies that PaineWebber deemed to be relevant for
the purposes of comparison to Noodle.
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The Noodle comparable companies consisted of
. Bombay Company
. Books-A-Million
. Hibbett Sporting Goods
. Petco Animal Supplies
. Pier 1 Imports
. Sunglass Hut International
. Toys "R" Us
. West Marine
PaineWebber reviewed, among other information, the comparable companies'
multiples of total enterprise value ("TEV"), which consists of the market value
of equity plus total debt less cash and cash equivalents to:
. latest twelve months revenue;
. latest twelve months EBITDA; and
. latest twelve months EBIT.
PaineWebber also reviewed, among other information, the comparable companies'
multiples of equity market value ("MV") to:
. latest twelve months net income;
. projected earnings per share ("EPS") based on First Call Research
earnings
estimates for calendar year ending December 31, 2000; and
. projected EPS based on First Call Research earnings estimates for
calendar year ending December 31, 2001.
The Noodle comparable companies analysis resulted in the following range of
values as of April 13, 2000:
<TABLE>
<CAPTION>
Analysis Range Median Mean
-------- ----- ------ ----
<S> <C> <C> <C>
TEV/Latest twelve months revenue 0.20x to 0.96x 0.48x 0.58x
TEV/Latest twelve months EBITDA 3.3 to 9.6 6.2 6.2
TEV/Latest twelve months EBIT 7.0 to 12.2 9.8 9.8
MV/Latest twelve months net income 9.8 to 19.4 15.7 15.3
MV/One year forward EPS 8.8 to 15.5 12.6 12.6
MV/Two year forward EPS 7.5 to 13.8 10.1 10.4
</TABLE>
Selected Comparable Mergers and Acquisitions Analysis. PaineWebber
-----------------------------------------------------
reviewed publicly available financial information for selected mergers and
acquisitions involving specialty retailers. From this universe, PaineWebber
used information from eleven mergers and acquisitions to perform its analysis.
The selected mergers and acquisitions PaineWebber analyzed included the
following:
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Acquiror Target
-------- ------
Claire's Stores Afterthought Accessories
Men's Wearhouse K&G Men's Center
Men's Wearhouse Moore's Retail
Trans World Entertainment Camelot Music
Proffitt's Carson Pirie Scott
Toys "R" Us Baby Superstore
Sears Roebuck Orchard Supply
West Marine E&B Marine
Consolidated Stores Kay-Bee Toy & Hobby Shops
Petsmart Pet Food Giant
Petsmart Petstuff
PaineWebber reviewed the consideration paid based on stock prices on the
day prior to the announcement of the comparable transactions and calculated
multiples of TEV and MV. The comparable transactions analysis resulted in the
following range of values:
<TABLE>
<CAPTION>
Analysis Range Median Mean
-------- ----- ------ ----
<S> <C> <C> <C>
Latest twelve months revenue........................ 0.33x to 1.18x 0.79x 0.78x
Latest twelve months EBITDA......................... 5.3 to 16.5 8.9 9.3
Latest twelve months EBIT........................... 8.0 to 23.4 10.7 12.5
Latest twelve months net income..................... 7.4 to 47.1 22.3 24.2
</TABLE>
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of Noodle
compared to the businesses, operations and prospects of the companies that were
parties to the selected mergers and acquisitions analyzed, PaineWebber believed
it was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning differences between the characteristics of these transactions.
Noodle Discounted Cash Flow Analysis. PaineWebber analyzed Noodle's
------------------------------------
unleveraged after-tax cash flows based on financial projections prepared by
Noodle management for five years. The discounted cash flow analysis determined
the present value of the unleveraged after-tax cash flows generated over the
projection period and then added a terminal value based on ranges of multiples
of revenue and EBITDA. PaineWebber also analyzed the present value of
unleveraged after-tax cash flows assuming a range of perpetual growth rates
that PaineWebber deemed relevant. In determining the present value, PaineWebber
used discount rates that it deemed appropriate.
Premiums Paid Analysis. PaineWebber reviewed premiums paid in nine
----------------------
publicly disclosed domestic stock-for-stock merger transactions of retailing
companies completed from January 1, 1995 to April 12, 2000 with transaction
values between $25 million and $200 million. This analysis indicated the
following premiums to the target's closing stock prices:
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Period prior to announcement Median
---------------------------- ------
One day.............................................. 9.2%
One week............................................. 24.7
Four weeks........................................... 36.3
PaineWebber also reviewed premiums paid in 132 publicly disclosed domestic
stock-for-stock merger transactions of non-financial companies completed from
January 1, 1995 to April 12, 2000 with transaction values between $25 million
and $200 million. This analysis indicated the following premiums to the
target=s closing stock prices:
Period prior to announcement Median
---------------------------- ------
One day............................................. 18.0%
One week............................................ 28.6
Four weeks.......................................... 40.0
Pro Forma Merger Analysis. PaineWebber prepared a pro forma analysis of
-------------------------
the financial impact of the merger using estimates provided by the managements
of Noodle and Zany for the fiscal years ending February 3, 2001 and February 2,
2002 and assumed the following:
. the merger will be accounted for under pooling-of-interests accounting
treatment; and
. no synergies achieved.
PaineWebber combined the projected operating results of Noodle provided by
Noodle management with projected operating results for Zany provided by Zany
management, to arrive at the combined company projected net income. PaineWebber
divided this result by the pro forma diluted shares outstanding to arrive at a
combined company diluted EPS. PaineWebber then compared the calculated combined
company EPS to the EPS estimate for Zany on a stand-alone basis to determine the
pro forma impact of the merger on Zany's EPS.
Zany Selected Comparable Public Company Analysis. Using publicly
------------------------------------------------
available information, PaineWebber compared selected historical and projected
financial, operating and stock market performance data of Zany to the
corresponding data of certain publicly traded companies that PaineWebber deemed
to be relevant for the purposes of comparison to Zany.
The Zany comparable companies consisted of:
. Bombay Company
. Books-A-Million
. Hibbett Sporting Goods
. Petco Animal Supplies
. Pier 1 Imports
. Sunglass Hut International
. Toys "R" Us
. West Marine
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The Zany comparable companies analysis resulted in the following range of
values as of April 13, 2000:
<TABLE>
<CAPTION>
Analysis Range Median Mean
-------- ----- ------ ----
<S> <C> <C> <C>
TEV/Latest twelve months revenue 0.20x to 0.96x 0.48x 0.58x
TEV/Latest twelve months EBITDA 3.3 to 9.6 6.2 6.2
TEV/Latest twelve months EBIT 7.0 to 12.2 9.8 9.8
MV/Latest twelve months net income 9.8 to 19.4 15.7 15.3
MV/One year forward EPS 8.8 to 15.5 12.6 12.6
MV/Two year forward EPS 7.5 to 13.8 10.1 10.4
</TABLE>
Zany Discounted Cash Flow Analysis. PaineWebber analyzed Zany's
----------------------------------
unleveraged after-tax cash flows based on financial projections for five years.
The discounted cash flow analysis determined the present value of the
unleveraged after-tax cash flows generated over the projection period and then
added a terminal value based on ranges of multiples of revenue and EBITDA.
PaineWebber also analyzed the present value of unleveraged after-tax cash flows
assuming a range of perpetual growth rates that PaineWebber deemed relevant. In
determining the present value, PaineWebber used discount rates that it deemed
appropriate.
The summary of the PaineWebber opinion set forth above does not purport to
be a complete description of the data or analyses presented by PaineWebber. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant quantitative methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the opinion.
In its analyses, PaineWebber made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Noodle and Zany. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
as set forth therein. Accordingly, such estimates are inherently subject to
substantial uncertainty and Noodle, Zany or PaineWebber do not assume
responsibility for the accuracy of such estimates. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses may actually be sold.
Engagement Letter. Pursuant to an engagement letter between Noodle and
-----------------
PaineWebber dated January 20, 2000, PaineWebber earned a fee of $150,000 for
rendering the opinion independent of the result of the opinion. In addition,
PaineWebber will receive a fee, payable upon completion of the merger, of
approximately $950,000, against which the opinion fee and a retention fee of
$25,000 will be credited, and will be reimbursed for certain of its out-of-
pocket expenses. PaineWebber will not be entitled to any additional fees or
compensation in the event the merger is not approved or otherwise consummated.
Noodle also agreed, under a separate agreement, to indemnify PaineWebber, its
affiliates and each of its directors, officers, agents and employees and each
person, if any, controlling PaineWebber or any of its affiliates against certain
liabilities, including liabilities under federal securities laws.
Other Relationships. PaineWebber has been previously engaged by Noodle
-------------------
to provide certain investment banking and financial services for which it
received customary compensation. In the ordinary course of business,
PaineWebber may actively trade the securities of Noodle and Zany for its
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own account and for the accounts of its customers and, accordingly, may at any
time hold long or short positions in such securities.
Certain Material United States Federal Income Tax Consequences of the Merger
The following is a discussion of the material United States federal income
tax consequences of the merger. This discussion does not address all tax
consequences that may be relevant to particular taxpayers in light of their
personal circumstances or to taxpayers subject to special treatment under the
Internal Revenue Code of 1986, as amended, including insurance companies,
financial institutions, mutual funds, dealers in insurance companies, dealers in
securities, tax-exempt organizations, foreign persons, persons who do not hold
securities, persons who do not hold shares of Noodle common stock as capital
assets, persons who hold shares of Noodle common stock as part of a straddle or
a conversion transaction for United States federal income tax purposes, and
individuals who received shares of Noodle common stock pursuant to the exercise
of employee stock options or otherwise as compensation.
This discussion provides no information on tax consequences of the merger,
if any, under applicable foreign, state, local and other tax laws. This
discussion is based on the provisions of the Internal Revenue Code, applicable
Treasury Regulations thereunder, IRS rulings and judicial decisions in effect as
of the date of this document. We can give no assurance that future legislative,
administrative or judicial changes or interpretations will not affect the
accuracy of this discussion. Any such change or interpretation could apply
retroactively and could affect the accuracy of this discussion. The discussion
also is based upon certain factual representations made by Zany and Noodle, and
the assumption that the merger will be consummated in accordance with the terms
of the merger agreement. Neither Zany nor Noodle will seek rulings from the IRS
concerning the tax consequences of the merger.
We urge each Noodle shareholder to consult such shareholder=s own tax
advisor as to the specific tax consequences of the merger to that shareholder,
including the application of foreign, state, local and other tax laws.
Based on the assumptions discussed above and upon the representations of
Zany and Noodle, it is the opinion of Kramer Levin Naftalis & Frankel LLP, tax
counsel to Noodle, and Morgan, Lewis & Bockius LLP, tax counsel to Zany, that,
for United States federal income tax purposes, the merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, that Noodle, Zany and Zany's merger subsidiary will each be a party to the
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code, and that, accordingly, none of Noodle, Zany or Zany=s merger subsidiary
will recognize gain or loss for United States federal income tax purposes as a
result of the merger and Noodle shareholders will not recognize gain or loss for
United States federal income tax purposes on the receipt pursuant to the merger
of the Zany common stock in exchange for Noodle common stock except to the
extent they receive cash in lieu of fractional shares of Zany common stock. An
opinion of counsel is not binding on the IRS and we can give no assurance that
the IRS will not take a position contrary to one or more positions reflected in
such opinions or that the courts will uphold such opinions if challenged by the
IRS.
The aggregate tax basis of the Zany common stock received by a Noodle
shareholder, including any fractional share deemed received, will be equal to
the tax basis of the Noodle common stock exchanged therefor. The holding period
of the Zany common stock will include the holding period of the Noodle common
stock exchanged therefor, provided that the shares of Noodle common stock are
held as capital assets at the effective time of the merger.
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Cash in Lieu of a Fractional Share
A Noodle shareholder who receives cash in lieu of a fractional share of
Zany common stock will be treated as having received this fractional share as a
part of the exchange and having it redeemed by Zany for cash. Therefore, such
Noodle shareholder will recognize gain or loss equal to the difference, if any,
between the amount of cash so received and the tax basis of the Noodle common
stock allocable to the fractional share. This gain or loss will constitute
capital gain or loss if the shareholder held the Noodle common stock as a
capital asset at the time of the merger and will be long-term capital gain or
loss if the holding period was greater than one year at the effective time of
the merger. In the case of an individual, any such long-term capital gain will
be subject to a maximum federal income tax rate of 20%. The deductibility of
capital losses is subject to limitations for both individuals and corporations.
Backup Withholding
A holder of Noodle common stock may be subject, under certain
circumstances, to backup withholding at a rate of 31% with respect to the amount
of cash, if any, received in lieu of a fractional share interest unless the
holder provides proof of an applicable exemption or a correct taxpayer
identification number, and otherwise complies with applicable requirements of
the backup withholding rules. Any amounts withheld under the backup withholding
rules are not an additional tax and may be refunded or credited against the
holder's federal income tax liability, provided the required information is
furnished to the IRS.
The obligation of each of Noodle and Zany to consummate the merger is
conditioned upon, among other things, the receipt by each of Noodle and Zany of
a tax opinion from each of their respective tax counsels that is identical in
all material respects to the opinions set forth above. The opinions to be
delivered at closing will be based on the facts described therein and upon
certain assumptions and certain representations made by Noodle, Zany and others.
In the event that Noodle or Zany is unable to obtain its respective opinion of
counsel, as set forth above, each of Noodle and Zany is permitted, under the
merger agreement, to waive the receipt of such opinions as a condition to such
party's obligation to consummate the merger. As of the date of this document,
neither Noodle nor Zany intends to waive the condition as to the receipt of
opinions of counsel as set forth herein and neither party anticipates that the
material income tax consequences of the merger will be materially different than
those described above. In the event of such a failure to obtain tax opinions as
set forth above, and a party's determination to waive such condition to the
consummation of the merger, Noodle and Zany will resolicit the votes of its
respective shareholders to approve the merger.
Employee Matters
Stock Options
Under the merger agreement, at the effective time of the merger, each
outstanding Noodle stock option exercisable for shares of Noodle common stock
under either the Noodle Stock Incentive Plan or the Outside Directors' Stock
Option Plan will be converted into an option exercisable for that number of
shares of Zany common stock equal to the product of:
. the aggregate number of shares of Noodle common stock for which such
Noodle stock option was exercisable; and
. the exchange ratio of 1.233
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and will be rounded to eliminate fractional shares, if necessary. The exercise
price per share of such converted stock option will be equal to the aggregate
exercise price per share of such Noodle common stock immediately prior to the
effective time divided by the exchange ratio of 1.233, rounded to the nearest
cent, if necessary. As of ____________, 2000, the number of shares of Noodle
common stock reserved for issuance pursuant to outstanding Noodle stock options
under the plans was _______________.
In the case of a converted stock option that is an "incentive stock option"
(within the meaning of Section 422 of the Code), the option price and the number
of shares of Zany common stock purchasable pursuant to that option will be
adjusted down, to the nearest whole share, if necessary, to preserve the status
of the option as an incentive stock option. Zany and Noodle intend that, to the
extent that any Noodle stock option constituted an incentive stock option
immediately prior to the effective time, such option continue to qualify as an
incentive stock option to the maximum extent permitted by Section 422 of the
Code, and that the adjustment of the Noodle stock options provided satisfy the
conditions of Section 424(a) of the Code.
Noodle agreed to establish, prior to the consummation of the merger, a
severance pay plan designed to provide severance benefits to certain employees
who are terminated as a direct result of the merger. The severance pay plan is
intended to alleviate, in part or in full, financial hardships that may be
experienced by such terminated employees and is intended to constitute a
"severance pay plan" under regulations published by the U.S. Secretary of Labor.
The severance pay plan will cover 74 employees who are named in the plan. The
plan provides, among other things, that a covered employee will receive a cash
payment set forth in the plan, ranging from approximately $800 to $120,000, if
he or she is not offered a "Comparable Position," as defined in the plan, by
Zany, by June 1, 2000 and is thereafter terminated for reasons other than for
cause. The total benefits payable from the plan to all participants combined
cannot exceeed $808,275.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
related rules of the Federal Trade Commission, the merger may not be completed
until notifications have been given and information has been furnished to the
Federal Trade Commission and the Antitrust Division of the Department of Justice
and the required waiting period has been terminated or has expired. Noodle and
Zany filed notification and report forms under the Hart-Scott-Rodino Act with
the FTC and the Antitrust Division on May 15, 2000. The required waiting period
under the Hart-Scott-Rodino Act will expire 30 days after the date of the
filing, unless Noodle and Zany are notified by the FTC that early termination of
the waiting period had been granted or unless they receive a request for further
information.
At any time before or after the closing of the merger, whether or not the
waiting period has expired or been terminated, the FTC, the Antitrust Division
or state attorneys general could take any action under the antitrust laws as
they deem necessary or desirable in the public interest, including seeking to
enjoin the closing of the merger.
Based on the information available to them, Noodle and Zany believe that
the merger can be completed in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the closing of the merger
on antitrust grounds will not be made or that, if a challenge were made, Noodle
and Zany would prevail or would not be requested to divest assets in order to
complete the merger.
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Anticipated Accounting Treatment
The merger is expected to be accounted for under the pooling of interests
method of accounting pursuant to Opinion No. 16 of the Accounting Principles
Board of the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board, and the rules and regulations of the SEC. The
pooling of interests method of accounting assumes that the combining companies
have been merged from the beginning of the periods presented and the historical
consolidated financial statements for periods prior to consummation of the
merger are restated as though the companies had been combined from the beginning
of the periods presented. Either Zany or Noodle may terminate the merger
agreement if the companies do not receive the pooling opinion letters from their
independent public accountants on the closing date.
Resales of Zany Common Stock
All shares of Zany common stock to be issued in the merger will be freely
transferable, except for shares received by any person who may be deemed to be
an affiliate of Noodle for purposes of paragraphs (c) and (d) of Rule 145 under
the Securities Act. An affiliate of Noodle is any individual or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, Noodle or Zany. Under Rule 145,
an affiliate of Noodle may not resell his or her shares of Zany common stock
received in the merger except in transactions permitted by Rule 145 or as
otherwise permitted under the Securities Act, including selling such shares
pursuant to an effective registration statement. Noodle has delivered to Zany a
list setting forth the names and addresses of all persons who were, at the time
of the signing of the merger agreement, affiliates of Noodle.
In addition, Zany and Noodle each have agreed to use reasonable efforts to
cause its affiliates to execute written agreements not to take any action that
would cause the merger not to be treated as a pooling of interests for
accounting purposes and, in Noodle's case, not to take any action that would
violate Rule 145 as discussed above. Under generally accepted accounting
principles, the sale of Zany common stock or Noodle common stock by an affiliate
of either Zany or Noodle within 30 days prior to the effective time or prior to
the publication of financial results that include at least 30 days of combined
operations of Zany and Noodle after the effective time could preclude pooling
of interests accounting treatment of the merger. The merger agreement requires
Noodle to use its reasonable best efforts to cause its affiliates to enter into
these agreements and conditions Zany's obligation to effect the merger on the
receipt of these agreements.
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INTERESTS OF NOODLE DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendation of the Noodle board of directors in favor
of the merger, you should be aware that certain directors and executive officers
of Noodle have interests in the merger that may be different from, or in
addition to, the interests of Noodle shareholders. These interests are
described below, and except as described below, those persons have, to the
knowledge of Zany and Noodle, no material interest in the merger apart from
those of shareholders generally. The Noodle board of directors was aware of,
and considered the interests of, its directors and officers in approving the
merger agreement and the merger.
Interests of Noodle Management in the Zany Board of Directors after the Merger
Pursuant to the terms of the merger agreement, Zany will expand its seven
member board of directors by one member and, prior to the effective time, take
all action necessary to elect Stanley Greenman, Noodle's Chairman and Chief
Executive Officer, to the Zany board.
Employment Agreements
Under an employment agreement between Noodle and Stanley Greenman dated
February 1, 1998, the merger will constitute a change in control entitling Mr.
Greenman to the following payment and benefits:
. a lump sum payment equal to the amount by which 299% of Mr. Greenman's
average annual compensation at Noodle for the last five years exceeds
the present value of all other payments that would be considered
contingent on a change of ownership and control under Section 280G of
the Internal Revenue Code, other than payments that would not be treated
as parachute payments; and
. the immediate vesting of all unvested options to purchase Noodle common
stock held by Mr. Greenman.
If the merger closes during the second quarter of fiscal 2000, the lump sum
payment that Mr. Greenman is entitled to receive is approximately $________, and
options to purchase _______ shares of Zany stock at a weighted average exercise
price of $_____ will immediately vest and be exercisable.
Pursuant to the terms of the merger agreement, Zany agreed to enter into a
new six-month employment agreement with Mr. Greenman providing for the following
payments and benefits:
. a salary of $257,500 in exchange for Mr. Greenman's performance of
executive duties and responsibilities in connection with the integration
of Zany's and Noodle's operations;
. a non-competition provision prohibiting Mr. Greenman from engaging in or
holding a financial interest in any business that competes with Zany and
has operations in North America and, in consideration for a lump sum
payment of $350,000, a continuation of the non-compete for a period of
one year after he ceases to perform services for Zany;
. a lump sum payment in the amount of $225,000 if the employment agreement
is not terminated by either party prior to its expiration or if the
employment agreement is terminated by the employee for good reason (as
defined in the employment agreement), by Zany without cause or because
of Mr. Greenman's death or disability;
. continued payment of salary and benefits for two months following
termination due to Mr. Greenman's death or disability; and
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. continued receipt of all scheduled payments and benefits under the
employment agreement if Mr. Greenman is terminated without cause or if
he terminates his employment with Zany for good reason.
In addition, Zany has agreed to enter into a two-year consulting agreement
with Mr. Greenman upon expiration of Mr. Greenman's six month employment
agreement or the termination of his employment without cause or by Mr. Greenman
for good reason. The consulting agreement provides for the following payments:
. consulting fees of $5,208.34 per month (or $125,000 in the aggregate)
during the term of the consulting agreement in exchange for Mr.
Greenman's provision of his toy retailing expertise for up to sixteen
hours during any thirty day period; and
. the continuation of his promise not to compete with Zany in North
America or solicit Zany employees.
Under an employment agreement between Noodle and Stewart Katz dated
February 1, 1998, the merger will constitute a change in control entitling Mr.
Katz to the following payment and benefits:
. a lump sum payment equal to the amount by which 299% of Mr. Katz's
average annual compensation at Noodle for the last five years exceeds
the present value of all other payments that would be considered
contingent on a change of ownership and control under Section 280G of
the Internal Revenue Code, other than payments that would not be treated
as parachute payments; and
. the immediate vesting of all unvested options to purchase Noodle common
stock held by Mr. Katz.
If the merger closes during the second quarter of fiscal 2000, the lump sum
payment that Mr. Katz is entitled to receive is approximately $________, and
options to purchase _______ shares of Zany stock at a weighted average exercise
price of $_____ will immediately vest and be exercisable.
Pursuant to the terms of the merger agreement, Zany agreed to enter into a
new six-month employment agreement with Mr. Katz providing for the following
payments and benefits:
. a salary of $232,500 in exchange for Mr. Katz's performance of executive
duties and responsibilities in connection with the integration of Zany's
and Noodle's operations;
. a non-competition provision prohibiting Mr. Katz from engaging in
holding a financial interest in any business that competes with Zany and
has operations in North America and, in consideration for a lump sum
payment of $325,000, a continuation of the non-compete for a period of
one year after he ceases to perform services for Zany;
. a lump sum payment in the amount of $200,000 if the employment agreement
is not terminated by either party prior to its expiration or if the
employment agreement is terminated by the employee for good reason (as
defined in the employment agreement), by Zany without cause or because
of Mr. Katz's death or disability;
. continued payment of salary and benefits for two months following
termination due to Mr. Katz's death or disability; and
. continued receipt of all scheduled payments and benefits under the
employment agreement if Mr. Katz is terminated without cause or if he
terminates his employment with Zany for good reason.
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In addition, Zany has agreed to enter into a two-year consulting agreement
with Mr. Katz upon expiration of Mr. Katz's six month employment agreement or
the termination of his employment without cause or by Mr. Katz for good reason.
The consulting agreement provides for the following payments:
. consulting fees of $5,208.34 per month (or $125,000 in the aggregate)
during the term of the consulting agreement in exchange for Mr. Katz's
provision of his toy retailing expertise for up to sixteen hours during
any thirty day period; and
. the continuation of his promise not to compete with Zany in North
America or solicit Zany employees.
Indemnification and Insurance
The merger agreement requires Zany to provide indemnification and liability
insurance arrangements for officers and directors of Zany and Noodle. See "The
Merger Agreement--Covenants--Directors' and Officers' Indemnification
and Insurance."
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COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Market Price Data
Zany
Zany common stock is listed on the Nasdaq National Market (ticker symbol:
ZANY). The following table sets forth the high and low sales prices of Zany
common stock as reported on Nasdaq since Zany's initial public offering in June
1999. For current price information, shareholders are urged to consult publicly
available sources.
High Low
---- ---
Fiscal Year Ending February 3, 2001
-----------------------------------
First Quarter............................... $ 8.06 $ 3.50
Second Quarter (through May 19, 2000)....... 4.00 2.88
Fiscal Year Ended January 29, 2000
----------------------------------
Second Quarter (beginning June 2, 1999)..... $ 13.13 $ 7.63
Third Quarter............................... 14.88 6.94
Fourth Quarter.............................. 12.75 7.13
On April 20, 2000, the last trading day prior to announcement of the
merger, the closing price of Zany common stock on the Nasdaq National Market was
$4.2812. On _____ ___, 2000 the closing price of Zany common stock on the Nasdaq
National Market was $_____.
Noodle
Noodle common stock is listed on the Nasdaq National Market (ticker
symbol: NKID). The following table sets forth the high and low sales prices of
Noodle common stock as reported on Nasdaq for the periods indicated.
High Low
---- ---
Fiscal Year Ending February 3, 2001
-----------------------------------
First Quarter............................... $ 6.63 $ 4.00
Second Quarter (through May 19, 2000)....... 4.75 3.00
Fiscal Year Ended January 29, 2000
----------------------------------
First Quarter............................... $ 9.00 $ 6.13
Second Quarter.............................. 7.63 4.13
Third Quarter............................... 6.19 3.88
Fourth Quarter.............................. 7.28 3.88
Fiscal Year Ended January 30, 1999
----------------------------------
First Quarter............................... $ 7.56 $ 3.75
Second Quarter.............................. 7.38 5.00
Third Quarter............................... 6.13 3.13
Fourth Quarter.............................. 11.63 5.25
On April 20, 2000, the last trading day prior to announcement of the
merger, the closing price of Noodle common stock on the Nasdaq National Market
was $4.25. On ______ ___, 2000, the closing price of Noodle common stock on the
Nasdaq National Market was $_____.
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Dividend Policies
Zany has never paid cash dividends and anticipates that it will not pay
cash dividends on Zany common stock in the foreseeable future.
Noodle has not paid cash dividends since 1968 and has not paid any stock
dividends since 1974.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement
among Zany, Night Owl Acquisition, Inc. and Noodle, and is not an exhaustive
description. You should read the merger agreement carefully and in its entirety.
A copy of the merger agreement is attached as Appendix I to this joint proxy
statement/prospectus and is incorporated herein by reference.
General
Under the merger agreement, Night Owl Acquisition, Inc., a wholly-owned
subsidiary of Zany, will merge with and into Noodle, with Noodle continuing as
the surviving corporation. Following the merger, Noodle will be led by Zany's
management team.
Closing Matters
Closing
Unless the parties agree otherwise, the closing of the merger will take
place as soon as practicable, but no later than five business days, after all
closing conditions have been satisfied or waived, unless the merger agreement
has been terminated. See "-Conditions" below for a more complete description of
the conditions that must be satisfied prior to closing.
Effective Time
On the closing date, Zany and Noodle will file a certificate of merger with
the Delaware Secretary of State in accordance with the relevant provisions of
the Delaware General Corporation Law. The merger will become effective when the
certificate of merger is filed or at such later time as Zany and Noodle agree
and specify in the certificate of merger.
Conversion of Shares; Treatment of Stock Options
As a result of the merger, each share of Noodle's common stock issued and
outstanding immediately prior to the effective time will be converted into the
right to receive 1.233 shares of Zany common stock, par value $.01 per share.
If you own Noodle common stock, you may exchange your shares of Noodle common
stock for shares of Zany common stock after the merger becomes effective. In
addition, the exchange agent will make a cash payment to you for any fractional
shares of Zany common stock you would otherwise be entitled to receive.
At the effective time of the merger, each outstanding and unexercised
option or right to purchase shares of Noodle common stock granted under the
Noodle stock option plans will be assumed by Zany and converted into an option
or a right to purchase shares of Zany common stock under the same terms and
conditions as were applicable to the options as granted under the Noodle stock
plans. The number of shares of Zany common stock that the converted options will
be exercisable for, and the exercise price of the option, will be adjusted to
reflect the exchange ratio of 1.233.
Each share of Zany common stock will remain outstanding following the
merger and will continue to represent one share of common stock of the combined
company.
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Exchange of Stock Certificates
Before the closing of the merger, Zany will appoint an exchange agent to
handle the exchange of Noodle stock certificates for stock of Zany and the
payment of cash for fractional shares. Soon after the closing of the merger,
the exchange agent will send a letter of transmittal to each former Noodle
shareholder, which is to be used to exchange Noodle stock certificates for stock
of Zany. The letter of transmittal will contain instructions explaining the
procedure for surrendering Noodle stock certificates. You should not return
certificates with the enclosed proxy card.
Noodle shareholders who surrender their stock certificates, together with a
properly completed letter of transmittal, will receive shares of Zany common
stock into which the shares of Noodle common stock were converted in the merger.
After the merger, each certificate that previously represented shares of
Noodle stock will only represent the right to receive the shares of Zany common
stock into which those shares of Noodle common stock have been converted.
After the effective time of the merger, Noodle will not register any
transfers of the shares of Noodle common stock.
Zany shareholders do not need to exchange their stock certificates.
Representations and Warranties
The merger agreement contains representations and warranties of Noodle that
are customary for a transaction of this nature relating to, among other things:
. Noodle's organization, capitalization and authority to enter into the
merger agreement;
. the enforceability of the merger agreement as a binding obligation of
Noodle; any conflicts between the merger agreement and any of Noodle's
other material contracts, any law, or any of Noodle's charter or bylaw
provisions; required filings and consents;
. the accuracy of Noodle's financial statements and filings with the SEC
and Noodle's submission of all required filings;
. material liabilities or obligations incurred by Noodle or any Noodle
subsidiary since January 29, 2000, other than in the ordinary course of
business;
. Noodle's conduct of its business since January 29, 2000 and the absence
of any material adverse effect on the business of Noodle;
. indebtedness and absence of undisclosed liabilities;
. title to Noodle's owned and leased personal property;
. the validity of Noodle's material contracts;
. insurance;
. compliance with laws;
. tax matters;
. the absence of litigation;
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. employee benefit and labor matters;
. environmental matters;
. intellectual property matters;
. adequacy and accuracy of disclosure;
. Noodle's owned and leased real property;
. Noodle's affiliates;
. certain matters with respect to pooling of interests accounting;
. Noodle's financial advisor's opinion;
. brokers and finders in connection with the merger; and
. the shareholder vote required for Noodle's approval and adoption of the
merger agreement and the merger.
The merger agreement also includes representations and warranties by Zany as to:
. Zany's organization, capitalization and authority to enter into the
merger agreement;
. the enforceability of the merger agreement as a binding obligation of
Zany;
. any conflicts between the merger agreement and any of Zany's other
material contracts, any law, or any of Zany's charter or bylaw
provisions;
. required filings and consents;
. the accuracy of Zany's financial statements and filings with the SEC and
Zany's submission of all required filings;
. material liabilities or obligations incurred by Zany or any Zany
subsidiary since January 29, 2000 other than in the ordinary course of
business;
. Zany's conduct of its business since January 29, 2000 and the absence of
any material adverse effect on Zany;
. the absence of litigation;
. compliance with laws;
. adequacy and accuracy of disclosure;
. title to Zany's owned and leased personal property;
. tax matters;
. employee benefit and labor matters;
. environmental matters;
. intellectual property matters;
. Zany's affiliates;
. certain matters with respect to pooling of interests accounting;
. Zany's financial advisor's opinion;
. brokers and finders in connection with the merger;
. the shareholder vote required for Zany's approval of the
merger agreement and the merger; and
. certain matters with respect to Zany's Internet joint venture.
Covenants
The merger agreement contains the following covenants made by Zany and Noodle,
among others.
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Conduct of Noodle's Business
Noodle made covenants concerning the conduct of its business and the
business of its subsidiaries from the date of execution of the merger agreement
until the effective time of the merger. In general, Noodle is required to
conduct its business in the ordinary course in the same manner as previously
conducted and to use its commercially reasonable efforts to preserve intact its
present relationships with customers, suppliers and other third parties. Noodle
has agreed that it will not do any of the following without Zany's prior written
consent:
. amend or propose to amend its charter or bylaws;
. change its capitalization, including (a) stock splits, combinations or
reclassifications, (b) repurchasing or redeeming its capital stock, and
(c) issuing, delivering or selling any shares of its capital stock or
other equity interests, other than in connection with its benefit plans
or the exercise of options;
. acquire, merge or consolidate with or into any corporation or other
business organization or make any equity investment therein;
. encumber or dispose of its assets other than in the ordinary course of
business, with certain specified exceptions;
. incur indebtedness other than in the ordinary course of business, with
certain specified exceptions;
. enter into or modify any material contract, lease or agreement other
than in the ordinary course of business, with certain specified
exceptions;
. make any material change to its accounting methods, principles or
practices;
. initiate any litigation;
. make certain tax elections, settlements or compromises;
. make salary, wage and benefits increases other than in the ordinary
course of business; and
. take any action that would cause the merger not to be treated as a
pooling of interests for accounting purposes and a reorganization
within the meaning of Section 368(a) of the Code.
Conduct of Zany's Business
Zany made covenants concerning the conduct of its business and the business
of its subsidiaries from the date of execution of the merger agreement until the
effective time of the merger. In general, Zany is required to conduct its
business in the ordinary course in the same manner as previously conducted. Zany
has agreed that it will not do any of the following without Noodle's prior
written consent:
. amend or propose to amend its charter or bylaws;
. change its capitalization, including (a) stock splits, combinations or
reclassifications, (b) repurchasing or redeeming its capital stock, and
(c) issuing, delivering or selling any shares of its capital stock or
other equity interests, other than in connection with its benefit plans
or the exercise of options;
. acquire, merge or consolidate with or into any corporation or other
business organization or make any equity investment therein;
. make any change to its accounting policies or procedures except as
required by a change in generally accepted accounted principles; and
. take any action that would cause the merger not to be treated as a
pooling of interests for accounting purposes and a reorganization
within the meaning of Section 368(a) of the Code.
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No Solicitation
Noodle agreed not to, without the prior written consent of Zany,
. solicit, initiate or encourage (including by way of furnishing
information) or take any other action to facilitate knowingly any
inquiries or the making of any proposal that would constitute or
may reasonably be expected to lead to an Acquisition Proposal;
. engage in any discussion or negotiations relating to any
Acquisition Proposal; or
. enter into any agreement with respect to, agree to, approve or
recommend any Acquisition Proposal.
An Acquisition Proposal is a proposal or offer for a tender or exchange
offer, merger, consolidation or other business combination involving Noodle or
any Noodle subsidiary or any proposal to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, Noodle or any
Noodle subsidiary.
Noodle is, however, expressly permitted to:
. prior to the approval of the merger agreement by Noodle's
shareholders, engage in discussions or negotiations with a third
party who (without solicitation or initiation by Noodle) makes an
unsolicited bona fide written Acquisition Proposal, if (1) the
Noodle board of directors determines, in good faith after
consultation with its financial advisors and outside legal
counsel, that such competing proposal would result in a
transaction that is more favorable to Noodle shareholders from a
financial point of view than the transactions contemplated by the
merger agreement and that such third party is financially able to
consummate the Acquisition Proposal (referred to in this document
as a Superior Proposal) and after consultation with its financial
advisors and legal counsel, that such action is necessary for the
board of directors to act in a manner consistent with its
fiduciary duties under applicable law, (2) prior to entering into
discussions or negotiations with such third party, Noodle
receives from such third party a signed confidentiality
agreement in the same form as the confidentiality agreement
executed by Zany and Noodle, and (3) Zany has been notified in
writing by Noodle of the Acquisition Proposal, including all of
its terms and conditions;
. comply with Rule 14d-9 and 14e-2 of the Exchange Act with regard
to a tender or exchange offer; or
. accept a Superior Proposal.
In the event that Noodle accepts a Superior Proposal, it will be obligated
to pay to Zany a termination fee of $2,250,000 plus up to $1,000,000 of Zany's
expenses. See "The Merger Agreement -- Termination; Termination Fees and
Expenses."
In addition, Noodle agreed to notify Zany promptly if it receives any
competing Acquisition Proposal. Additionally, prior to accepting a Superior
Proposal, Noodle agreed to negotiate in good faith with Zany, for a period of
not less than three business days, to make such changes to the terms and
conditions of the merger agreement that would enable Noodle to proceed with the
transactions contemplated by the merger agreement.
Access to Information
Zany and Noodle each agreed to provide the other reasonable access to its
and its subsidiaries' facilities, books and records and to furnish certain
information to the other upon reasonable request. Zany and Noodle each agreed to
comply with all of their respective obligations under a confidentiality
agreement, dated as of February 28, 2000, between Zany and Noodle.
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Shareholders' Meeting
Noodle agreed to use its reasonable best efforts to solicit and secure from
its shareholders the approval and adoption of the merger agreement and the
merger, subject to the fiduciary duties of its board of directors under
applicable law.
Zany agreed to use its reasonable best efforts to solicit and secure from
its shareholders the approval of the merger agreement and the merger, subject to
the fiduciary duties of its board of directors under applicable law.
Reasonable Best Efforts
Each party agreed to use its reasonable best efforts to take all
appropriate actions and to do all things necessary, proper or advisable under
applicable laws, statutes, ordinances, codes, rules and regulations to
consummate and make effective the transactions contemplated by the merger
agreement in the most expeditious manner practicable.
Public Announcements
The parties agreed to consult with each other before making any public
announcements or otherwise communicating with any news media concerning the
merger agreement or the transactions contemplated thereby, unless applicable law
requires.
Notification
The parties agreed to promptly notify each other of the occurrence or any
threatened occurrence of any fact or circumstance that would cause or constitute
a breach of any of the representations and warranties set forth in the merger
agreement or any failure to materially comply with or satisfy any covenant,
condition or agreement set forth in the merger agreement, and use their
respective best efforts to prevent or remedy any such breach.
Consents; Filings; Further Actions
Each party agreed to use its commercially reasonable efforts to comply with
all legal requirements that may be imposed with respect to the merger and to
obtain all authorizations, consents and approvals of governmental entities and
other third parties which may be necessary to complete the transactions
contemplated by the merger agreement, provided that neither party will be
required to divest any assets, except for, in the case of Noodle, stores which
do not account for more than 5% of Noodle's total revenues or, in the case of
Zany, stores which do not account for more than 3% of Zany's total revenues. The
parties agreed to use their commercially reasonable best efforts to resist any
suit, action or proceeding to restrain, prohibit or otherwise oppose the merger
or any other transaction contemplated by the merger agreement; provided that
neither party is obligated to make material expenditures to resist any effort to
oppose the completion of the merger.
Takeover Statutes
Each party agreed that it and its respective board of directors will grant
any approvals and take any actions which would be reasonably necessary to
consummate the merger and the transactions contemplated by the merger
agreement as promptly as practicable, if any takeover statute is or becomes
applicable to the merger.
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and further agreed to act as necessary to eliminate or minimize the statute's
effects on the merger transactions.
Directors' and Officers' Indemnification and Insurance
Zany agreed to maintain in effect the current provisions regarding
indemnification of officers and directors contained in the charter documents and
by-laws of Noodle for a period of six years following the effective time of the
merger. Zany further agreed that it shall cause the surviving corporation to
maintain, for six years following the effective time of the merger, policies of
directors' and officers' liability insurance that are no less advantageous than
those provided to directors and officers of Noodle immediately prior to the
effective time of the merger; provided that Zany is not obligated to provide
such coverage to the extent that the cost of such coverage exceeds 300% of the
cost immediately prior to the effective time of the merger.
Affiliates
Noodle agreed to use all reasonable efforts to cause those parties identified
as Noodle affiliates for pooling purposes to execute and deliver an affiliate
agreement as promptly as practicable, but not later than five business days
prior to the effective time of the merger. Zany agreed to use all reasonable
efforts to cause those parties identified as Zany affiliates for pooling
purposes to execute and deliver an affiliate agreement as promptly as
practicable, but not later than five business days prior to the effective time
of the merger.
Listing
Zany agreed to apply for approval for listing of the Zany common stock to be
issued to Noodle shareholders in the merger on the Nasdaq National Market.
Letters of Accountants
Upon the request of either Zany or Noodle, Zany and Noodle each agreed to use
reasonable best efforts to cause its independent public accountants to deliver
to the other party two comfort letters, one dated approximately as of the date
the registration statement containing this joint proxy statement/prospectus is
declared effective by the SEC and one dated as of the closing date of the
merger, in form reasonably satisfactory to the other party and customary in
scope for comfort letters delivered by independent accountants. In addition,
Zany and Noodle each agreed to use reasonable best efforts to cause its
independent public accountants to deliver to the other party a letter dated as
of the closing date of the merger regarding the qualification of the merger as a
pooling of interests under Opinion 16 of the Accounting Principles Board.
Employee Matters
Zany agreed to treat each Noodle employee who continues employment with the
combined company as if that employee had been employed by Zany for the same
period that he or she had been employed by Noodle for purposes of the employee's
coverage under Zany's benefits plans.
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Corporate Matters
Zany agreed that it will enter into a six-month employment agreement followed
by a two-year consulting agreement with each of Stanley Greenman and Stewart
Katz and that its board of directors will appoint Stanley Greenman to be a Zany
director effective immediately following the completion of the merger.
Other Covenants
The merger agreement also contains covenants relating to, among other things,
delivery of information concerning Noodle's leases and owned real property,
access to Noodle's owned real property and the termination of Noodle's 401(k)
plans.
Conditions to Obligations to Effect the Merger
The merger agreement contains various conditions to the parties' obligations
to effect the merger, including:
. the requisite approval of the Noodle shareholders and the Zany
shareholders;
. the absence of any judicial or quasi-judicial action or litigation that
restrains or prohibits consummation of the merger and the related
transactions or that prohibits or limits the ownership, operation or
control by Noodle, Zany or any of their respective subsidiaries of any part
of their respective businesses or assets, or any action taken by any
governmental entity seeking to prohibit the merger;
. the expiration or termination of any waiting period applicable to the
merger under the HSR Act;
. effectiveness of the registration statement of which this joint proxy
statement/prospectus is a part;
. approval of the Nasdaq National Market, upon official notice of issuance,
of the listing of the Zany common stock to be issued in the merger;
. Zany's receipt of letters from the independent public accountants of
Noodle, one dated approximately the date this joint proxy
statement/prospectus is declared effective by the SEC and one dated as of
the closing date, regarding the ability of Noodle to be a party in a
business combination accounted for as a pooling of interest; and
. Noodle's receipt of letters from the independent public accountants of
Zany, one dated approximately the date this joint proxy
statement/prospectus is declared effective by the SEC and one dated as of
the closing date, stating that the independent public accountants concur
with the management of Zany that the merger will qualify as a pooling-of-
interests.
Additional Conditions to Obligations of Zany
Zany's obligations to complete to merger are subject to additional conditions
including:
. the accuracy of the representations and warranties of Noodle as of the date
of the merger agreement and as of the date of closing, except for such
inaccuracies which, individually or in the aggregate, would not have a
Noodle material adverse effect, as defined in the merger agreement;
. Noodle's performance in all material respects of each of the obligations it
has agreed, under the merger agreement, to perform prior to the closing,
and delivery to Zany of an officer's certificate to that effect;
. the absence of any Noodle material adverse effect, as defined in the merger
agreement;
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. the absence of any litigation or other proceeding, pending or threatened,
which is reasonably likely to be decided adversely to Noodle and reasonably
likely to have a Noodle material adverse effect, as defined in the merger
agreement;
. Zany's receipt of an opinion stating the merger as contemplated in the
merger agreement will be treated for federal income tax purposes as a
reorganization within the meaning of section 368(a) of the Code;
. the fairness opinion given by DLJ shall not have been withdrawn; and
. Zany's receipt of an affiliate agreement from all parties deemed be
Noodle's affiliates, as defined under Rule 145 of the Securities Act.
Additional Conditions to Obligations of Noodle
Noodle's obligations to complete the merger are subject to additional
conditions including:
. the accuracy of the representations and warranties of Zany and Night Owl
Acquisition, Inc. as of the date of the merger agreement and as of the date
of the closing, except for such inaccuracies which, individually or in the
aggregate, would not have a Zany material adverse effect, as defined in the
merger agreement;
. Zany's and Night Owl Acquisition, Inc.'s performance in all material
respects of each of the obligations it has agreed, under the merger
agreement, to perform prior to the closing, and delivery to Noodle of an
officer's certificate to that effect;
. the absence of any Zany material adverse effect, as defined in the merger
agreement;
. Noodle's receipt of an opinion stating the merger as contemplated in the
merger agreement will be treated for federal income tax purposes as a
reorganization within the meaning of section 368(a) of the Code;
. Noodle's receipt of an affiliate agreement from all parties deemed to be
Zany's affiliates, as defined under Rule 145 of the Securities Act
. the execution and delivery by Zany of the employment agreements with
Stanley Greenman and Stewart Katz; and
. the fairness opinion given by PaineWebber Incorporated shall not have been
withdrawn.
Termination; Termination Fees and Expenses
The merger agreement provides that the merger may be abandoned and the merger
agreement may be terminated prior to the merger's effectiveness, in various ways
including:
. by mutual written consent of Zany and Noodle;
. by either Zany or Noodle if the merger is not consummated on or before
October 31, 2000, as long as the party requesting such termination did not,
by its failure to fulfill an obligation under the merger agreement, prevent
consummation of the merger;
. by either Zany or Noodle if any governmental entity or arbitrator with
jurisdiction issues a final order, injunction or decree preventing
consummation of the merger;
. by either Zany or Noodle upon the other entity's breach or failure to
comply with, its obligations under the merger agreement in any material
respect, or any representation or warranty of the other entity being
incorrect in any material respect, and such breaches, failures or
misrepresentations, individually or in the aggregate, would result in a
material adverse effect on that entity, as defined in the merger agreement;
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. by Zany or Noodle after the occurrence of changes or events that,
individually or in the aggregate, have (or are reasonably expected to have)
a material adverse effect on the other entity, as defined in the merger
agreement;
. by Zany if the board of directors of Noodle does not recommend the merger
to Noodle's shareholders or withdraws or modifies its approval or
recommendation of the merger agreement in any adverse manner, recommends to
the shareholders of Noodle any Acquisition Proposal, other than by Zany,
fails to recommend against the tender by the Noodle shareholders of their
shares in a tender offer or exchange offer that has been commenced or with
respect to which an offer to purchase or a registration statement has been
filed or resolves to take any of the preceding actions or if Noodle enters
into, authorizes, recommends or proposes a merger, a sale of all or a
substantial portion of its assets or a sale of beneficial ownership of
securities representing 15% or more of Noodle's voting power;
. by Noodle if the board of directors of Zany withdraws or modifies its
approval or recommendation of the merger agreement in any adverse manner,
or resolves to take any of the preceding actions;
. by Zany or Noodle if the required shareholder approval of either entity is
not obtained;
. by Noodle if Noodle accepts a Superior Proposal or has changed its
recommendation concerning the merger, and, in either case, Noodle has
complied with its obligations regarding non-solicitation under the merger
agreement;
. by Zany or Noodle if the merger is not completed within 30 days following
the fulfillment of the conditions to closing;
. by Zany if DLJ withdraws its fairness opinion; or
. by Noodle if PaineWebber withdraws its fairness opinion.
If the merger agreement is terminated, it becomes void and none of the parties
to the agreement has any liability or further rights or obligations under the
agreement other than the remedies described below. However, if any party
wilfully breaches any of its representations and warranties, or breaches any of
its covenants or agreements under the merger agreement, the breaching party
remains fully liable to the non-breaching parties for such breach.
If the merger agreement is terminated, each party is responsible for the
expenses it incurs, except that if either party terminates the merger agreement
because the other party has breached its representations and warranties or has
failed to comply with its obligations, the breaching party will pay up to $1
million of the non-breaching party's expenses.
However, if
. Zany terminates the merger agreement because the board of directors
of Noodle withdraws its approval, recommends to the shareholders of
Noodle any Acquisition Proposal, other than by Zany, fails to
recommend against the tender by the Noodle shareholders of their
shares in a tender offer or exchange offer or resolves to take any
of the preceding actions or if Noodle enters into, authorizes,
recommends or proposes a merger, a sale or all or a substantial
portion of its assets or a sale of beneficial ownership of
securities representing 15% or more of Noodle's voting power;
. Zany terminates the merger agreement because Noodle breaches its
non-solicitation obligations under the agreement;
. Zany terminates the merger agreement because Noodle's shareholders
do not approve the merger;
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. Noodle terminates the merger agreement because Noodle has accepted a
Superior Proposal or changed its recommendation concerning the
merger, and, in either case, has complied with its obligations
regarding non-solicitation under the merger agreement;
. Zany terminates the merger agreement because the merger is not
completed within 30 days following the fulfillment of the conditions
to closing; or
. Noodle terminates the merger agreement because PaineWebber has
withdrawn its fairness opinion,
then, if after the date of the merger agreement and prior to such termination,
an Acquisition Proposal was made, or within one year following such termination,
Noodle enters into an agreement with respect to, or consummates, an Acquisition
Proposal, Noodle will pay a termination fee of $2,250,000 to Zany within one
business day after such termination or entering into such agreement or
consummating such Acquisition Proposal, plus up to $1,000,000 of Zany's
expenses.
Furthermore, if
. Noodle terminates the agreement because the merger is not completed
within 30 days following the fulfilment of the conditions to
closing;
. Noodle terminates the agreement because the board of directors of
Zany withdraws or modifies its approval or recommendation of the
merger agreement in any adverse manner or has resolved to take any
of the preceding actions; or
. Zany terminates the agreement because DLJ has withdrawn its fairness
opinion;
then Zany will pay a termination fee of $2,250,000 to Noodle within one
business day after such termination, plus up to $1,000,000 of Noodle's expenses.
If either party fails to promptly pay any termination fees due to the other
party under the merger agreement, such party will pay the costs of expenses
(including reasonable legal fees and expenses) in connection with any action
taken to collect payment, plus interest on the amount of the unpaid fee.
Amendment and Waiver
The merger agreement may be amended by Zany and Noodle at any time prior to
the effective time. Any amendment must be in writing signed by all the parties.
Once Noodle's shareholders have voted to approve the merger agreement, however,
no party may make an amendment to the merger agreement that would reduce the
amount or change the type of consideration for which each share of Noodle's
common stock will be exchanged or which would materially and adversely affect
Noodle shareholders.
Prior to the consummation of the merger, any party may:
. extend the time given for the performance of any of the obligations or
other acts of the other parties;
. waive any inaccuracies in the representations and warranties of the other
parties contained herein or in any document delivered by the other parties
pursuant to the merger agreement; and
. waive compliance by the other parties with any of the agreements or
conditions contained in the merger agreement.
Any agreement as to extension or waiver by any party will be valid only as
against such party and only if set forth in writing executed by such party.
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DESCRIPTION OF ZANY CAPITAL STOCK
Zany's authorized capital stock consists of 100,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share.
Common Stock
As of April 29, 2000, Zany's outstanding common stock consisted of
21,683,181 shares of common stock, held by ____ shareholders of record. Holders
of common stock are entitled to one vote for each share held of record on all
matters on which shareholders may vote, and do not have cumulative voting rights
in the election of directors. Holders of common stock are entitled to receive,
as, when and if declared by the board of directors from time to time, such
dividends and other distributions in cash, stock or property from our assets or
funds legally available for such purposes subject to any dividend preferences
that may be attributable to our outstanding preferred stock.
No preemptive, conversion, redemption or sinking fund provisions apply to the
common stock. All outstanding shares of common stock are fully paid and non-
assessable. In the event of Zany's liquidation, dissolution or winding up,
holders of Zany common stock are entitled to share ratably in the assets
available for distribution.
Preferred Stock
There are presently no outstanding shares of preferred stock. Zany's board of
directors, without further action by the shareholders, is authorized to issue an
aggregate of 5,000,000 shares of preferred stock. Zany has no plans to issue a
new series of preferred stock. Zany's board of directors may issue preferred
stock with dividend rates, redemption prices, preferences on liquidation or
dissolution, conversion rights, voting rights and any other preferences, which
rights and preferences could adversely affect the voting power of the holders of
common stock. Issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions or other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring control.
Common Stock Warrants
As of April 29, 2000, Zany has outstanding warrants which
entitle the holders to purchase an aggregate of 15,000 shares of common stock at
an exercise price of $4.00 per share. These warrants expire on various dates
through January 2003.
The exercise price and number of shares of common stock issuable upon the
exercise of each of the warrants may be adjusted upon the occurrence of certain
events, including stock splits, stock dividends, reorganization,
recapitalization, merger or sale of all or substantially all of Zany's assets.
Indemnification of Directors and Officers
Section 1741 of the Pennsylvania Business Corporation Law, provides Zany with
the power to indemnify any officer or director acting in his or her capacity as
a representative of Zany who was, is or is threatened to be made a party to any
action or proceeding for expenses, judgments, penalties, fines and amounts paid
in settlement in connection with such action or proceeding. The indemnity
provisions apply whether the action was instituted by a third party or arose by
or in Zany's
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right. Generally, the only limitation on Zany's ability to indemnify its
officers and directors is if the act violates a criminal statute or if the act
or failure to act is finally determined by a court to have constituted willful
misconduct or recklessness.
Zany's bylaws provide a right to indemnification to the full extent permitted
by law for expenses, attorney's fees, damages, punitive damages, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by any director or officer whether or not the indemnified liability arises or
arose from any threatened, pending or completed proceeding by or in our right by
reason of the fact that such director or officer is or was serving as Zany's
director, officer or employee or, at Zany's request, as a director, officer,
partner, fiduciary or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, unless the act or
failure to act giving rise to the claim for indemnification is finally
determined by a court to have constituted willful misconduct or recklessness.
Zany's bylaws provide for the advancement of expenses to an indemnified party
upon receipt of an undertaking by the party to repay those amounts if it is
finally determined that the indemnified party is not entitled to
indemnification.
Zany's bylaws authorize Zany to take steps to ensure that all persons entitled
to the indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
Limitation of Liability
Zany's bylaws provide that none of its directors shall be personally liable to
Zany or its shareholders for monetary damages for any action taken or failure to
take any action, unless:
. such director has breached or failed to perform such person,s duties under
the Pennsylvania corporate laws; and
. the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
Zany maintains directors and officers' liability insurance to provide its
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no pending litigation or proceeding, and Zany is not aware of
any threatened litigation or proceeding, involving any director, officer,
employee or agent where indemnification will be required or permitted under its
bylaws.
Registration Rights
Certain holders of shares of common stock are entitled to certain registration
rights with respect to Zany securities. These rights are provided under the
terms of agreements between Zany and the holders of such securities. Such
agreements provide, in certain instances, demand and piggyback registration
rights. Registration of shares of common stock pursuant to the exercise of
registration rights under the Securities Act of 1933 would result in such shares
becoming freely tradable without restriction under the Securities Act of 1933
immediately upon the effectiveness of such registration.
Transfer Agent
The transfer agent for Zany's common stock is StockTrans, Inc.
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COMPARISON OF THE RIGHTS OF THE HOLDERS OF NOODLE COMMON STOCK
AND ZANY COMMON STOCK
The rights of Zany shareholders are governed by the Pennsylvania Business
Corporation Law, and the articles of incorporation and bylaws of Zany. The
rights of Noodle shareholders are governed by the Delaware General Corporation
Law, and the certificate of incorporation and bylaws of Noodle. Upon completion
of the merger, Noodle shareholders will become Zany shareholders. The material
differences between the rights of Noodle shareholders and Zany shareholders are
summarized below.
The following discussions are not intended to be complete. You should also
refer to the Pennsylvania corporate law, the Zany articles of incorporation and
the Zany bylaws. Copies of the Zany articles of incorporation, the Zany bylaws,
the Noodle certificate of incorporation and the Noodle bylaws will be sent to
the shareholders of Zany and Noodle, respectively, upon request. See "Where You
Can Find More Information" on page ___.
Dividend Rights
Noodle
Under the Delaware corporate law, a corporation may pay dividends out of
surplus or, if no such surplus exists, out of net profits, for the fiscal year
in which such dividends are declared and/or for its preceding fiscal year,
provided, however, that dividends may not be paid out of net profits if the
capital of such corporation is less than the aggregate amount of capital
represented by the outstanding stock of all classes having a preference upon the
distribution of assets.
Zany
Under the Pennsylvania corporate law, a corporation is prohibited from making
a distribution to shareholders if, after giving effect thereto:
. that corporation would be unable to pay its debts as they become due in
the usual course of business; or
. the total assets of that corporation would be less than the sum of its
total liabilities plus the amount that would be needed, if that
corporation were then dissolved, to satisfy the rights of shareholders
having superior preferential rights upon dissolution to the shareholders
receiving such distribution. For the purpose of this clause, the board of
directors may base its determination on one or more of the following: the
book value, or the current value, of the corporation's assets and
liabilities, unrealized appreciation and depreciation of the corporation's
assets and liabilities or any other method that is reasonable in the
circumstances.
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Number and Election of Directors
Noodle
Under the Delaware corporate law, the certificate of incorporation of a
corporation may authorize cumulative voting in the election of directors. The
Noodle charter does not provide for cumulative voting in the election of
directors. The Noodle certificate of incorporation and bylaws provide that there
be eight members of the Noodle board. Under the Delaware corporate law and the
Noodle bylaws, any director or the entire board of directors may be removed,
with or without cause, by the owners of a majority of the shares then entitled
to vote at an election of directors or by consent of the holders of a majority
of the outstanding stock. The Noodle charter and bylaws provide that the Noodle
board of directors be divided into three classes: two Class 3 directors with
terms expiring at the annual meeting of shareholders in 2000 and triennially
thereafter, three Class 1 directors with terms expiring at the annual meeting of
shareholders in 2001 and triennially thereafter, and three Class 2 directors
with terms expiring at the annual meeting of shareholders in 2002 and
triennially thereafter.
Zany
Under the Pennsylvania corporate law, cumulative voting is required unless
otherwise provided in the articles of incorporation. The Zany charter provides
that shareholders shall not have the right to cumulate their votes for the
election of directors. Under the Pennsylvania corporate law, the board of
directors may be removed at any time with or without cause by the vote of
shareholders entitled to vote thereon. Furthermore, the articles of a
corporation may not prohibit the removal of directors by the shareholders for
cause. The Zany bylaws state that the entire board of directors or any
individual directors may be removed only for cause by a vote of a majority of
the shareholders entitled to vote thereon. The Zany bylaws provide that the
number of directors shall be fixed from time to time by resolution of the board
of directors. There are currently seven members of the Zany board. Upon the
consummation of the merger, the Zany board will be increased to eight members
and shall include Mr. Stanley Greenman, currently a Noodle director.
Fiduciary Duties of Directors
Noodle
Under the Delaware corporate law, the business and affairs of a corporation
are managed by or under the direction of its board of directors. In exercising
their powers, directors are charged with a fiduciary duty of care to protect the
interests of the corporation and a fiduciary duty of loyalty to act in the best
interests of its shareholders. Under the Delaware corporate law, the duty of
care requires that the directors act in an informed and deliberative manner and
inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of care also requires that
directors exercise care in overseeing and investigating the conduct of corporate
employees. The duty of loyalty maybe summarized as the duty to act in good
faith, not out of self-interest, and in a manner which the directors reasonably
believe to be in the best interests of the shareholders. A party challenging the
propriety of a decision of a board of directors bears the burden of rebutting
the applicability of the presumptions afforded to directors by the "business
judgment rule." If the presumption is not rebutted, the business judgment rule
attaches to protect the directors and their decisions, and their business
judgments will not be second guessed. Where, however, the presumption is
rebutted, the directors bear the burden of demonstrating the entire fairness of
the relevant transaction. Notwithstanding the
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foregoing, Delaware courts subject directors' conduct to enhanced scrutiny in
respect of defensive actions taken in response to a threat to corporate control
and approval of a transaction resulting in a sale of control of the corporation.
Zany
The fiduciary duties of directors are similar under the Pennsylvania corporate
law to the duties prescribed under the Delaware corporate law. Under the
Pennsylvania corporate law, directors are required to discharge their duties in
good faith and in a manner reasonably believed to be in the best interests of
the corporation. They are required to use such care, including reasonable
inquiry, skill and diligence, as a person of ordinary prudence would use under
similar circumstances. Unlike the Delaware corporate law, however, the
Pennsylvania corporate law includes a provision specifically permitting
directors, in discharging their duties, to consider the effects of any action
taken by them upon any or all groups affected by such action, including
shareholders, employees, suppliers, customers and creditors of such corporation,
and upon communities in which offices or other establishments of such
corporation are located. Furthermore, unlike the Delaware corporate law, the
Pennsylvania corporate law also makes clear that directors have no greater
obligation to justify their activities and need not meet any higher burden of
proof in the context of a potential or proposed acquisition of control than in
any other context.
Liability of Directors
Noodle
The Delaware corporate law permits a corporation to include in its certificate
of incorporation a provision limiting or eliminating the liability of its
directors to such corporation or its shareholders for monetary damages arising
from a breach of fiduciary duty, except for:
. a breach of the duty of loyalty to the corporation or its shareholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law ;
. a declaration of a dividend or the authorization of the repurchase or
redemption of stock in violation of the Delaware corporate law; or
. any transaction from which the director derived an improper personal
benefit.
The Noodle charter contains such a provision eliminating the liability of its
directors to such extent.
Zany
Under the Pennsylvania corporate law, a corporation may include in its bylaws
a provision, adopted by a vote of its shareholders, that eliminates the personal
liability of its directors, as such, for monetary damages for any action taken
or the failure to take any action unless:
. such directors have breached or failed to perform their duties; and
. the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
A Pennsylvania corporation is not empowered, however, to eliminate personal
liability where the responsibility or liability of a director is pursuant to any
criminal statute or is for the payment of taxes pursuant to any federal, state
or local law.
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Indemnification of Directors and Officers
Noodle
Under the Delaware corporate law, a corporation may indemnify any person
involved in a third party action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of being a director, officer,
employee or agent of the corporation, against expenses (including attorneys'
fees), judgments, fines and settlement amounts actually and reasonably incurred
in connection with such action, suit or proceeding or incurred by reason of such
persons being or having been a representative of such corporation, if he or she
acted in good faith and reasonably believed that his or her actions were in or
not opposed to the best interests of such corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe that his or her conduct
was unlawful. Under the Delaware corporate law, a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust of
other enterprise against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper. The Delaware corporate law also provides that a corporation
may advance to a director or officer expenses incurred by him in defending any
action, upon receipt of an undertaking by the present or former director or
officer to repay the amount advanced if it is ultimately determined that he is
not entitled to indemnification. A determination as to the amount of the
indemnification to be made by the corporation shall be made, with respect to a
person who is a director or officer at the time of that determination by a
majority vote of the directors who are not parties to that action, even though
less than a quorum, or by a committee of such directors designated by majority
vote of such directors, even though less than a quorum, or if there are no such
directors, or, if these directors so direct, by independent legal counsel, or by
the shareholders. If, however, a present or former director or officer is
successful in defending a third party or derivative action, indemnification for
expenses incurred is mandatory. The Delaware corporate law provides further that
the provisions for indemnification contained therein are nonexclusive of any
other rights to which the party may be entitled under any bylaw, agreement, vote
of shareholders, disinterested directors or otherwise. The Noodle bylaws provide
for indemnification of any person to the fullest extent permitted bylaw and
authorize Noodle to purchase and maintain insurance on behalf of any such
person.
Zany
The provisions of the Pennsylvania corporate law regarding indemnification are
substantially similar to those of the Delaware corporate law. Unlike the
Delaware corporate law, however, the Pennsylvania corporate law expressly
permits indemnification in connection with any action, including a derivative
action, unless a court determines that the acts or omissions giving rise to the
claim constituted willful misconduct or recklessness. The Zany bylaws provide
for indemnification of representatives against liability incurred by reason of
the fact that such representative was serving in an indemnified capacity except
where
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indemnification is expressly prohibited by applicable law, or where a
determination is made that the representative's conduct constituted willful
misconduct or recklessness within the Pennsylvania corporate law, was based upon
or attributable to the receipt by the representative of a personal benefit to
which the representative is not legally entitled or was otherwise unlawful.
Annual Meetings
Noodle
Under the Delaware corporate law, if the annual meeting for the election of
directors is not held on the designated date, or action by written consent to
elect directors in lieu of an annual meeting has not been taken, the directors
are required to cause that meeting to be held as soon as is convenient. If there
is a failure to hold the annual meeting or to take action by written consent to
elect directors in lieu of an annual meeting for a period of 30 days after the
designated date for the annual meeting, or if no date has been designated for a
period of 13 months after latest to occur of the organization of the
corporation, its last annual meeting or the last action by written consent to
elect directors in lieu of an annual meeting, the court of chancery may
summarily order a meeting to be held upon the application of any shareholder or
director.
Zany
Under the Pennsylvania corporate law, if the annual meeting for election of
directors is not held within six months after the designated date, any
shareholder may call the meeting at any time thereafter.
Special Meetings
Noodle
Under the Delaware corporate law, a special meeting of the shareholders may be
called by the board of directors or any other person as may be authorized by the
certificate of incorporation or the bylaws. The Noodle bylaws state that a
special meeting of the shareholders may be called only by the Chairman of the
Board, the President, the Vice Chairman of the Board or a majority of the board
of directors.
Zany
Under the Pennsylvania corporate law, special meetings of shareholders may be
called by the board of directors, by any officers or by any other persons as
provided in the bylaws, and, unless otherwise provided in the articles, by
shareholders entitled to cast at least 20% of the votes that all shareholders
are entitled to cast at a particular meeting. The Zany bylaws, however, provide
that special meetings of the shareholders may be called at any time only by the
Chief Executive Officer or a majority of the board of directors and may not be
called by shareholders.
Action by Shareholders Without a Meeting
Noodle
The Delaware corporate law permits the shareholders of a corporation to
consent in writing to any action without a meeting, unless the certificate of
incorporation of that corporation provides otherwise, provided this consent is
signed by shareholders having at least the minimum number of votes required to
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authorize that action at a meeting of shareholders at which all shares entitled
to vote thereon were present and voted. The Noodle charter does not restrict the
ability of Noodle shareholders to act by written consent.
Zany
Under the Pennsylvania corporate law, unless the bylaws of a corporation
provide otherwise, any corporate action may be taken without a meeting, by
partial or unanimous written consent. The Zany bylaws allow shareholders to take
action without a meeting by partial or unanimous written consent.
Shareholder Proposals
Noodle
The Delaware corporate law does not include a provision restricting the manner
in which nominations for directors may be made by shareholders or the manner in
which business may be brought before a meeting. The Noodle bylaws provide that
for business to be properly brought at an annual meeting, a shareholder must
give notice of that business to Noodle. This notice must be received by Noodle
not less than 75 days nor more than 120 days prior to the anniversary date of
the annual meeting for the prior year. If Noodle schedules its annual meeting
more than 30 days before or more than 60 days after that anniversary date, the
shareholder's notice must be received by Noodle no later than the later of 75
days prior to the date of the annual meeting or 15 days after public
announcement of the date of the annual meeting is made by Noodle. The notice
must set forth, among other things, a description of the business the
shareholder seeks to bring at the meeting, the name and address of the
shareholder and the class and number of shares of capital stock owned by the
shareholder.
Zany
The Pennsylvania corporate law, like the Delaware corporate law, does not
include a provision restricting the manner in which nominations for directors
may be made by shareholders or the manner in which business may be brought
before a meeting. The Zany bylaws provide that for business to be properly
brought at an annual meeting, a shareholder must give notice of that business to
Zany. This notice must be received by Zany not less than 90 days nor more than
120 days prior to the anniversary date of the annual meeting for the prior year.
If Zany schedules its annual meeting more than 30 days before or more than 60
days after that anniversary date, the shareholder's notice must be received by
Zany no later than the later of 90 days prior to the date of the annual meeting
or 10 days after public announcement of the date of the annual meeting is made
by Zany. The notice must set forth, among other things, a description of the
business the shareholder seeks to bring at the meeting, a representation that
the shareholder is a holder of record of stock of Zany entitled to vote at such
annual meeting and intends to appear in person or by proxy at the meeting to
bring the business before the meeting, the name and address of the shareholder
and the class and number of shares of capital stock owned by the shareholder.
Charter Amendments
Noodle
Under the Delaware corporate law, an amendment or change to the certificate of
incorporation generally requires the approval of the board of directors,
followed by the approval of such amendment by the affirmative vote of the owners
of a majority of the shares entitled to vote thereon. When an amendment of the
certificate would adversely affect the rights of a class of stock or the rights
of a series of a class, the Delaware corporate law provides that the enactment
of the amendment also requires the affirmative vote of the owners of a majority
of the outstanding shares of such class or series.
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Zany
Under the Pennsylvania corporate law, unlike the Delaware corporate law, an
amendment to the articles only requires the approval of the board of directors
followed by the affirmative vote of a majority of the votes cast by all
shareholders entitled to vote thereon and, if any class or series of shares is
entitled to vote thereon as a class, the affirmative vote of a majority of the
votes cast in each such class vote. Furthermore, the Pennsylvania corporate law
provides that, unless otherwise provided in the articles, an amendment of the
articles of a corporation need not be adopted by the board of directors prior to
its submission to the shareholders for approval if it is proposed by a petition
of shareholders entitled to cast at least 10% of the votes that all shareholders
are entitled to cast thereon.
Amendments to Bylaws
Noodle
Under the Delaware corporate law, bylaws may be adopted, amended or
repealed by the shareholders entitled to vote thereon; provided, however, that
any corporation may, in its certificate of incorporation, confer this power upon
the directors, provided the power vested in the shareholders shall not be
divested or limited where the board of directors also has such power. The Noodle
charter and bylaws vest the board of directors with the authority to adopt,
amend or repeal bylaws subject to the power of the shareholders to make or
repeal bylaws.
Zany
Under the Pennsylvania corporate law, bylaws may be adopted, amended and
repealed by the shareholders entitled to vote thereon. This authority may be
expressly vested in the board of directors by the bylaws, subject to the power
of the shareholders to change such action, unless the subject of the amendment
is solely within the province of the shareholders. The Zany bylaws vest the
board of directors with the authority to adopt, amend or repeal bylaws
subject to the power of the shareholders to make or repeal bylaws.
Mergers and Major Transactions
Noodle
Under the Delaware corporate law, whenever the approval of the shareholders
of a corporation is required for an agreement of merger or consolidation or for
a sale, lease or exchange of all or substantially all of its assets, such
agreement, sale, lease or exchange must be approved by the affirmative vote of
the owners of a majority of the outstanding shares entitled to vote thereon.
Notwithstanding the foregoing, unless required by its certificate of
incorporation, no vote of the shareholders of a constituent corporation
surviving a merger is necessary to authorize a merger if:
. the agreement of merger does not amend in any respect the certificate
of incorporation of such constituent corporation;
. each share of stock of such constituent corporation outstanding
immediately prior to such merger is to be an identical outstanding or
treasury share of the surviving corporation after such merger; and
. either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into such common stock
are to be issued under such agreement of merger, or the number of
shares of common stock issued or so issuable does not exceed 20% of
the number thereof outstanding immediately prior to such merger.
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<PAGE>
In addition, the Delaware corporate law provides that a parent corporation
that is the record holder of at least 90% of the outstanding shares of each
class of stock of a subsidiary may merge such subsidiary into such parent
corporation without the approval of such subsidiary's shareholders or board of
directors and without the approval of the parent's shareholders.
Zany
Under the Pennsylvania corporate law, shareholder approval is required for
the sale, lease, exchange or other disposition of all, or substantially all, of
the property and assets of a corporation when not made in the usual and regular
course of the business of such corporation or for the purpose of relocating the
business of such corporation or in connection with the dissolution or
liquidation of the corporation. Unlike the Delaware corporate law, however, in
cases where shareholder approval is required, a merger, consolidation, sale,
lease, exchange or other disposition must be approved by a majority of the votes
cast by all shareholders entitled to vote thereon. Under the Pennsylvania
corporate law, unless required by the bylaws of a constituent corporation,
shareholder approval is not required for a plan of merger or consolidation if:
. the surviving or new corporation is a domestic corporation whose
articles are identical to the articles of such constituent
corporation;
. each share of such constituent corporation outstanding immediately
prior to the merger or consolidation will continue as or be converted
into, except as otherwise agreed to by the holder thereof, an
identical share of the surviving or new corporation; and
. such equity plan provides that the shareholders of such constituent
corporation will hold in the aggregate shares of the surviving or new
corporation having a majority of the votes entitled to be cast
generally in an election of directors.
In addition, the Pennsylvania corporate law provides that no shareholder
approval is required if, prior to the adoption of such equity plan, another
corporation that is a party to such equity plan owns 80% or more of the
outstanding shares of each class of such constituent corporation.
Dissenters' Rights of Appraisal
Noodle
Under the Delaware corporate law, unless the certificate of incorporation
of a corporation provides otherwise, there are no appraisal rights provided in
the case of certain mergers, a sale or transfer of all or substantially all of
its assets or an amendment to the corporation's certificate of incorporation.
Moreover, the Delaware corporate law does not provide appraisal rights in
connection with a merger or consolidation, unless the certificate of
incorporation provides otherwise, to the owners of shares of a corporation that,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at the meeting of shareholders to act upon the merger or
consolidating agreements, is either:
. listed on a national securities exchange or designated as a national
market system security by the National Association of Securities
Dealers, Inc., or
. held of record by more than 2,000 shareholders, unless the applicable
agreement of merger or consolidation requires the owners of these
shares to receive, in exchange for these shares, anything other than:
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<PAGE>
. shares of stock of the resulting or surviving corporation;
. shares of stock of any other corporation listed on a national
securities exchange, designated as described above, or held of record
by more than 2,000 holders; or
. cash in lieu of fractional shares or any combination of the foregoing.
In addition, the Delaware corporate law denies appraisal rights to the
shareholders of the surviving corporation in a merger if that merger did not
require for its approval the vote of the shareholders of the surviving
corporation.
Zany
The Pennsylvania corporate law provides that shareholders of a corporation
have a right of appraisal with respect to specified corporate actions,
including:
. a plan of merger, consolidation, division, as defined in Section 1951 of
the Pennsylvania corporate law share exchange or conversion, as defined in
Section 1961 of the Pennsylvania corporate law;
. certain other plans or amendments to its articles in which disparate
treatment is accorded to the holders of shares of the same class or series;
and
. a sale, lease, exchange or other disposition of all or substantially all of
the corporation's property and assets, except if, such sale, lease,
exchange or other disposition is:
. made in connection with the dissolution or liquidation of the
corporation;
. the acquiring corporation owns all of the outstanding shares of the
acquired corporation or the voting rights, preferences, limitations or
relative rights of the acquired corporation are not altered thereby;
or
. the assets sold, leased, exchanged or otherwise disposed of are
simultaneously leased back to the corporation.
Under the Pennsylvania corporate law, appraisal rights are not provided,
however, to the holders of shares of any class that is either listed on a
national securities exchange or held of record by more than 2,000 shareholders
unless:
. such shares are not converted solely into shares of the acquiring,
surviving, new or other corporation and cash in lieu of fractional
shares;
. such shares constitute a preferred or special class of stock, and the
articles of such corporation, the corporate action under consideration or
the express terms of the transaction encompassed in such corporate action
do not entitle all holders of the shares of such class to vote thereon
and the transaction requires for the adoption thereof the affirmative
vote of a majority of the votes cast by all shareholders of such class;
or
. such shares constitute a group of a class or series that are to receive
the same special treatment in the corporate action under consideration,
and the holders of such group are not entitled to vote as a special class
in respect of such corporate action.
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<PAGE>
Anti-Takeover Provisions
Noodle
Under the Delaware corporate law, a corporation is prohibited from engaging in
any business combination with an interested shareholder who, together with his
affiliates or associates owns, or within a three-year period did own, 15% or
more of the corporation's voting stock, unless:
. prior to the time the shareholder became an interested shareholder, the
board of directors approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder;
. the interested shareholder owned at least 85% of the voting stock of the
corporation, excluding specified shares, upon consummation of the
transaction which resulted in the shareholder becoming an interested
shareholder; or
. on or subsequent to the time the shareholder became an interested
shareholder, the business combination is approved by the board of directors
of the corporation and authorized by the affirmative vote, at an annual or
special meeting and not by written consent, by at least 66 2/3% of the
outstanding voting shares of that corporation, excluding shares held by
that interested shareholder. A business combination generally includes:
. mergers, consolidations and sales or other dispositions of 10% or more
of the assets of a corporation to or with an interested shareholder;
. certain transactions resulting in the issuance or transfer to an
interested shareholder of any stock of the corporation or its
subsidiaries; and
. other transactions resulting in a disproportionate financial benefit
to an interested shareholder.
This provision of the Delaware corporate law does not apply to a corporation
if, subject to certain requirements, the certificate of incorporation or bylaws
contain a provision expressly electing not to be governed by this provision or
the corporation does not have voting stock either listed on a national
securities exchange, authorized for quotation on an inter-dealer quotation
system of a registered national securities association or held of record by more
than 2,000 shareholders.
Zany
The Pennsylvania corporate law contains provisions applicable to publicly-held
Pennsylvania corporations that may be deemed to have an anti-takeover effect.
Zany has opted out of all but Section 1715 of the Pennsylvania corporate law,
which remains applicable to Zany.
Under Section 1715 of the Pennsylvania corporate law, directors of a
corporation are not required to regard the interests of the shareholders as
being dominant or controlling in considering the best interests of the
corporation. The directors may consider, to the extent they deem appropriate,
such factors as:
. the effects of any action upon any group affected by that action, including
shareholders, employees, suppliers, customers and creditors of the
corporation and upon communities in which offices or other establishments
of the corporation are located;
. the short term and long term interests of the corporation, including
benefits that may accrue to the corporation from its long term plans and
the possibility that these interests may be best served by the continued
independence of the corporation;
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<PAGE>
. the resources, intent and conduct of any person seeking to acquire control
of the corporation; and
. all other pertinent factors.
The Pennsylvania corporate law also provides directors with broad discretion
with respect to actions that may be taken in response to acquisitions or
proposed acquisitions of corporate control.
Section 1715 of the Pennsylvania corporate law further provides that any act
of Zany's board of directors, a committee of the board or an individual director
relating to or affecting an acquisition or potential or proposed acquisition of
control to which a majority of Zany's disinterested directors have assented will
be presumed to satisfy the standard of care set forth in the Pennsylvania
corporate law, unless it is proven by clear and convincing evidence that Zany's
disinterested directors did not consent to such act in good faith after
reasonable investigation. As a result of this and the other provisions of
Section 1715 of the Pennsylvania corporate law, Zany's board of directors are
provided with broad discretion with respect to actions that may be taken in
response to acquisitions or proposed acquisitions of corporate control.
Section 1715 of the Pennsylvania corporate law may discourage open market
purchases of Zany's common stock or a non-negotiated tender or exchange offer
for Zany common stock and, accordingly, may be considered disadvantageous by a
shareholder who would desire to participate in any such transaction. In
addition, Section 1715 of the Pennsylvania corporate law may have a depressive
effect on the price of Zany's common stock.
In addition, the ability of Zany's board of directors to establish the rights
of, and to issue, substantial amounts of preferred stock without the need for
shareholder approval may discourage, delay or prevent a change in control. Such
preferred stock, among other things, may be used to create voting impediments
with respect to any changes in control or to dilute the stock ownership of
holders of common stock seeking to obtain control.
Dissolution
Noodle
Under the Delaware corporate law, if the board of directors of the
corporation deems it advisable that the corporation should be dissolved and a
majority of the outstanding stock of the corporation entitled to vote thereon
votes in favor of the proposed dissolution, the corporation shall be dissolved
upon the filing of a certificate of dissolution with the Secretary of State of
the State of Delaware. The corporation shall continue after dissolution for the
purposes of defending suits and settling its affairs for a three-year period.
The Delaware corporate law sets forth certain payment and distribution
procedures a dissolving corporation must follow in connection with winding up
its affairs. Such procedures include certain notification requirements and,
under certain circumstances, obtaining the approval of the Delaware court of
chancery. Under the Delaware corporate law, directors of a dissolved corporation
that comply with the payment and distribution procedures provided therein shall
not be personally liable to the claimants of the dissolved corporation.
Zany
Under the Pennsylvania corporate law, if the board of directors adopts a
resolution recommending that the corporation be dissolved, the shareholders must
adopt the resolution by the affirmative vote of a
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<PAGE>
majority of the votes cast by all shareholders entitled to vote thereon. Unlike
the Delaware corporate law, the Pennsylvania corporate law provides two
different procedures for the corporation to provide for the winding up and
distribution of the corporation=s assets. The board of directors of the
corporation may elect that the dissolution shall proceed under Subchapter H or
under Section 1975 of the Pennsylvania corporate law. Under Section 1975, the
corporation must provide for the liabilities of the corporation prior to filing
the articles of dissolution in the Pennsylvania Department of State. Directors
of corporations that elect to follow this procedure are held to the standard of
care that applies to all of their other duties. The Subchapter H provision is
largely analogous to the procedure under the Delaware corporate law. Under the
Pennsylvania corporate law, however, the corporation only continues to exist for
the purpose of settling its affairs for a period of two years. Furthermore, the
court in determining the amount of security that shall be posted by the
dissolved corporation shall consider the amount that would be reasonably likely
to be sufficient to provide compensation for claims that are unknown but that
are likely to arise or become known for a period of only two years after the
dissolution of the corporation.
Shareholder Rights Plan
Noodle
Noodle entered into a Rights Agreement dated as of May 1, 1998 between Noodle
and ChaseMellon Shareholder Services, L.L.C., as Right Agent, as amended,
pursuant to which Noodle has issued rights, exercisable only upon the occurrence
of certain events (which does not include this transaction), to purchase its
series A junior participating preferred stock.
Zany
Zany does not have a shareholder rights plan.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements combine the
historical statements of operations of Zany and Noodle, referred to in this
section as the combined company, after giving effect to the merger, as if the
merger had occurred on February 2, 1997, and the historical balance sheet of the
combined company as if the merger had occurred on January 29, 2000, in each case
using the "pooling of interests" method of accounting. The following unaudited
pro forma information should be read in conjunction with the historical
financial statements of each of Zany and Noodle
The pro forma amounts are presented for informational purposes only and are
not necessarily indicative of the results of operations of the combined company
that would have actually occurred had the merger been consummated as of February
2, 1997 or of the financial condition of the combined company had the merger
been consummated as of January 29, 2000 or of the future results of operations
or financial condition of the combined company. The pro forma information does
not reflect any synergies anticipated as a result of the merger, in particular
the elimination of costs associated with Noodle's status as a public company and
other administrative savings. There can be no assurances that such synergies
will be realized.
Zany and Noodle estimate that they will incur direct transaction costs of
approximately $3.0 million, net of tax, associated with the merger, which will
be charged to operations in the quarter in which the merger is consummated. In
addition, it is expected that following the merger, the combined company will
incur additional expenses, which are currently estimated to range from $10.0 to
$13.0 million, net of tax, associated with the merger and integrating the
operations of the two companies. Merger and integration expenses are not
reflected in the accompanying unaudited pro forma combined financial statements.
83
<PAGE>
THE COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
---------------------------
Zany Noodle Adjustments Combined
---- ------ ----------- ---------
<S> <C> <C> <C> <C>
NET SALES.............................................. $241,194 $135,038 $ $376,232
COST OF GOODS SOLD, including occupancy costs.......... 165,950 82,770 19,132(a)(b) 267,852
-------- -------- -------- --------
Gross profit......................................... 75,244 52,268 (19,132) 108,380
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 63,592 49,356 (20,017)(a)(c) 92,931
-------- -------- -------- --------
Operating income (loss).............................. 11,652 2,912 885 15,449
INTEREST INCOME........................................ 520 116 636
INTEREST EXPENSE....................................... (1,037) (616) (1,653)
-------- -------- -------- --------
Income before income tax benefit (expense)........... 11,135 2,412 885 14,432
INCOME TAX BENEFIT (EXPENSE)........................... (4,231) 7,271 (336)(d) 2,704
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS...................... $ 6,904 $ 9,683 $ 549 $ 17,136
======== ======== ======== ========
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic................................................ $ .44 $ .68(e)
======== ========
Diluted.............................................. $ .33 $ .56(e)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................ 15,834 9,374(f) 25,208
======== ======== ========
Diluted.............................................. 21,211 9,569(f) 30,780
======== ======== ========
</TABLE>
___________
(a) Includes reclassifications of $19,703 to conform Noodle's presentation of
cost of goods sold, including occupancy costs, to Zany's financial
reporting presentation.
(b) Includes adjustments to conform Noodle's accounting policy for inventory
capitalization to Zany's accounting policy.
(c) Includes adjustment to conform Noodle's adoption of an accounting principle
for start-up costs to that of Zany.
(d) Represents tax effect of (b) and (c) above.
(e) Includes a tax benefit recorded by Noodle due to the recognition of their
deferred tax asset representing net income per pro forma basic and diluted
share of $0.29 and $0.24, respectively.
(f) Represents Noodle's weighted average shares outstanding for the period
adjusted for the exchange ratio of 1.233.
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THE COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
Zany Noodle Adjustments Combined
---- ------ ----------- --------
<S> <C> <C> <C> <C>
NET SALES...................................... $168,471 $107,886 $ $276,357
COST OF GOODS SOLD, including
occupancy costs............................. 118,153 65,405 15,395 (a)(b) 198,953
-------- -------- -------- --------
Gross profit 50,318 42,481 (15,395) 77,404
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...................... 46,376 38,804 (15,367)(a)(c) 69,813
-------- -------- -------- --------
Operating income............................ 3,942 3,677 (28) 7,591
INTEREST INCOME................................ 81 269 350
INTEREST EXPENSE............................... (1,211) (194) (1,405)
-------- -------- -------- --------
Income before income tax benefit (expense).. 2,812 3,752 (28) 6,536
INCOME TAX BENEFIT (EXPENSE)................... 6,187 --- 10 (d) 6,197
-------- -------- -------- --------
NET INCOME..................................... $ 8,999 $ 3,752 $ (18) $ 12,733
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic........................................ $ 1.67 $ .86 (e)
======== ========
Diluted...................................... $ .51 $ .47 (e)
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic........................................ 5,373 9,356 (f) 14,729
======== ======== ========
Diluted...................................... 17,770 9,521 (f) 27,291
======== ======== ========
</TABLE>
____________
(a) Includes reclassifications of $15,640 to conform Noodle's presentation of
cost of goods sold, including occupancy costs, to Zany's financial reporting
presentation.
(b) Includes adjustments to conform Noodle's accounting policy for inventory
capitalization to Zany's accounting policy.
(c) Includes adjustment to conform Noodle's adoption of an accounting principle
for start-up costs to that of Zany.
(d) Represents tax effect of (b) and (c) above.
(e) Includes a tax benefit of $7,166 recorded by Zany due to the recognition of
their deferred tax asset representing net income per pro forma basic and
diluted share of $0.49 and $0.26, respectively.
(f) Represents Noodle's weighted average shares outstanding for the period
adjusted for the exchange ratio of 1.233.
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<PAGE>
THE COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
Zany Noodle Adjustments Combined
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
NET SALES...................................... $123,345 $81,664 $ $205,009
COST OF GOODS SOLD, including
occupancy costs............................. 89,452 50,388 14,073(a)(b) 153,913
-------- ------- -------- --------
Gross profit.............................. 33,893 31,276 (14,073) 51,096
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...................... 33,581 33,552 (14,300)(a)(c) 52,833
-------- ------- -------- --------
Operating income (loss)................... 312 (2,276) 227 (1,737)
INTEREST INCOME................................ 253 448 701
INTEREST EXPENSE............................... (718) (90) (808)
-------- ------- -------- --------
Loss before income tax benefit............. (153) (1,918) 227 (1,844)
INCOME TAX BENEFIT............................. --- --- -- ---
-------- ------- -------- --------
NET LOSS....................................... $ (153) $(1,918) $ 227 $ (1,844)
======== ======= ======== ========
NET LOSS PER COMMON SHARE:
Basic........................................ $ (.03) $ (.13)
======== ========
Diluted...................................... $ (.03) $ (.13)
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic........................................ 5,085 9,346(d) 14,431
======== ======== ========
Diluted...................................... 5,085 9,355(d) 14,440
======== ======== ========
</TABLE>
______________
(a) Includes reclassifications of $14,064 to conform Noodle's presentation of
cost of goods sold, including occupancy costs to Zany's financial
reporting presentation.
(b) Includes adjustments to conform Noodle's accounting policy for inventory
capitalization to Zany's accounting policy.
(c) Includes adjustment to conform Noodle's adoption of an accounting principle
for start-up costs to that of Zany.
(d) Represents Noodle's weighted average shares outstanding for the period
adjusted for the exchange ratio of 1.233.
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THE COMBINED COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 29, 2000
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
---------------------------
Zany Noodle Adjustments Combined
---- ------ ----------- --------
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................... $ 24,550 $ 491 $ $ 25,041
Receivables, net.................................... 4,118 761(e) 4,879
Inventories, net.................................... 71,020 33,610 1,674(a) 106,304
Deferred tax asset.................................. 1,496 1,448 1,226(a)(b) 4,170
Prepaid expenses.................................... 1,458 3,244 (761)(e) 3,941
-------- ------- -------- --------
Total current assets................................. 102,642 38,793 2,900 144,335
PROPERTY AND EQUIPMENT, net............................ 34,602 28,931 63,533
DEFERRED TAX ASSET..................................... 1,259 4,992 6,251
OTHER ASSETS, net...................................... 5,223 166 5,389
-------- ------- -------- --------
$143,726 $72,882 $ 2,900 $219,508
======== ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
Current portion of long-term debt................... $ 2,578 $ 4,019 $ $ 6,597
Line of credit...................................... - - -
Accounts payable.................................... 19,898 9,498 29,396
Income taxes payable................................ - - -
Accrued liabilities................................. 13,696 9,976 2,569(b)(d) 26,241
-------- ------- --------- --------
Total current liabilities............................ 36,172 23,493 2,569 62,234
-------- ------- --------- --------
DEFERRED RENT.......................................... 5,002 - 2,331 7,333
-------- ------- --------- --------
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS, less
current portion 3,855 689 4,544
-------- ------- --------- --------
SHAREHOLDERS' EQUITY:
Common Stock........................................ 216 9 86(c) 311
Additional paid-in capital.......................... 104,190 43,097 (3,783)(c) 143,504
Retained earnings (deficit)......................... (5,709) 9,291 (2,000)(a)(b) 1,582
Less: treasury stock............................... - (3,697) 3,697(c) -
-------- ------- --------- --------
Total shareholders' equity........................... 98,697 48,700 (2,000) 145,397
-------- ------- --------- --------
$143,726 $72,882 $ 2,900 $219,508
======== ======= ========= ========
</TABLE>
________________
(a) Includes adjustment to conform Noodle's accounting policy for inventory
capitalization to Zany's accounting policy, and the related tax effect.
(b) Includes $4.9 million in accrued expenses associated with the merger
representing estimated transaction costs that will be charged to expense
upon consummation of the merger, and the related tax effect. The accrual
excludes other merger and integration expenses which are currently estimated
to be in the range of $10.0 to $13.0 million, net of tax.
(c) Represents the exchange of Noodle's Common Stock for Zany's Common Stock
and the elimination of Noodle's Common Stock.
(d) Includes reclassification of $2,331 in deferred rent.
(e) Represents reclassification of receivables for conformity with Zany's
presentation.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF ZANY
Zany provides the following financial information to aid you in your analysis
of the financial aspects of the merger. You should read the following summary
selected consolidated financial data of Zany in conjunction with the
Consolidated Financial Statements of Zany and the notes, and "Zany Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this joint proxy statement/prospectus.
When reading this data, you should be aware that:
. All fiscal years presented include 52 weeks of operations, except the
fiscal year ended February 3, 1996, which includes 53 weeks.
. A store becomes comparable in the 14th full month of store operations.
. Sales per square foot and average sales per store are based on stores
opened for the entire period.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands, except per share, number of stores and sales per
square foot data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ............................................. $ 54,372 $ 92,563 $ 123,354 168,471 $ 241,194
Gross profit .......................................... 13,400 $ 23,358 33,893 50,318 75,244
Selling, general and administrative expenses .......... 21,110 28,732 33,581 46,376 63,592
Operating income (loss)............................... (7,710) (5,374) 312 3,942 11,652
Net income (loss)..................................... (7,828) (6,023) (153) 8,999(a) 6,904
Net income (loss) per common share:
Basic............................................. $ (1.55) $ (1.19) $ (0.03) $ 1.67(a) $ 0.44
Diluted (b)....................................... (1.55) (1.19) (0.03) 0.51(a) 0.33
Weighted average shares outstanding:
Basic............................................. 5,065 5,068 5,085 5,373 15,834
Diluted (b)....................................... 5,065 5,068 5,085 17,770 21,211
Store Data:
Number of stores at end of the period................. 31 43 52 75 103
Total square feet at end of the period................ 387 538 630 868 1,159
Comparable store sales increase....................... 0.3% 4.3% 9.1% 9.9% 4.0%
Sales per square foot................................. $ 202 $ 183 $ 203 $ 227 $ 227
Average sales per store............................... 2,382 2,286 2,523 2,746 2,625
Operating Data:
Gross profit margin................................... 24.6% 25.2% 27.5% 29.9% 31.2%
Operating margin (loss)............................... (14.2) (5.8) 0.3 2.3 4.8
Capital expenditures.................................. $ 7,377 $ 6,276 $ 6,420 $ 7,309 $ 13,612
Depreciation and amortization......................... 2,115 3,713 5,017 6,859 8,698
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Inventories ...................................... $ 20,538 $ 24,278 $ 29,822 $ 43,252 $ 71,020
Working capital .................................. 15,220 21,599 20,085 25,542 66,470
Total assets ..................................... 41,393 56,376 59,552 82,141 143,726
Capitalized lease obligations, less current
portion ......................................... 2,231 2,620 1,407 2,860 3,855
Total shareholders' equity ........................... 28,372 38,547 39,219 48,291 98,697
</TABLE>
- ----------------
(a) Net income for the fiscal year ended January 30, 1999 includes a net income
tax benefit of $6,187 due to the $7,166 benefit recorded for Zany's net
operating loss carryforward, partially offset by income tax expense of
$979. The $7,166 tax benefit represents net income per basic and diluted
common share of $1.33 and $0.40, respectively.
(b) Stock options, warrants and preferred stock convertible into common stock
were excluded from the calculation of diluted net loss per common share for
the fiscal year ended February 3, 1996 through the fiscal year ended
January 31,1998 as they were anti-dilutive due to the losses in each of
those periods.
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<PAGE>
ZANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
The following provides information that management believes is relevant to
an assessment and understanding of Zany's consolidated results of operations and
financial condition. The discussion should be read in conjunction with Zany's
consolidated financial statements and accompanying notes included in this joint
proxy statement/prospectus. All references to 1999, 1998 and 1997 mean the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively.
Overview
Zany is a specialty retailer of high quality toys, games, books and
multimedia products for children, operating 103 stores in 26 states as of
January 29, 2000. As of May 15, 2000, Zany had opened four additional stores.
From 1997 to 1999, Zany's net sales grew at a compound annual growth rate of
45.3%, while net income increased from a loss of $(0.2) million to income of
$6.9 million. These increases were principally due to the opening of new stores
and comparable store sales growth. Zany achieved comparable store net sales
growth of 9.1%, 9.9% and 4.0% in 1997, 1998 and 1999, respectively. Zany opened
nine stores in 1997, 23 in 1998 and 28 in 1999, increasing its store base from
43 stores at the end of 1996 to 103 stores at the end of 1999. Zany plans to
open approximately 25 new stores in each of 2000 and 2001.
In the first quarter of 1999, two popular products, Beanie Babies and Crazy
Bones, represented over 10% and 5% of Zany's sales, respectively. Consumer
demand for these products has decreased significantly. This decrease in demand
will lead to negative comparisons during the first quarter of 2000 causing a net
loss greater than last year's first quarter loss. Zany expects these difficult
sales comparisons to continue into the second quarter of 2000 as sales of these
popular products accounted for approximately 10% of second quarter sales last
year.
Results of Operations
The following table sets forth Zany's financial data expressed as a
percentage of net sales, and operating data for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
January 3 January 30, January 29,
1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Net Sales............................. 100.0% 100.0% 100.0%
Cost of goods sold(1)................. 72.5 70.1 68.8
-------- ------- -------
Gross Profits...................... 27.5 29.9 31.2
Selling, general and administrative
expenses........................... 27.2 27.6 26.4
-------- ------- -------
Operating income...................... 0.3 2.3 4.8
Interest expense, net................. (0.4) (0.6) (0.2)
-------- ------- -------
Income (loss) before income taxes..... (0.1) 1.7 4.6
Income tax benefit/(expense).......... - 3.6 (1.7)
-------- ------- -------
Net income/(loss)..................... (0.1%) 5.3% 2.9%
======== ======= =======
Comparable store net sales 9% 10% 4%
increase(2).......................... ======== ======= =======
Total number of stores at end of
period............................. 52 75 103
-------- ======= =======
Stores opened during period........... 9 23 28
======== ======= =======
</TABLE>
(1) Cost of sales includes buying, distribution and occupancy costs
(2) A store becomes comparable in the 14th full month of store operations
90
<PAGE>
Year Ended January 29, 2000 Compared to January 30, 1999
Net Sales
Net sales increased $72.7 million, or 43.2%, to $241.2 million in 1999 from
$168.5 million in the comparable 1998 period. Sales for the 28 stores opened in
1999 contributed $41.8 million of the increase in net sales. Comparable store
net sales increased 4.0% over the prior year and contributed $6.3 million to the
increase in net sales. The growth in comparable net sales was due to an increase
in the average customer purchase. Stores open prior to January 30, 1999 but not
qualifying as a comparable store contributed $22.1 million to the net sales
increase. Sales of Pokemon products, which are represented in several different
departments including games, books, stationery, and plush, represented
approximately 7% of sales for the year. Sales of Beanie Babies declined from
approximately 8% of sales in the 1998, to 4% of sales for the comparable 1999
period.
Gross Profit
Gross profit increased by $24.9 million, or 49.5%, to $75.2 million in 1999,
from $50.3 million. As a percentage of net sales, gross profit increased to
31.2% in 1999, from 29.9% in 1998. The increase in gross profit percentage was
primarily attributable to improved product margins and leveraging of occupancy
costs over a higher revenue base. Product margins increased by 1.1% of net sales
in 1999 primarily due to an increase in sales of products with a higher gross
margin and reduced inventory shrink, partially offset by increased freight
expenses. The decrease in store occupancy expense of 0.2% of net sales is
primarily due to the 4.0% increase in comparable store sales and the timing of
new store openings.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by $17.2 million, or
37.1%, to $63.6 million in 1999, from $46.4 million in 1998. The dollar increase
in these expenses was due principally to an increase of $13.8 million in store
payroll, selling and depreciation expenses incurred in 1999 associated with the
opening of 28 additional stores following the end of 1998, and increase of $3.4
million in marketing and promotion expenditures primarily related to the opening
of stores in new markets. As a percentage of net sales, selling, general, and
administrative expenses decreased by 1.2% to 26.4% of net sales in 1999 from
27.6% of net sales in 1998. This percentage decrease was primarily related to a
decrease of 1.4% in corporate expenses partially offset by an increase in store
expenses of 0.2%.
Interest Expense, Net
Net interest expense was approximately $516,000 for 1999, a decrease of
$613,000 from 1998. The dollar decrease was due to an increase in investment
income from the proceeds of the Initial Public Offering in June 1999, and less
borrowings under Zany's line of credit.
Income Taxes
For 1999, Zany recorded an income tax expense of $4.2 million. For 1998, an
income tax benefit of $6.2 million was recorded primarily related to the Federal
tax benefit, recorded for Zany's net operating loss carryforward. Zany's
effective tax rate for 1999 was 38.0%. See Note 7 of "Notes to Consolidated
91
<PAGE>
Financial Statements" for the reconciliation of the statutory federal income tax
rate to Zany's effective tax rates in fiscal 1999 and 1998.
Year Ended January 30, 1999 Compared to Year Ended January 31, 1998
Net Sales
Net sales increased by $45.2 million, or 36.6%, to $168.5 million in 1998 from
$123.3 million in 1997. Sales for the 23 stores opened in 1998 contributed
$25.7 million of the increase in net sales. Comparable store net sales
increased 9.9% over the prior year and contributed $11.7 million of the increase
in net sales. The growth in comparable store sales was due primarily to an
increase in the number of customer transactions. Stores open prior to February
1, 1998, but not qualifying as comparable stores contributed $7.8 million of the
increase in net sales.
Gross Profit
Gross profit increased by $16.4 million to $50.3 million in 1998 from $33.9
million in 1997. As a percentage of net sales, gross profit increased to 29.9%
in 1998 from 27.5% in 1997. The increase in the gross profit percentage was
primarily attributable to improved product margins and leveraging store
occupancy, buying and distribution costs over a higher revenue base. Product
margins increased by 1.0% of net sales in 1998 primarily due to an increase in
sales of products with a higher gross margin. The decrease in store occupancy
expense of 0.9% of net sales was primarily due to the 9.9% increase in
comparable store sales and the timing of new store openings. The decrease in the
buying and distribution costs of 0.6% of net sales was due to the application of
fixed costs over a higher revenue base.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $12.8 million to
$46.4 million in 1998 from $33.6 million in 1997. The dollar increase in these
expenses was principally from an increase of $4.3 million in store payroll and
$1.2 million in store preopening costs primarily due to the increase in number
of stores in 1998, an increase of $2.7 million in corporate expenses associated
with the expansion of Zany's store base and corporate infrastructure to support
continued growth and an increase of $1.9 million in marketing and promotion
expenditures primarily related to the opening of stores in new market areas. As
a percentage of net sales, selling, general and administrative expenses
increased by 0.4% to 27.6% of net sales in 1998 from 27.2% of net sales in 1997.
This percentage increase was primarily related to an increase of 0.7% of net
sales in marketing and promotion and an increase of 0.5% of net sales in store
preopening expenses associated with opening 23 stores in 1998 versus nine stores
in 1997. These were partially offset by a decrease of 0.5% of net sales in store
payroll and other selling expenses due to an increase in comparable store sales
during 1998.
Interest Expense, Net
Net interest expense, principally attributable to borrowings under Zany's
credit facility, increased by $665,000 to $1.1 million in 1998 from $465,000 in
1997, due to an increase in the average outstanding loan balance to $6.4 million
in 1998 from $1.5 million in 1997. The increase in average borrowings in 1998
reflected the opening of 23 new stores and additional working capital
requirements to support those stores.
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<PAGE>
Income Tax Benefit
In 1998, Zany recorded a net income tax benefit of $6.2 million due to the
$7.2 million benefit recorded for Zany's net operating loss carryforward,
partially offset by the 1998 income tax expense of $979,000. In previous years,
no benefit was recorded with respect to the net operating loss carryforward
because Zany established a valuation allowance. Zany reversed the valuation
allowance as a result of management's assessment that it is more likely than not
that Zany's net deferred tax assets will be realized through future taxable
earnings. Management's assessment was based on the trend toward income in 1996
and 1997, the utilization of $5.8 million of the net operating loss carryforward
in 1997 and 1998 together with 1999 financial projections.
Liquidity and Capital Resources
Zany's main sources of liquidity have been cash flows from operations,
borrowing under Zany's credit facilities, and proceeds from Zany's initial
public offering. Zany requires cash principally to finance capital investment
in new stores, new store inventories and seasonal working capital. Zany opened
28 stores in fiscal 1999.
Cash flows provided by operating activities were $118,000 for fiscal 1999, a
decrease of $5.3 million over the same period for the previous year. The
decrease was primarily a result of an increase in inventories net of payables,
offset by an increase in net income after the noncash effect of deferred income
taxes.
Cash flows used in investing activities were $18.6 million for fiscal 1999, an
increase of $11.3 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 Zany's investment of $5.0
million in the Internet joint venture.
Cash flows provided by financing activities during fiscal 1999 increased $41.3
million from the previous year reflecting the net proceeds of $42.3 million from
the sale of common stock associated with the Zany's initial public offering, and
proceeds for the exercise of stock options, partially offset by capital lease
obligations.
On June 14, 1999, Zany entered into a new three-year credit facility with its
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 Federal
funds rate plus .5% per annum or (2) the prime rate. As of January 29, 2000 Zany
had no outstanding borrowings under the credit facility. However, as of April
26, 2000, Zany had $4,500,000 of outstanding borrowings under the credit
facility at the prime rate. Zany terminated, without penalty, a credit facility
with a different bank upon completion of its initial public offering.
Additionally, on August 25, 1999, Zany entered into a lease agreement with a
bank to provide a $5.0 million lease line of credit at an average rate of 10.3%.
As of January 29, 2000, $1.2 million under this lease line was remaining.
Management believes that Zany's operating cash flow together with the unused
portion of the 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, as a result of the additional $6.8 million investment in
ZanyBrainy.com, Zany's Internet joint venture, Zany may seek to increase its
credit facility.
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<PAGE>
Seasonality of Business
Seasonal shopping patterns affect Zany's business. A significant portion of
Zany's 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, management does not expect to earn a
profit in the first three-quarters of a fiscal year in the foreseeable future.
Two New Sales Channels
During the third quarter of 1999, Zany implemented an Internet shopping site
(www.zanybrainy.com) through a joint venture with Online Retail Partners, Inc.
Zany and Online Retail Partners 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. In March 2000, Online Retail Partners
and Zany agreed to contribute another $12.0 million in the joint venture over a
three month period on a pro rata basis. Zany's share of this investment is
approximately $6.8 million. As of April 2, 2000 Zany owned approximately 51% of
the joint venture.
Management expects that ZanyBrainy.com will continue to require cash
investment or financing prior to its profitability. Management also expects
that ZanyBrainy.com will continue to incur losses for the foreseeable future.
As of April 26, 2000, Zany's total investment in ZanyBrainy.com was $11.8
million. 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
point will require Zany to recognize losses up to the amount of its investment.
Zany would also have to recognize losses if its investment were to become
materially impaired, up to the amount of Zany's investment. In the event
ZanyBrainy.com is unable to raise additional capital, management expects to
commence incurring losses during the first half of 2000.
During the third quarter of 1999, Zany also introduced toll-free telephone
ordering through its Holiday catalog. This past holiday season, in a six-week
period ending on December 25, 1999, Zany generated over $2.5 million in sales
through its 877-WOW-KIDS number. Zany intends to integrate toll-free telephone
ordering into its year-round promotional efforts.
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<PAGE>
BUSINESS OF ZANY
General
Zany is a leading specialty retailer of high quality toys, games, books and
multimedia products for kids. Zany sells products that entertain, educate and
spark the imaginations of children up to 12 years of age.
Zany was incorporated in 1991 and opened its first store in Wynnewood,
Pennsylvania in the same year. Zany opened 28 new stores during the year ended
January 29, 2000 and, as of May 15, 2000, Zany operated 107 stores in 27
states. Zany also sells its merchandise on the worldwide web at
www.zanybrainy.com and through catalogs with toll-free ordering.
Zany Stores
Store Design
Zany designs its stores to be bright, colorful and inviting for children and
adults. Zany's current store prototype is 10,600 square feet and contains 11
major categories of products. Large banners with unique graphics identify each
of these categories to enable customers to find specific items quickly. Zany's
stores are fully carpeted and have low shelving to encourage children to see,
touch and play with its products. Departments are located around the perimeter
of the store in a "racetrack" style to promote browsing and impulse sales. Zany
has a play center in its stores that is surrounded with large red pillars so
children can locate it easily. Zany also provides seating in the play center so
adults can comfortably play with their children. Zany typically locates its
Zany Showtime Theater, which is used to show the latest video releases, adjacent
to the play center so these two spaces can be combined to accommodate larger
special events. A reading area is situated next to Zany's book department, and
software demonstration stations are placed near Zany's multimedia department to
encourage sampling of these items.
Merchandise Selection
Zany strives to carry over 15,000 stock keeping units from more than 400
suppliers in 20 different countries. While Zany's products generally range in
price from less than one dollar up to $200, the average price paid for a single
product is less than $10. Zany presents its merchandise across 11 product
categories to satisfy a broad spectrum of customer needs. Zany's extensive
selection of merchandise includes:
Category Description
-------- -----------
Brainy Games and Puzzles Board games and puzzles
Bright Start Toys for ages up to three
Creativity Arts and crafts supplies and kits
Good Sports Indoor and outdoor sport-theme toys
95
<PAGE>
Category Description
-------- -----------
Kidtronics Electronic learning aids and musical instruments
Let's Pretend Pretend play, dress up and doll houses
Our Planet Science-related toys
Plush and Dolls Stuffed animals and dolls
Young Builders Building toys and trains
Books Over 7,000 titles
Multimedia Software, audio and video
Zany regularly offers numerous limited distribution, innovative products.
Zany also works closely with several specialty suppliers to secure exclusive
product or licensing arrangements. In addition, Zany supplements its
merchandise offering with its own product development efforts, including
products under such brand names as "Ready, Set, Grow!" and "Kidstruments."
Store Associates
Zany actively recruits educators, child care providers and back-to-work
parents as store employees because Zany believes that these people are most
likely to have a respect and affection for children, and an appreciation of how
children learn through play. Zany's sales associates receive approximately 25
hours of training within their first month of employment and are tested before
they are designated a "Certified Kidsultant." In addition, some of Zany's
sales associates receive supplemental training to become specialists in various
areas including books, multimedia and events.
Zany's stores are typically staffed with a general manager, three assistant
managers, four specialists, and a varying number of part-time sales associates,
depending on store volume and time of year. A general manager and three
assistant managers, who may be specialists, typically manage each store, and are
responsible for building relationships within the community. The operations of
each store are supervised by one of 12 district managers who each in turn report
to one of three regional managers. Each regional manager reports to the vice
president of stores.
Store Locations
As of May 15, 2000, Zany operated 107 stores in 27 states. Zany plans to
add approximately 25 stores in each of 2000 and 2001. Zany selects geographic
markets and store sites on the basis of demographic information, quality and
nature of co-tenants and store visibility and accessibility. Key demographics
include population density, household income, and the number of households with
children and education level. Zany locates its stores primarily in suburban
strip or power centers as well as in selected freestanding locations. Zany
typically seeks sites with co-tenants that are strong, destination and
lifestyle-oriented retailers or high quality supermarkets.
Competitive Pricing
Zany prices its products competitively, but does not attempt to be the
discount leader in a given market. Zany does, however, maintain a policy of
matching its competitors' advertised prices.
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Marketing
Zany uses direct mail and newspaper advertising to promote its products and
increase awareness of its stores and the Zany brand. Zany primarily relies on
direct mail advertising, which allows Zany to capitalize on its internally
generated customer database. A variety of direct mail pieces, including Zany's
large, color "Zany Zone" catalog, are mailed throughout the year to both current
and prospective customers. Zany also uses full color newspaper inserts for
broader consumer reach during its peak selling periods. Zany advertises most
heavily during the Christmas holiday and back-to school seasons.
Special Events Program
Zany publishes a monthly calendar of free events for its stores. Each of
Zany's stores host regular daily activities for kids, including creative arts
and crafts activities, character and author appearances and mini-concerts by
nationally known children's performers. Zany's stores also feature several
interactive areas, including play centers and software demonstration stations.
In addition, each Zany store shows movies throughout the day at its Zany
Showtime Theater.
ZanyBrainy.com
During the third quarter Zany implemented an Internet shopping site
(www.zanybrainy.com) through a joint venture with Online Retail Partners.
Customers shopping at ZanyBrainy.com can, in addition to ordering toys, books
and other products, conduct targeted searches, view bestseller lists, interact
with one of Zany's Kidsultants for product recommendations, view the latest
calendar of special events for all of Zany's stores and check order status. In
addition, ZanyBrainy.com customers can return merchandise to any of Zany's
stores.
Purchasing and Suppliers
Zany purchases merchandise from over 400 suppliers in 20 different countries.
In mid-1998, Zany entered into a relationship with a subsidiary of Ingram
Industries Inc. to be Zany's principal book distributor. Zany's central buying
staff is comprised of one vice president, two divisional merchandise managers
and seven buyers, each of whom is responsible for purchasing selected categories
of Zany's products. Zany also maintains an in-house private label product
development team that develops products that are unique to Zany. In addition,
Zany has a merchandise planning team that manages inventory levels and the flow
of merchandise through its stores. This team works closely with Zany's buying
staff to react quickly to sales trends and improve in-stock levels at its
stores.
Distribution
Zany currently operates one distribution center in Swedesboro, New Jersey of
approximately 250,000 square feet. Approximately 80% of Zany's products are
distributed through this facility and the balance is shipped to the stores
directly by the manufacturer or supplier. Zany's automated inventory
replenishment system optimizes the inventory levels at each of its stores. This
computerized system retrieves sales information from the stores, enabling Zany
to pick, price and ship products to each of the stores on a weekly basis.
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Competition
The toy retailing market is highly competitive and comprised of:
. mass market retailers, including superstores such as Toys "R" Us and
discounters such as Wal-Mart and Target;
. smaller format specialty educational and creative toy and game
retailers;
. non-toy specialty retailers, such as traditional book, music, video
and software retailers;
. Internet-only retailers such as e-Toys; and
. a variety of other retailers offering a subset of Zany's products
including card and gift shops, craft stores and department stores.
Management Information Systems
In the first quarter of 2000, Zany replaced SFR, its old business-wide
software package, with JDA, a business-wide software package that supports
Zany's major back-office functions, including buying, replenishment, physical
distribution, general ledger and payables. JDA provides more forecasting
capabilities and more advanced replenishment and trend algorithms than SFR.
At the store level, Zany utilizes a point-of-sale system to capture sales
transactions that include price look-up, UPC scanning, check and credit
authorization and zip code capture. Zany's store systems interface with JDA to
automatically replenish inventory, by stock keeping unit, to each store. Zany
also analyzes this information to tailor its merchandise assortment, determine
markdowns, generate forecasts and evaluate product and supplier performance.
Proprietary Rights
To protect its proprietary rights, Zany generally relies on copyright,
trademark and trade secret laws, and confidentiality agreements with employees
and third parties and license agreements with consultants and suppliers. Each
of "Zany Brainy," "A Zillion Neat Things for Kids," "Zany Zone," "Price Chomper"
and "Kidsultant" have been registered as a service mark and/or trademark with
the United States Patent and Trademark Office. In addition, Zany has numerous
pending applications for trademarks. "ZanyBrainy.com," "ZB.com" and numerous
other related URL's have also been registered as Internet domain names.
Backlog and Seasonality
Backlog is not considered relevant to an understanding of Zany's business.
Zany's business is highly seasonal and approximately 40% of its revenue occurred
in the fourth quarter of fiscal 1999. As a result, Zany increases levels of
inventory during the months of September through December in order to meet
seasonal requirements.
Employees
As of April 29, 2000, Zany employed approximately 2,150 employees,
approximately 925 of whom were employed full-time. Zany also employs additional
personnel during peak selling periods. Zany considers its relationships with its
employees to be good. None of Zany's employees are covered by collective
bargaining agreements.
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Properties
Zany's corporate headquarters is located at 2520 Renaissance Boulevard in King
of Prussia, Pennsylvania, where Zany leases approximately 52,000 square feet.
Zany has an option to lease another 10,000 square feet on this site. The lease
has an initial term of ten years with two five-year renewal options.
Zany also currently leases one distribution center in Swedesboro, New Jersey
of approximately 250,000 square feet. Zany has an option to expand the
distribution center by a minimum of 100,000 and a maximum of 250,000 square
feet. The distribution center lease has an initial term of five years with two
five-year renewal options. Zany is currently investigating the expansion of its
distribution center in Swedesboro or opening a second distribution center to
support its store growth and seasonal demands.
Zany leases all of its stores. Initial lease terms are generally for ten
years, and most leases contain multiple five-year renewal options. Zany
generally selects a new store site 6 -18 months before its opening. Zany's
stores are primarily in suburban strip or power shopping centers as well as in
selected freestanding locations. As of January 29, 2000, Zany had 13 signed
leases for stores it plans to open in 2000, and one signed lease for stores it
plans to open in 2001.
Legal Proceedings
Zany is from time to time involved in litigation that it believes ordinarily
accompanies a retail business. Zany does not believe that any of its pending or
threatened litigation will result in an outcome that would materially affect
Zany's business.
Quarterly Results of Operations
The following table presents certain of Zany's quarterly information for the
fiscal years ended January 29, 2000 and January 30, 1999. This information is
derived from Zany's unaudited financial statements and, in the opinion of Zany's
management, includes all adjustments, consisting only of only normal recurring
adjustments, necessary for a fair presentation of such information. Operating
results for any given quarter are not necessarily indicative of results for any
future period and should not be relied upon as an indicator of future
performance.
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<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------------
1998 1999 2000
--------------------------------- --------------------------------------------- --------
May 2 Aug. 1 Oct. 31 Jan. 30 May 1 Jul. 31 Oct. 30 Jan. 29
------- ------- ------- ------- ------- ------- ------- --------
(in thousands; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $27,452 $29,654 $30,661 $80,704 $40,577 $44,141 $46,697 $109,779
Gross profit............... 7,315 7,544 8,591 26,868 11,190 11,773 13,289 38,992
Selling, general and
administrative expenses... 9,659 11,592 12,076 13,049 12,986 15,205 16,504 18,897
Operating income (loss).... (2,344) (4,048) (3,485) 13,819 (1,796) (3,432) (3,215) 20,095
Net income (loss).......... (2,470) (4,277) (3,922) 19,668(a) (1,378) (2,158) (2,001) 12,441
Net income (loss) per
common share:
Basic................. $ (0.46) $ (0.80) $ (0.73) $ 3.66 $ (0.26) $ (0.15) $ (0.09) $ 0.58
Diluted (b)........... $ (0.46) $ (0.80) $ (0.73) $ 1.09 $ (0.26) $ (0.15) $ (0.09) $ 0.55
Weighted average shares
outstanding:
Basic................. 5,363 5,369 5,378 5,380 5,384 14,748 21,528 21,609
Diluted (b)........... 5,363 5,369 5,378 18,014 5,384 14,748 21,528 22,828
</TABLE>
___________________
(a) Net income for quarter ended January 30, 1999 includes an income tax
benefit of $6,187 due to the $7,166 benefit recorded for Zany's net
operating loss carryforward, partially offset by income tax expense of
$979.
(b) Stock options, warrants and preferred stock convertible into common stock
were excluded from the calculation of quarterly diluted net loss per common
share for quarters generating net losses as they were anti-dilutive in each
of those periods.
Zany's quarterly operating results have varied significantly and are likely
to vary significantly in the future, as demand for its products is seasonal.
The majority of Zany's sales occur in the fourth quarter of its fiscal year;
however, because a high percentage of Zany's operating expenses and overhead is
relatively fixed throughout the year, operating income and net income tend to be
lower in quarters with lower sales.
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SELECTED CONSOLIDATED FINANCIAL DATA OF NOODLE
Noodle provides the following financial information to aid you in your
analysis of the financial aspects of the merger. You should read the following
selected consolidated financial data of Noodle in conjunction with the
Consolidated Financial Statements of Noodle and the notes and Noodle
Management's Discussion and Analysis of Financial Condition and Results of
Operations. All fiscal years presented include 52 weeks of operations, except
the fiscal year ended February 3, 1996, which includes 53 weeks.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands, except per share and number of stores)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales................................... $ 32,143 $59,410 $81,664 $107,886 $135,038
Gross profit................................ 12,318 22,868 31,276 42,481 52,268
Selling and administrative expenses......... 17,680 31,124 33,552 38,804 49,356
Provision for restructuring operations...... 500 -- -- -- --
Operating income (loss)..................... (5,862) (8,256) (2,276) 3,677 2,912
Net income (loss) from:
Continuing operations................... $ (5,272) $(7,492) $(1,918) $ 3,752 $ 9,683(a)
Discontinued operations................. (9,059) -- -- -- 1,550
Cumulative effect of a change in
accounting principle.................... -- -- -- -- (195)
-------- ------- ------- -------- --------
Net income (loss)....................... $(14,331) $(7,492) $(1,918) $ 3,752 $ 11,038
======== ======== ======== ======== ========
Net income (loss) per common share from
continuing operations:
Basic................................... $ (0.99) (1.00) (0.25) 0.49 $ 1.27(a)
Diluted................................. (0.99) (1.00) (0.25) 0.49 1.25(a)
Net income (loss) per common share:
Basic .................................. (2.69) (1.00) (0.25) 0.49 1.45(a)
Diluted ................................ (2.69) (1.00) (0.25) 0.49 1.42(a)
Weighted average shares outstanding:
Basic................................... 5,320 7,488 7,580 7,588 7,603
Diluted................................. 5,498 7,601 7,587 7,722 7,761
Operating Data:
Number of stores at end of the period..... 22 31 32 42 58
Gross profit margin....................... 38.3% 38.5% 38.3% 39.4% 38.7%
Operating margin (loss)................... (18.2%) (13.9%) (2.8%) 3.4% 2.2%
Capital expenditures (continuing
operations).............................. 8,877 9,397 1,664 7,318 9,835
Depreciation and amortization............. 1,028 1,926 2,490 2,932 3,787
As of
Fiscal Years Ended
------------------
Feb. 3, Feb. 1, Jan. 31, Jan. 30, Jan. 29,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Inventories............................... $ 10,328 $17,318 $16,821 $ 21,074 $ 33,610
Working capital........................... 14,031 16,819 15,977 15,404 15,300
Total assets.............................. 37,276 51,036 49,481 57,962 72,882
Long-term obligations, less current
portion.................................. -- 753 733 712 689
Total shareholders' equity................ 27,080 35,699 33,781 37,612 48,700
</TABLE>
____________
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(a) The fiscal year ended January 29, 2000 includes a net income tax benefit of
$7,271 due to the recognition of Noodle's deferred tax asset which
represents net income per basic and diluted common share of $0.96 and $0.94,
respectively.
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NOODLE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Noodle's
consolidated financial statements and accompanying notes included in this joint
proxy statement/prospectus. All references to Fiscal 2000, Fiscal 1999 and
Fiscal 1998 mean the fiscal years ended January 29, 2000, January 30, 1999 and
January 31, 1998, respectively.
Results of Operations
Fiscal Year Ended January 29, 2000 Compared to Fiscal Year Ended January 30,
1999
Continuing operations. Net sales increased a total of 25.1% to $135.0
---------------------
million in Fiscal 2000 from $107.9 million in Fiscal 1999 due to the addition of
sixteen new stores during Fiscal 2000 and ten new stores during Fiscal 1999.
Sales in comparable stores increased 1% for Fiscal 2000. Sales on the Internet
were $0.9 million in Fiscal 2000, compared to $0.1 million in Fiscal 1999. Sales
of Beanie Babies declined from approximately 13% of sales in Fiscal 1999 to
approximately 7% of sales in Fiscal 2000. Noodle operated 58 stores at January
29, 2000 compared to 42 stores at January 30, 1999.
Gross profit (derived from net sales less cost of products sold, which
includes buying and warehousing costs) increased 23.1% to $52.3 million for
Fiscal 2000 from $42.5 million in Fiscal 1999. Overall gross profit as a
percent of sales decreased to 38.7% in Fiscal 2000 from 39.4% in Fiscal 1999.
The decrease in this gross profit percentage was primarily attributable to
increased distribution costs in Fiscal 2000. Distribution costs increased
because Noodle leased 65,000 square feet of additional warehousing space to
supplement the storage capacity of its Phillipsburg, NJ distribution center, and
also because as Noodle's store base expands, freight costs to more distant store
locations increase.
Selling and administrative expenses increased $10.6 million or 27.3% to
$49.4 million in Fiscal 2000 from $38.8 million in the prior year. $1.1 million
of this increase is related to the costs of NoodleKidoodle.com, Noodle's
Internet subsidiary. Direct store expenses which consist of payroll, occupancy,
advertising and other store operating expenses increased $9.2 million, primarily
due to an increase in the store base. Home office expenses increased $0.8
million, including an increase of $0.4 million of store pre-opening costs.
Selling and administrative expenses as a percent of net sales increased to 36.5%
in Fiscal 2000 from 36.0% in the prior year, primarily as a result of the costs
incurred in new stores and costs related to Noodle's Internet activities.
Net interest expense in Fiscal 2000 was $0.5 million as compared to net
interest income of $0.1 million in the prior year. The increase in interest
expense of $0.6 million in Fiscal 2000 resulted primarily from an increase in
borrowings under Noodle's revolving credit facility.
Discontinued Operations. In the third quarter ended October 30, 1999,
-----------------------
Noodle adjusted the estimated gain on disposal of its discontinued wholesale
operations recognized in fiscal 1996. The adjustment resulted in an additional
gain of $1.5 million, net of tax of $1.0 million. The additional gain arose from
the sale of Noodle's leasehold interest in its former distribution center in
Birmingham, Alabama and the settlement of liabilities related to its
discontinued operations. The leasehold interest in the Birmingham, Alabama
distribution center was sold on November 15, 1999.
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<PAGE>
Fiscal 2000's results include the recognition of a deferred tax asset
relating primarily to Noodle's net operating loss carryforward. Recognizing this
asset resulted in an income tax benefit of $7.3 million from continuing
operations this year. At January 29, 2000, Noodle had approximately $16.0
million of net operating loss carryforwards for tax purposes.
The cumulative effect of a change in accounting principle of $195,000, net
of a tax benefit of $119,000 represents the write-off of unamortized pre-opening
costs as a result of adopting SOP 98-5, "Reporting on the Costs of Start-Up
Activities," in the first quarter of fiscal 2000. This accounting change
requires Noodle to expense on a current basis previously capitalized pre-opening
costs.
Net income rose to $11.0 million ($1.42 per share) in Fiscal 2000 from net
income of $3.8 million ($.49 per share) in the prior year.
Fiscal Year Ended January 30, 1999 Compared to Fiscal Year Ended January 31,
1998
Net sales increased a total of 32.1% to $107.9 million in Fiscal 1999 from
$81.7 million in fiscal year ended January 31, 1998. Noodle sales increased
$26.4 million or 32.4% to $107.9 million in Fiscal 1999 from $81.5 million in
the prior year, primarily due to increased sales in comparable stores of 16%,
the addition of ten new stores during Fiscal 1999 and one new store during
Fiscal 1998. Other retail stores had $.2 million of sales in Fiscal 1998. The
last Playworld store was closed on October 31, 1997. Noodle operated 42 stores
at January 30, 1999 compared to 32 stores at January 31, 1998.
Gross profit (derived from net sales less cost of products sold, which
includes buying and warehousing costs) increased 35.8% to $42.5 million for
Fiscal 1999 from $31.3 million in Fiscal 1998. Overall gross profit as a
percent of sales increased to 39.4% in Fiscal 1999 from 38.3% in Fiscal 1998.
The increase in this gross profit percentage was primarily attributable to
favorable product mix and the leveraging of buying and fixed warehousing costs
over a larger sales base, offset by slightly higher variable warehousing costs.
Selling and administrative expenses increased $5.2 million or 15.5% to
$38.8 million in Fiscal 1999 from $33.6 million in the prior year. Direct store
expenses which consist of payroll, occupancy, advertising and other store
operating expenses increased $4.4 million, due to change in the store base and
higher sales levels. Home office expenses increased $0.8 million. Selling and
administrative expenses as a percent of net sales decreased to 36.0% in Fiscal
1999 from 41.1% in the prior year, primarily as a result of sales leveraging
against the fixed portion of these costs.
Net income rose to $3.8 million ($.49 per share) in Fiscal 1999 from a net
loss of $1.9 million ($.25 per share) in the prior year. The net income in
Fiscal 1999 did not include a tax provision and the net loss in Fiscal 1998 did
not include a tax benefit. At January 30, 1999, Noodle had approximately $16.5
million of net operating loss carryforwards for tax purposes.
Liquidity and Capital Resources
During the past three fiscal years Noodle satisfied the cash requirements
of its continuing retail operations principally through borrowings under its
revolving credit facility and from internal cash balances. These cash
requirements principally have included financing operating losses, working
capital requirements and expenditures for new store openings.
104
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------
Jan. 31, Jan. 30, Jan. 29,
1998 1999 2000
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net cash provided by (used in)
Operating activities:
Continuing operations $ 2,673 $ 6,215 $(4,134)
Discontinued operations (1,252) 130 247
Investing activities (1,637) (7,315) (9,835)
Financing activities (18) 59 4,025
------- ------- -------
Net (decrease) in cash and cash equivalents (234) (911) (9,697)
Cash and cash equivalents - beginning of year 11,333 11,099 10,188
------- ------- -------
Cash and cash equivalents - end of year $11,099 $10,188 $ 491
======= ======= =======
</TABLE>
During Fiscal 2000, Noodle used $4.1 million of cash in its operating
activities, primarily due to increases in working capital of $10.9 million
(excluding borrowings under Noodle's revolving credit facility), an increase in
deferred tax assets of $6.4 million, and other items of $0.3 million, offset by
net income of $9.7 million and non-cash charges of $3.8 million. The net
increase in working capital was attributable to higher inventory levels as a
result of opening sixteen new stores and an increase in average store
inventories of $77 thousand per store at year-end. Cash provided by discontinued
operations was $0.2 million during the year. Net cash used in investing
activities was $9.8 million, primarily to purchase fixed assets for new stores.
Borrowings under Noodle's revolving credit facility increased by $4.0 million
during the year. As a result of the foregoing, cash and cash equivalents
decreased during the year by $9.7 million.
During Fiscal 1999, Noodle generated $6.2 million of cash from operating
activities, primarily from net income of $3.8 million and non-cash charges of
$2.9 million, offset by increases in working capital of $0.5 million. The net
increase in working capital was attributable to higher inventory levels as a
result of opening ten new stores. The net liabilities of discontinued operations
increased $0.1 million during the year. Net cash used in investing activities
was $7.3 million, primarily to purchase fixed assets for new stores including
$0.7 million for stores scheduled to open in Fiscal 2000. As a result of the
foregoing, cash and cash equivalents decreased during the year by $0.9 million.
Noodle maintains a revolving credit facility, effective through June 2000,
with The CIT Group/Business Credit, Inc. that provides up to $15 million of
available borrowings. This facility may be used for direct borrowings and
letters of credit and may not exceed a certain percentage of, and is
collateralized by, Noodle's inventory, receivables and certain other assets. The
agreement provides for an annual collateral management fee and commitment fee on
the unused portion of the commitment. Outstanding borrowings bear interest, at
the option of Noodle, based on the prime rate or LIBOR. The agreement contains
certain covenants that, among other items, limit the payment of cash dividends
when borrowings under the agreement are outstanding. As of January 29, 2000,
$4.0 million of borrowings and $1.0 million of letters of credit were
outstanding under the revolving credit facility.
Noodle has amended its credit facility to extend the term for another three
years and to increase the amount available to be borrowed under the facility to
$50 million.
105
<PAGE>
Without reference to the merger, Noodle expects to open approximately ten
stores and to add a second distribution center during Fiscal 2001. Noodle
anticipates that its capital expenditures in Fiscal 2001 will be approximately
$8.1 million. Until completion of the merger, Noodle expects to meet these cash
requirements through a combination of operating cash flows and borrowings from
its revolving credit facility.
Noodle has available net operating loss carryforwards of approximately
$16.0 million for income tax purposes, the use of which will be limited upon
completion of the merger.
Noodle expects to fund its near-term cash requirements principally by
borrowing under its revolving credit facility.
If the merger does not occur, Noodle expects to finance its long-term
expansion plan with internally and externally generated funds, which may include
borrowings under future credit facilities, and through the sale of equity,
equity-related or debt securities. There can be no assurance that financing
would be available in amounts, or at rates or on terms and conditions acceptable
to Noodle.
Seasonality
Noodle's operations are highly seasonal and approximately 48% of its
revenues fall within Noodle's fourth quarter which coincides with the Christmas
selling season. New stores are expected to be opened throughout the year, but
generally before the Christmas selling season, which will make Noodle's fourth
quarter revenues an even greater percentage of the total year's revenues.
Operations during the first three quarters are not expected to be profitable for
the foreseeable future.
Impact of Inflation
The impact of inflation on Noodle's results of operations has not been
significant. Noodle attempts to pass on increased costs by increasing product
prices over time.
Year 2000 Compliance
Last year, Noodle discussed the nature and progress of its plan to become
year 2000 ready. In late 1999, Noodle completed its remediation and testing of
systems. As a result of those planning and implementation efforts, Noodle
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Noodle's expenditures in
connection with remediating its systems were not material. Noodle is not aware
of any material problems resulting from Year 2000 issues, either with its
internal systems, or with the products and services of third parties. Noodle
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
106
<PAGE>
BUSINESS OF NOODLE
Noodle is a specialty retailer of a broad assortment of educationally
oriented, creative and non-violent children's products. The Noodle concept
offers something new to parents and children by combining the attractive pricing
and larger size of traditional toy stores with the more creative product
selection and superior customer service of small boutiques, while providing an
entertaining shopping environment through interactive play areas and frequent
in-store events.
Noodle's stores range from approximately 5,000 to 13,300 square feet and
average approximately 9,500 square feet. Each store offers customers a warm and
inviting shopping environment with brightly lit spaces, colorful walls, ceilings
and carpets, wide aisles for strollers and kid-level seating and product
shelving. Each store typically carries approximately 16,000 stock-keeping units,
or SKU's, conveniently displayed in separate merchandise departments, such as
"Science & Nature" and "Arts & Crafts," which are identified by eye-catching
signs that are visual as well as verbal so that children can understand them.
All of the products carried in Noodle stores conform to Noodle's creative, non-
violent and educational merchandising strategy. Noodle generally does not carry
mass market television advertised toys. However, in certain product categories,
Noodle does carry brand name products that fit the Noodle philosophy, such as
Crayola, Lego, Playmobil, Mattel, the full line of Walt Disney video titles and
the Goosebumps line of books. Noodle purchases merchandise from over 600
suppliers. No single supplier represents greater than 10% of Noodle's total
purchases.
During Fiscal 2000 Noodle, through a newly created subsidiary
NoodleKidoodle.com, LLC, substantially enhanced the e-commerce capability of its
Internet site www.noodlekidoodle.com. Additionally, the merchandise offered for
sale on the Internet was increased from approximately 700 items during the 1998
Holiday selling season to almost 4,000 during the 1999 Holiday selling season.
Noodle believes that offering the best selling merchandise in its stores over
the Internet presents an opportunity to serve its existing customers better, and
to expand its customer base to geographic areas where Noodle does not operate
retail stores. Noodle's Internet strategy is to build on the strength of the
Noodle brand by integrating the marketing of its retail stores and its Internet
site, and to take advantage of Noodle existing capabilities in procurement,
merchandising, fulfillment and marketing. Noodle believes that this strategy may
give it a cost advantage over Internet-only retailers.
At the end of its 2000 fiscal year, Noodle operated 58 Noodle Kidoodle stores
located in New York, New Jersey, Connecticut, Texas, Oklahoma, Florida, New
Hampshire, Nebraska, Kansas, Tennessee, Pennsylvania, Arkansas and the Boston,
Chicago and Detroit metropolitan areas. Noodle opened a total of sixteen new
stores in fiscal 2000: four stores in Texas, three in Florida and one in each of
the States of New York, New Hampshire, Nebraska, Kansas, Tennessee,
Pennsylvania, Connecticut, Arkansas, and Massachusetts. Noodle's new store
program for the current year is underway, with two stores open as of May 15,
2000. Noodle has signed leases for another four stores that it expects will open
this year. Noodle plans to open approximately ten new stores and a second
distribution center in Fiscal 2001. Noodle believes that there are opportunities
for nationwide expansion over the longer term.
Noodle believes that the following elements are important to its retailing
concept:
. Interactive Shopping Environment - Each Noodle store is designed with
children in mind. Each store has designated play areas where children and
their parents are encouraged to explore toys and games in keeping with
Noodle's "try before you buy" philosophy. Among the key
107
<PAGE>
interactive features of each store are the Computer Center, "Kidoodle
Theater" and the Electronic Learning Center.
. Broad Assortment of Imaginative Products - Noodle stores offer a broad
assortment of products designed to stimulate a child's imagination and
contribute to his or her growth and development, consistent with Noodle's
slogan that "Kids learn best when they're having fun." To keep its
merchandise mix fresh and exciting, Noodle continually seeks innovative new
products.
. In-Store Events - Noodle provides without charge frequent in-store events
such as personal appearances by authors and children's television
personalities, arts and crafts workshops and readings from selected books
to provide entertainment to its customers, increase store traffic and
position Noodle as a destination store.
. Superior Customer Service - By providing knowledgeable and friendly
customer service and selecting enthusiastic employees who enjoy working
with children, Noodle believes that it has a competitive advantage over
lower-service superstores and mass merchandisers.
. Targeted Marketing - Noodle conducts a targeted direct mail marketing
program and continuously updates its customer database for this purpose.
. Competitive Pricing - Noodle offers everyday competitive pricing. Many
products are regularly discounted and prices in general are believed to be
competitive with those featured by superstores carrying similar lines of
merchandise.
Backlog is not considered relevant to an understanding of Noodle's business.
Noodle is required to carry substantial amounts of inventory in the months of
September through November of each year to meet holiday delivery requirements.
Noodle did not have any customers that represented more than 10% of
consolidated revenues for the year ended January 29, 2000.
Noodle's business is highly seasonal and approximately 48% of its revenues
occur in the fourth quarter.
The retail toy business is highly competitive. Noodle competes on the basis of
its stores' interactive environment, broad merchandise selection, superior
customer service and competitive pricing. Noodle competes with a variety of mass
merchandisers, superstores and other toy retailers, including Toys "R" Us and
Kay-Bee Toy Stores and other store formats selling children's products, such as
discount stores and smaller specialty toy stores. Retailing of children's
educational products is a relatively new concept. Included among Noodle's direct
competitors are Store of Knowledge and Learning Express. Noodle also faces
growing competition from Internet-based retailers such as eToys and Amazon.com.
Because Internet-based retailers do not operate retail stores, they may enjoy an
overall operating cost advantage. Some of Noodle's competitors are much larger
in terms of sales volume and have more capital and greater management resources
than Noodle. In addition, due to the nature of electronic commerce, they may
reach a broader market. If any of Noodle's larger competitors were to increase
their focus on the educational market or if any regional competitors were to
expand their activities in the markets primarily served by Noodle, it could be
adversely affected. If any of the Noodle's major competitors seek to gain or
retain market share by reducing prices, it may be required to reduce its prices
on key items in order to remain competitive, which would have the effect of
reducing its profitability.
108
<PAGE>
As of April 29, 2000, Noodle employed 1,607 people, of whom 522 were employed
full-time. Noodle also employs additional part-time personnel during the pre-
Christmas season. Noodle believes that its relations with its employees are
generally good.
Noodle has registered several service marks and trademarks with Federal and
State authorities, including Noodle Kidoodle(R), Oodles & Oodles of Fun Things
to Learn(R), Kidoodle Animation(R), and Noodle's slogan "Kids learn best when
they're having fun"(R). Noodle believes it has all licenses necessary to conduct
its business.
Properties
Noodle leases all of its stores. Original lease terms generally are for ten
years, and many leases contain renewal options. Noodle's stores are generally
located in either strip shopping centers or in enclosed shopping malls. The 58
stores operating at the end of Fiscal 2000 ranged in size from approximately
5,000 to 13,300 square feet.
Noodle currently supports its retail operations with an owned 269,000 square
foot distribution center in Phillipsburg, New Jersey. Noodle also has entered
into a lease for a second 225,000 square foot distribution center in
Murphreesboro, Tennessee. This center is currently under construction and is
expected to be operational in the third quarter of 2000. Noodle had previously
supported its total retail and wholesale operations with three other
distribution centers located in Farmingdale, New York, West Haven, Connecticut
and Birmingham, Alabama. The Farmingdale and West Haven facilities were disposed
of when Noodle's wholesale operations were discontinued. Noodle discontinued the
use of the Birmingham center in 1989 and assigned its leasehold interest in that
property in November, 1999.
Noodle has also leased 65,000 square feet of warehouse space in Allentown, PA
from July 1999 through June 2000. This space was necessary to accommodate last
year's seasonal inventory build-up in the fall months.
Noodle's executive offices are located at Syosset, New York. Noodle's lease
for its executive offices runs through May, 2004 and contains an option to renew
for an additional five years.
Noodle believes that the foregoing facilities are adequate for its present
operations and such facilities are maintained in a good state of repair.
Legal Proceedings
Noodle is not a party to any legal proceedings other than claims and lawsuits
arising in the normal course of its business which, in the opinion of Noodle
management, are not individually or in the aggregate material to its business.
Quarterly Results of Operations
The following table presents certain of Noodle's quarterly information for the
fiscal years ended January 29, 2000 and January 30, 1999. This information is
derived from Noodle's unaudited financial statements and, in the opinion of
Noodle's management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information.
Operating results for any given quarter are not necessarily indicative of
results for any future period and should not be relied upon as an indicator of
future performances.
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<PAGE>
Noodle's quarterly operating results have varied significantly and are likely
to vary significantly in the future, as demand for its products is seasonal.
The majority of Noodle's sales occur in the fourth quarter of its fiscal year;
however, because a high percentage of Noodle's operating expenses and overhead
is relatively fixed throughout the year, operating income and net income tend to
be lower in quarters with lower sales.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
1998 1999 2000
--------------------------------- --------------------------------------- -------
May 2 Aug. 1 Oct. 31 Jan. 30 May 1 Jul. 31 Oct. 30 Jan. 29
------------ ------- ------- ------- ------- ------- ------- -------
(in thousands; unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................... $18,045 $18,431 $22,670 $48,740 $22,890 $20,795 $27,205 $64,148
Gross profit............................. 7,015 7,342 8,854 19,270 8,990 8,229 10,522 24,527
Net income (loss):
Continuing operations................... (1,049) (1,525) (1,554) 7,880 (1,054) (3,339) (2,996) 17,072
Discontinued operations................. --- --- --- --- --- --- 2,500 (950)
Accounting change....................... --- --- --- --- (314) --- --- 119
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... (1,049) (1,525) (1,554) 7,880 (1,368) (3,339) (496) 16,241
Basic income (loss) per
share:
Continuing operations................... (0.14) (0.20) (0.20) 1.04 (0.14) (0.44) (0.39) 2.24
Discontinued operations................. --- --- --- --- --- --- 0.33 (0.12)
Accounting change....................... --- --- --- --- (0.04) --- --- 0.02
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... (0.14) (0.20) (0.20) 1.04 (0.18) (0.44) (0.06) 2.14
Diluted income (loss) per
share:
Continuing operations................... (0.14) (0.20) (0.20) 1.00 (0.14) (0.44) (0.39) 2.21
Discontinued operations................. --- --- --- --- --- --- 0.33 (0.12)
Accounting change....................... --- --- --- --- (0.04) --- --- 0.01
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ (0.14) $ (0.20) $ (0.20) $ 1.00 $ (0.18) $ (0.44) $ (0.06) $ 2.10
Weighted average shares:
Basic................................... 7,580 7,587 7,592 7,594 7,599 7,604 7,604 7,605
Assuming dilution....................... 7,670 7,699 7,661 7,860 7,882 7,770 7,681 7,740
</TABLE>
In accordance with SFAS 128, as a result of net losses, the inclusion of stock
options were antidilutive and, therefore, were not utilized in the computation
of diluted loss per share in quarters with a net loss.
Net income (loss) per share calculations for each of the quarters are based on
the weighted average number of shares outstanding for each period and the sum of
the quarters may not necessarily be equal to the full year income (loss) per
share amount.
January 29, 2000 interim financial data reflects the effect in the fourth
quarter of reversing the valuation allowance against deferred tax assets based
on management's assessment that it is more likely than not that the deferred tax
assets will be realized through future taxable earnings.
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ELECTION OF DIRECTORS OF ZANY
The Zany board of directors currently consists of seven directors, each
serving until the 2000 annual meeting of shareholders and until such directors'
successors have been elected and qualified, except in the event of any such
director's earlier death, resignation or removal.
The board of directors, acting on the recommendation of its nominating
committee, has nominated the following individuals for election as directors:
Keith C. Spurgeon, C. Donald Dorsey, Robert A. Fox, Henry Nasella, Yves B.
Sisteron, Mary A. Tocio and David V. Wachs.
The persons named as proxy agents in the enclosed Proxy Card intend (unless
instructed otherwise by a shareholder) to vote for the election of these seven
nominees. In the event that the nominee should become unable to accept
nomination or election (a circumstance which the board of directors does not
expect), the proxy agents intend to vote for any alternate nominee designated by
the board of directors or, in the discretion of the board, the position may be
left vacant.
The board of directors unanimously recommends a vote FOR the nominees.
Set forth below is certain information with respect to the nominees for
director, each of whom, other than Ms. Tocio, is currently serving as a director
of Zany. This information has been provided by each nominee for director at the
request of Zany.
Keith C. Spurgeon has served as Zany's Chairman of the Board and Chief
Executive Officer since January 1998. He served as Zany's President and Chief
Executive Officer from June 1996 to January 1998. Prior to joining us, Mr.
Spurgeon was at Toys 'R' Us for over ten years where he served in various
capacities, most recently as Vice President for Asia and Australia. Mr.
Spurgeon is 45 years of age.
C. Donald Dorsey has served as one of Zany's directors since June 1994. From
March 1989 to August 1999, Mr. Dorsey was at PETsMART, Inc. where he served in
various capacities, most recently as Executive Vice President. From 1989 to
1998, Mr. Dorsey also served as PETsMART's Chief Financial Officer. Mr. Dorsey
is 58 years of age.
Robert A. Fox has served as one of Zany's directors since January 1993. Mr.
Fox has been the Chairman and Chief Executive Officer of R.A.F. Industries,
Inc., a private investment company that acquires and manages a diversified group
of operating companies and venture capital investments, since 1980. Mr. Fox is
a Trustee of the University of Pennsylvania and the Wistar Institute. Mr. Fox
also currently serves as a director of Safeguard Scientifics, Inc. Mr. Fox is
70 years of age.
Henry Nasella has served as one of Zany's directors since October 1993. Since
July 1999, Mr. Nasella has been the Chairman and Chief Executive Officer of
Online Retail Partners, an e-commerce venture capital and technology operating
business. From September 1994 to June 1999, Mr. Nasella was the Chairman, Chief
Executive Officer and President of Star Markets Company, Inc., a Boston-based
grocery retailer. From January 1994 to September 1994, he was a principal of
Phillips-Smith Specialty Retail Group, a venture capital firm. Mr. Nasella
formerly served as President and Chief Operating Officer of Staples Inc. He
currently serves as a director of Au Bon Pain Co., Inc. Mr. Nasella is 53 years
of age.
Yves B. Sisteron has served as one of Zany's directors since June 1994. Mr.
Sisteron has been a principal of Global Retail Partners, L.P., an investment
fund, since January 1996 and a manager of U.S.
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<PAGE>
investments for Carrefour S.A. since 1993. Mr. Sisteron currently serves as a
director of InterWorld Corporation. Mr. Sisteron is 44 years of age.
Mary A. Tocio is not currently a Zany director. Since July 1998, Ms. Tocio
has been the Chief Operating Officer of Bright Horizons Family Solutions, Inc.,
a national provider of workplace services for employers and families. From
November 1993 until July 1998, she served as Chief Operating Officer of Bright
Horizons, Inc. which merged with CorporateFamily Solutions, Inc. in July 1998 to
form Bright Horizons. Ms. Tocio is 52 years of age.
David V. Wachs has served as one of Zany's directors since October 1993. Mr.
Wachs currently serves as a consultant to Charming Shoppes, Inc., a retail
company he co-founded. Mr. Wachs is 74 years of age.
In addition Gerald R. Gallagher, who has served as one of our directors since
June 1994, is not running for re-election at the Zany 2000 annual meeting of
shareholders. Since 1987, Mr. Gallagher has been a general partner of Oak
Investment Partners, a venture capital firm. Before joining Oak Investment
Partners, he was Chairman of Dayton Hudson Corporation. Currently, Mr. Gallagher
serves as a director of P.F. Chang's China Bistro, Inc. Mr. Gallagher is 59
years of age.
Under the merger agreement, after completion of the merger, Zany will increase
the size of its board of directors by one, and the directors will appoint
Stanley Greeman a director of Zany.
Committees and Meetings
The Zany board of directors has an audit committee, a compensation committee
and a nominating committee. During the fiscal year ended January 29, 2000, the
board of directors held ten meetings (including one by telephone conference),
the audit committee held two meetings (both by telephone conference), the
compensation committee held six meetings and acted once by unanimous consent and
the nominating committee did not meet. Each director attended at least 75% of
the aggregate of the meetings in the fiscal year ended January 29, 2000 of the
board of directors and of the board committee or committees on which he served
during the year.
The audit committee has the power and authority to:
. review Zany's internal financial controls and accounting procedures and
reports with Zany management;
. review the engagement of Zany's independent auditors;
. make recommendations to the board of directors regarding the selection of
independent auditors; and
. review the scope, fees and results of any audit.
The compensation committee has the power and authority to administer Zany's
salary and incentive compensation policies. The compensation committee also has
the power and authority to administer and interpret Zany's 1998 Equity
Compensation Plan and the 1993 Incentive Stock Plan (which has expired but under
which there remain outstanding stock options) and establish the terms and
conditions of all stock option grants.
The nominating committee's duties are to evaluate board performance and
recommend to the board nominees for election as directors.
The current members of the audit committee are Messrs. Dorsey (Chairman),
Wachs and Sisteron; of the compensation committee, Messrs. Gallagher (Chairman),
Dorsey and Fox; and of the nominating committee, Messrs. Spurgeon (Chairman) and
Nasella.
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Standard Compensation Arrangements
Historically, directors did not receive any cash compensation for service as
directors, however, they were reimbursed for the expenses they incurred in
attending meetings of the board or board committees. In order to attract highly
qualified new directors to serve on Zany's board of directors and to retain
existing members, in January 2000, the board of directors approved a
compensation program that includes a one-time grant of options to purchase
25,000 shares of common stock to new non-employee directors. Such options will
be granted on the date the individual becomes a member of the Zany board of
directors and will be granted under Zany's 1998 Equity Compensation Plan. Each
such option will have an exercise price equal to the last reported sale price on
the date of the director's election, a ten-year term and vest in four equal
installments beginning on the first anniversary of the director's election. In
January 2000, the Zany board of directors also approved a stock option grant to
purchase 25,000 shares of common stock to Mr. Fox in the event he is elected at
Zany's 2000 annual meeting of shareholders and continues to serve as a director.
Such grant would be on the same terms as a grant to a new director. The Zany
board of directors approved this grant to Mr. Fox because prior to the Zany 2000
annual meeting he was a member of the board pursuant to a contractual
arrangement.
In addition, commencing with the Zany 2000 annual meeting of shareholders,
directors who are not employees of Zany will receive $500 for attendance at each
meeting of the board of directors or committee of the board of directors
(including meetings held by telephone conference) and the chairman of each
committee of the board of directors will receive an annual retainer of $2,500,
based upon the length of service of such committee chairman during the annual
period commencing on the annual meeting date.
Share Ownership Guideline
None.
Requirements for Advance Notification of Nominations
Section 3-1(d) of the Amended and Restated Bylaws of Zany provides that no
person may be nominated for election as a director by a shareholder at an annual
or special meeting unless written notice of such shareholder's intent to make
such nomination has been given, either by personal delivery or by first class or
express mail, postage prepaid, or by telegram (with messenger service
specified), telex or TWX (with answerback received) or courier service, charges
prepaid, or by telecopier, to the Secretary of Zany at the principal executive
offices of Zany as follows:
. with respect to an election to be held at an annual meeting of
shareholders, not later than the close of business on the 90th calendar day
nor earlier than the close of business on the 120th calendar day prior to
the first anniversary of the preceding year's annual meeting of
shareholders; provided, however, that in the event that the date of the
annual meeting of shareholders is more than 30 calendar days before or more
that 60 calendar days after such anniversary date, notice by the
shareholder to be timely must be delivered not earlier than the close of
business on the 120th calendar day prior to such annual meeting of
shareholders and not later than the close of business on the later of the
90th calendar day prior to such annual meeting of shareholders or the 10th
calendar day following the calendar day on which public announcement of the
date of such meeting is first made by Zany; and
. with respect to an election to be held at a special meeting of shareholders
for the election of directors, not earlier than the close of business on
the 120th calendar day prior to such special meeting and not later than the
close of business on the later of the 90th calendar day prior to such
special meeting or the 10th calendar day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the board of directors to be elected at such meeting.
Each such notice shall set forth, or be accompanied by,
. the name and residence address of the shareholder who intends to make the
nomination and of the person or persons to be nominated;
. a representation that the shareholder is a holder of record of stock of
Zany entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the
notice;
. a description of all arrangements or understandings between the shareholder
and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by
the shareholder;
. such other information regarding each nominee proposed by such shareholder
as would be required to be included in a proxy statement filed pursuant to
the proxy rules of the Securities
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and Exchange Commission had the nominee been nominated, or intended to be
nominated, by the board of directors; and
. the consent of each nominee to serve as a director of Zany if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedure.
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SECURITIES OWNERSHIP OF ZANY'S EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of April 29, 2000 (or as
of such other date as may be noted below) with respect to shares of common stock
of Zany beneficially owned by each person believed by Zany to be the beneficial
owner of more than 5% of the outstanding shares of common stock, by each
incumbent director and nominee for director of Zany, by each executive officer
of Zany who was serving as such on January 29, 2000 and by all current directors
and executive officers of Zany as a group. Except as indicated below, Zany
understands that the shareholders listed in such table have sole voting and
investment power with respect to the shares owned by them. The number of shares
in the table below includes shares issuable upon the exercise of outstanding
stock options to the extent that such options are exercisable by the
shareholder, incumbent director, nominee for director or executive officer on or
within 60 days after April 29, 2000. In the case of each incumbent director,
nominee for director and executive officer, the information below has been
provided by such person at Zany's request.
<TABLE>
<CAPTION>
Percent of
Number of Shares Common Stock
Name of Individual or Identity of Group of Common Stock Outstanding
- --------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Yves B. Sisteron(1)(2)............................. 3,224,836 14.9%
Fourcar, B.V.(3)................................... 2,442,154 11.3
Vulcan Ventures, Inc.(4)........................... 2,141,757 9.9
Robert A. Fox(5)................................... 1,101,892 5.1
Gerald R. Gallagher(6)............................. 694,031 3.2
Keith C. Spurgeon(2)............................... 650,000 2.9
Thomas G. Vellios(2)............................... 431,250 2.0
Robert A. Helpert(2)............................... 263,750 1.2
David V. Wachs(2).................................. 215,737 1.0
C. Donald Dorsey(2)(7)............................. 53,512 *
Henry Nasella(2)................................... 49,836 *
Mary Ann Tocio..................................... 0 *
All current directors and executive officers
as a group (9 persons)(2)........................ 6,684,884 28.8
</TABLE>
__________________
*Less than 1%.
(1) Outstanding shares include:
(a) 2,023,085, 414,119, 130,774, 130,769, 154,390, 104,708, 51,784 and
104,708 shares of common stock held by Fourcar, B.V., Lacomble
Retailing, SA, Fidas Business S.A., SG Cowen, Fondation Consuelo,
Fundacion Juan March, Fundation Appomatox and Daniel Bernard,
respectively (collectively, the "Sisteron Affiliates"); and
(b) 67,672, 4,399, 4,659, 20,165, 7,489 and 1,165 shares of common stock
held by Global Retail Partners, L.P., GRP Partners, L.P., Global
Retail Partners Funding, Inc., DLJ Diversified Partners, L.P., DLJ
Diversified Partners-A, L.P. and DLJ ESC II, L.P., respectively
(collectively, the "GRP Affiliates").
Mr. Sisteron is a manager of U.S. investments of Carrefour S.A. and has
certain voting rights with respect to the shares owned by each of the
Sisteron Affiliates. Carrefour S.A. is a beneficial owner of the shares
owned by Fourcar, B.V. and Lacomble Retailing, SA. Although Mr. Sisteron
may be deemed to be a beneficial owner of the shares owned by the Sisteron
Affiliates, he disclaims all such beneficial ownership, except to the
extent of any pecuniary interest therein that he may have. Mr. Sisteron is
also a principal of Global Retail Partners, L.P. Global Retail Partners,
L.P. and the other GRP Affiliates are affiliated with DLJ. Although Mr.
Sisteron may be deemed a beneficial owner of the shares owned by the GRP
Affiliates, he disclaims all such beneficial ownership, except to the
extent of any pecuniary interest therein that he may have.
(2) Includes with respect to Mr. Sisteron 4,000 shares, Mr. Fox 4,000 shares,
Mr. Gallagher 84,000 shares held by Oak Investment Partners, Limited
Partnership and Oak Affiliates Fund, Limited Partnership, Mr. Spurgeon
650,000 shares, Mr. Vellios 431,250 shares, Mr. Helpert 263,750 shares, Mr.
Wachs 34,000 shares, Mr. Dorsey 34,000 shares and Mr. Nasella 41,500
shares, all of which shares are subject to presently exercisable options.
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(3) Outstanding shares include:
(a) 414,119 shares of common stock held by Lacomble Retailing, SA; and
(b) 950 shares of common stock held by Yves Sisteron.
The address for Fourcar B.V. is Gebouw Autumn, Overschiestraate No. 184P,
1062XK Amsterdam Netherlands.
(4) As reflected in Schedule 13G dated February 11, 2000. Vulcan Ventures,
Inc's. address is 110C110th Avenue, N.E., Suite 550, Bellevue, WA 98004.
The sole owner of Vulcan Ventures, Inc. is Paul G. Allen.
(5) Mr. Fox's address is One Pitcairn Place, Suite 2100, 165 Township Line
Road, Jenkintown, PA 19046.
(6) As of May 16, 2000. Includes:
(a) 609,398 shares owned by Oak Investment Partners V, Limited
Partnership;
(b) 82,152 shares of common stock underlying presently exercisable options
held by Oak Investment Partners V, Limited Partnership;
(c) 633 shares owned by Oak V Affiliates Fund, Limited Partnership; and
(d) 1,848 shares of common stock underlying presently exercisable options
held by Oak V Affiliates Fund, Limited Partnership.
Mr. Gallagher is a partner of Oak Investment Partners with certain voting
and investment power over such shares. Although Mr. Gallagher may be deemed
to be a beneficial owner of such shares, he disclaims all such beneficial
ownership, except to the extent of any pecuniary interest therein that he
may have.
(7) Includes 19,512 outstanding shares of common stock held by the C. Donald
Dorsey and Lydia Dorsey Family Trust Dated August 5, 1993.
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<PAGE>
EXECUTIVE COMPENSATION OF ZANY
Compensation
The following table sets forth certain information with respect to
compensation earned during the fiscal years ended January 29, 2000 and January
30, 1999 by Zany's chief executive officer and its other executive officers.
These executives are referred to in this joint proxy statement/prospectus as the
Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Adwards
-------------------------------------- ---------------------
Name and Other Annual(1) Securities
Principal Position Year Ended Salary Bonus Compensation Underlying Option
------------------ ----------- ------ ----- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Keith C. Spurgeon......... Jan. 29, 2000 $307,500 $115,800 $2,202 100,000
Chief Executive Officer Jan. 30, 1999 300,000 135,000 2,335 -0-
and Chairman of the
Board of Directors
Thomas G. Vellios......... Jan. 29, 2000 $307,500 $102,900 $2,333 125,000
President Jan. 30, 1999 275,000 110,000 2,466 -0-
Robert A. Helpert......... Jan. 29, 2000 $282,500 $ 82,600 $6,478 25,000
Chief Financial Officer, Jan. 30, 1999 262,500 91,875 6,666 -0-
Treasurer and Secretary
</TABLE>
________________
(1) Represents premiums paid by Zany with respect to term life insurance for
the benefit of the Named Executive Officer.
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<PAGE>
Option Grants
The following table discloses options granted to the Named Executive
Officers during the fiscal year ended January 29, 2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------
Percent of Total Potential Realizable
Options/SARs Value at Assumed
Number of Granted to Annual Rates of
Securities Employees in the Stock Price
Underlying Fiscal Year Exercise Appreciation for
Option/SARs ended Jan. 29 or Base Price Expiration Option Term
Name Granted 2000(1) Per Share(2) Date 5% 10%
- ---- ------- ------- ------------ ----- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Keith C. Spurgeon... 100,000 11.8% $11.75(3) 4/29/09 $1,913,951 $3,047,647
Thomas G. Vellios... 125,000 14.8% 11.75(3) 4/29/09 2,392,439 3,809,559
Robert A. Helpert... 25,000 3.0% 11.75(3) 4/29/09 478,488 761,912
</TABLE>
___________________
(1) During fiscal year 1999, options to purchase 846,750 shares of Zany common
stock were granted to 210 employees.
(2) The exercise price of the options granted was equal to the fair market value
of the underlying stock on the date of grant.
(3) Options become exercisable in four equal installments commencing on the
first anniversary of the date of grant.
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<PAGE>
Fiscal Year-End Values
The following table sets forth certain information regarding the number and
value of stock options held at January 29, 2000 by the Named Executive Officers.
Aggregate Fiscal Year-End Option Values
Number of Value of
Unexercised Unexercised In-the-
Options at Money Options at
January 29, 2000 January 29, 2000(1)
--------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Keith C. Spurgeon 375,000 425,000 $1,490,250 $1,284,850
Thomas G. Vellios 250,000 325,000 993,500 788,100
Robert A. Helpert 157,500 142,500 635,285 470,965
___________________
(1) Based on the closing price of Zany's common stock as reported on the Nasdaq
National Market on January 28, 2000 ($7.438 per share), net of the option
exercise price.
Certain Employment Agreements
Messrs. Spurgeon, Vellios and Helpert were employed by Zany during the
fiscal year ended January 29, 2000 under employment agreements with Zany. Under
these employment agreements, Messrs. Spurgeon, Vellios and Helpert are entitled
to receive a base salary, which may be increased from time to time, and such
additional compensation as may be awarded to them. During the fiscal year ended
January 29, 2000, the annual base salaries for Messrs. Spurgeon, Vellios and
Helpert were $300,000, $300,000 and $275,000, respectively.
Each of the employment agreements contains the following principal terms:
. severance payment equal to six months of the employee's base salary if
the employee is terminated for any reason other than for cause or a
change of control;
. severance payment equal to one year of the employee's base salary, if
the employee is terminated or the employee's responsibilities are
significantly reduced after a change in control;
. the option to resign and still receive a severance payment equal to one
year of the employee's base salary within one year after a change of
control if, after the change in control, the successor organization
does not offer to extend the employee's employment agreement for two
years on substantially the same terms; and
. may be terminated at will by either party.
For the fiscal year ending February 3, 2001, Messrs. Spurgeon, Vellios and
Helpert annual salaries were increased to equal to $338,250, $338,250 and
$296,625, respectively.
In May 2000, Messrs. Spurgeon, Vellios and Helpert entered into new three-
year employment agreements with Zany.
Each of the new employment agreements contain the following principal
terms:
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. severance benefits equal to one year of the employee's base salary,
payment of any incentive bonus and continuation of health, life and
disability insurance for one year, if the employee is terminated without
cause or for good reason (each as defined in the employment agreements);
and
. a non-competition provision that, during the term of the employment
agreement and for a period of one year after the employee ceases to
perform services for Zany, prohibiting the employee from engaging in or
holding a financial interest in any business that competes with Zany and
has operations in North America.
The following Report of the Zany Compensation Committee and the Performance
Graph shall not be deemed incorporated by reference by any general statement
incorporating by reference this joint proxy statement/prospectus into any filing
under the Securities Act of 1933, as amended, or under the Securities Exchange
Act of 1934, as amended, except to the extent that Zany specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
REPORT OF THE ZANY COMPENSATION COMMITTEE
The Zany compensation committee has the power and authority to administer
Zany's salary and incentive compensation policies, including setting the base
salaries and the total compensation levels of the Chief Executive Officer (the
"CEO") and, in consultation with the CEO, the other Zany employees, including
the other executive officers. In addition, the compensation committee approves
the annual bonus award and stock option grant for the CEO and, upon
recommendation by the CEO, the annual bonus awards and stock option grants for
other Zany employees, including the other executive officers.
Compensation Philosophy
Zany's compensation policy for executive officers is to pay competitively
and to be fair and equitable in the administration of pay. This is the same
policy applicable to all Zany employees. Zany seeks to balance the compensation
paid to a particular individual with the compensation paid to other executives
holding comparable positions both inside Zany and at other similar companies.
Salary and Bonus
Annual cash compensation is comprised of a base salary and bonus awards and
is based in part upon a review of compensation packages of executives in
comparable positions with other publicly-held specialty retailers. Base salary
increases are awarded based on subjective factors, including (a) an executive's
increased level of individual responsibility and performance, (b) maintaining an
appropriate scale among our executives based on relative positions and
responsibilities and (c) the competitiveness of the labor market in the
specialty retail sector. Zany's CEO, Keith C. Spurgeon, had a base salary for
the fiscal year ended January 29, 2000 of $300,000 and the base salary for
Messrs. Vellios and Helpert for the fiscal year ended January 29, 2000 was
$300,000 and $275,000, respectively. Effective at the beginning of the fiscal
year ending February 3, 2001, annual base salaries for Messrs. Vellios and
Helpert were increased to $338,250 and $296,625, respectively, pursuant to the
CEO's salary
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recommendations, which were approved by the compensation committee, a 10%
increase for Mr. Vellios and a 5% increase for Mr. Helpert, which were based on
many of the factors described above, including, with respect to Mr. Vellios'
increase, consideration of his expanded role at ZanyBrainy.com. Effective as of
the beginning of the fiscal year ending February 3, 2001, the compensation
committee also approved a 10% (to $338,250) increase in Mr. Spurgeon's base
salary. In doing so, the compensation committee also based its decision on many
of the factors described above, including consideration of Mr. Spurgeon's
anticipated responsibilities as a result of the merger. Salary increases at Zany
for employees generally were approximately 5%.
Bonus awards are made pursuant to criteria typically established at the
beginning of each fiscal year. The amount of a bonus paid to an executive
officer is largely based upon the individual's and Zany's achievement of
specified financial and/or operational goals determined by the compensation
committee. Messrs. Spurgeon, Vellios and Helpert received bonuses of $115,800,
$102,900 and $82,600, respectively, for their contributions to Zany in the
previous year.
In May 2000, Zany entered into new three year employment agreements with
Messrs. Spurgeon, Vellios and Helpert that provide for severance benefits equal
to one year of the employee's base salary, payment of any incentive bonus and
continuation of health, life and disability insurance for one year, if the
employee is terminated without cause or for good reason (each as determined in
the employment agreement), and a non-competition provision that prohibits the
employee during the term of the employee agreement and for a period of one year
after the employee ceases to perform services for Zany from engaging in or
holding a financial interest in any business that competes with Zany and has
operations in North America.
Stock Options
The compensation committee has the discretion to grant stock options to the
executive officers. Grants are awarded based on a number of factors, including
the achievement of our financial, strategic and operational objectives, the
individual's contributions toward the achievement of our objectives, and the
amount and term of options already held by each individual. In April 1999, in
connection with Zany's initial public offering, the compensation committee
granted options to purchase an aggregate of 846,750 shares of common stock to
210 Zany employees at an exercise price of $11.75 per share under Zany's 1998
Equity Compensation Plan, which included stock option grants to Messrs.
Spurgeon, Vellios and Helpert of 100,000, 125,000, and 25,000 shares,
respectively.
ZanyBrainy.com
In recognition of Messrs. Spurgeon, Vellios and Helpert's significant
contribution to ZB Holdings LLC, in April 2000, Zany sold to Messrs. Spurgeon,
Vellios and Helpert 102,500, 102,500 and 41,000 of its non-voting preferred
interests in ZB Holdings at a purchase price of $.001 per interest. In
connection with the sale, Zany awarded bonuses in the amount of $74,901, $74,901
and $29,961 to Messrs. Spurgeon, Vellios and Helpert, respectively, to
compensate them for the tax exposure of the transaction. On the date of sale,
fair market value per interest was $0.98, resulting in compensation expense to
Zany of $100,347.50, $100,347.50 and $40,139 for the sale of the interests to
Messrs. Spurgeon, Vellios and Helpert, respectively.
In addition, in order to provide appropriate incentives to Zany employees
for their contributions to ZanyBrainy.com, in April 2000, Zany
contributed 533,500, approximately 3.6%, of its non-voting preferred interests
in ZB Holdings to Children's Equity LLC. There are 533,500 non-voting units in
Children's Equity, of which 102,500 units were given to each of Messrs. Spurgeon
and Vellios and 41,000 units were given to Mr. Helpert. The non-voting members,
including Messrs. Spurgeon, Vellios and Helpert, received their units at no
cost. All non-voting units are subject to forfeituure under certain
circumstances, including termination of employment with Zany pursuant to the
operating agreement. Forfeited units are automatically reallocated to a charity
that is also a member of Children's Equity. The fair market value per non-
voting unit on the date of contribution was $0.98, resulting in compensation
expense to Zany of $100,450, $100,450 and $40,180 for the units given to Messrs.
Spurgeon, Vellios and Helpert, respectively. See "Certain Relationships and
Related Transactions."
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In summary, we believe that the combination of salary, bonus, stock options
and awards and other compensation received by each of Zany's executive officers
for fiscal year ended January 29, 2000 was reasonable in view of their past and
anticipated future contributions to Zany.
Payments during the fiscal year ended January 29, 2000 to Zany's executives
as discussed above were made with regard to the provisions of Section 162(m) of
the Internal Revenue Code. Section 162(m) limits the deduction that may be
claimed by a "public company" for compensation paid to certain individuals to $1
million except to the extent that any excess compensation is "performance-based
compensation." It is the compensation committee's intention that as a general
rule compensation should not be limited as to its deductibility under Section
162(m).
COMPENSATION COMMITTEE
Gerald R. Gallagher, Chairman
Robert A. Fox
C. Donald Dorsey
Zany Performance Graph
The following graph shows a comparison of cumulative total shareholder
return for Zany's common stock, the S&P Retail Index and a peer group, described
more fully below (the "Specialty Retail Group"). The graph assumes the
investment of $100 on June 2, 1999, the date of Zany's initial public offering.
The data regarding Zany assumes an investment at the initial public offering
price of $10.00 per share of Zany's common stock. The performance shown is not
necessarily indicative of future performance.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
==============================================================================================================
Index 6/2/99 7/31/99 10/30/99 1/29/00
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zany Brainy, Inc. $100.00 $ 78.75 $ 123.75 $ 74.38
- --------------------------------------------------------------------------------------------------------------
S&P Retail Index $100.00 $ 100.95 $ 103.18 $ 99.97
- --------------------------------------------------------------------------------------------------------------
Specialty Retail Group $100.00 $ 92.19 $ 70.37 $ 51.03
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Specialty Retail Group is not a "published industry or line-of-business
index" as that term is defined by Securities and Exchange Commission
regulations. Accordingly, the Specialty Retail Group is considered a "peer
index" and the identity of the issuers used in the index is as follows: bebe
stores, inc., David's Bridal, Inc., Toys "R" Us, Inc., Guitar Center, Inc. and
The Children's Place Retail Stores, Inc.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1999, Zany 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. ZB Holdings formed
ZanyBrainy.com LLC, a wholly owned subsidiary, for the purpose of developing and
operating such site. Zany initially contributed $5.0 million and certain
tangible and rights to intangible assets for the purchase of 100% of the
outstanding preferred interests of ZB Holdings and Online Retail Partners, LLC
contributed a total of $5.0 million for the purchase of 100% of the common
interests of ZB Holdings. Online Retail Partners LLC contributed another $10.0
million to the joint venture in November 1999 for additional non-voting common
interests.
In March 2000, Zany began, and has subsequently completed, a second round
of financing for ZB Holdings with Online Retail Partners, Inc., successor to
Online Retail Partners, LLC. As part of the second round of financing, Zany
contributed an additional $6,862,242 for the purchase of an additional 7,002,288
non-voting preferred interests in ZB Holdings and Online Retail Partners,
contributed $5,137,758 for the purchase of an additional 5,242,610 non-voting
common interests in ZB Holdings.
In April 2000, Zany sold Keith C. Spurgeon, Zany's Chief Executive Officer
and Chairman of the Board, Thomas G. Vellios, Zany's President, and Robert A.
Helpert, Zany's Chief Financial Officer, 102,500, 102,500 and 41,000 of its non-
voting preferred interests, respectively, in ZB Holdings, at a purchase price of
$.001 per interest. The fair market value per interest was $0.98, resulting in
compensation expense to Zany of $100,347.50, $100,347.50 and $40,139 for the
sale of the interests to Messrs. Spurgeon, Vellios and Helpert, respectively. In
addition, in connection with the sale, Zany awarded bonuses in the amount of
$74,901, $74,901 and $29,961 to Messrs. Spurgeon, Vellios and Helpert,
respectively, to compensate them for the tax exposure of the transaction.
In April 2000, Zany formed Children's Equity LLC and contributed 533,500 of
its non-voting preferred interests of ZB Holdings held by Zany to Children's
Equity. Zany owns the only voting units in Children's Equity and is the sole
manager of Children's Equity. There are 533,500 non-voting units in Children's
Equity that, in April 2000, were distributed to certain Zany employees, of which
102,500 units were given to each of Messrs. Spurgeon and Vellios and 41,000
units were given to Mr. Helpert. The non-voting members,
including Messrs. Spurgeon, Vellios and Helpert, received their units at no
cost. All non-voting units are subject to forfeiture under certain
circumstances, including termination of employment with Zany. Forfeited units
are automatically reallocated to a charity that is also a member of Children's
Equity. The fair market value per non-voting unit on the date of gift was $0.98,
resulting in compensation expense to Zany of $100,450, $100,450 and $40,180 for
the units given to Messrs. Spurgeon, Vellios and Helpert, respectively.
As of May 10, 2000, after the grants and contributions described above,
Zany maintains an ownership interest in ZB Holdings of approximately 51%. Both
Zany and Online Retail Partners continue to hold 50% of the voting interests of
ZB Holdings.
Zany has entered into certain agreements with ZanyBrainy.com pursuant to
which it will provide services to, and act as an agent for, ZanyBrainy.com.
Under the terms of the agreements, these services are to be provided at cost to
ZanyBrainy.com. During fiscal 1999, Zany procured and transferred, at cost,
$8,186,000 of merchandise, including freight and other procurement costs, to
ZanyBrainy.com. In addition, the Company transferred costs of $2,673,000 for the
cost of production and marketing materials, and $250,000 for the cost of other
services rendered. At January 29, 2000, a receivable of $1,378,000 from
ZanyBrainy.com was included in receivables, net on Zany's balance sheet.
Additionally, ZanyBrainy.com has entered into certain agreements with Online
Retail Partners and its affiliates pursuant to which Online Retail Partners and
its affiliates will provide services and Internet
123
<PAGE>
infrastructure to, and act as an agent for, ZanyBrainy.com. Under the terms of
the agreements, services are to be provided on a cost plus basis to
ZanyBrainy.com. During fiscal 1999, ZanyBrainy.com paid Online Retail Partners
and its affiliates $5,622,965 under these agreements.
Keith Spurgeon, Zany's Chairman of the Board and Chief Executive of the
Company, is the Chairman of the Board of ZB Holdings and is on the Board of
ZanyBrainy.com. Thomas Vellios, Zany's President, is on the Boards of ZB
Holdings and ZanyBrainy.com. Henry Nasella, a member of Zany's Board, is a
member of the Board and Chief Executive Officer of Online Retail Partners, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that directors and certain officers of Zany, and persons who own more than ten
percent of Zany's common stock, file reports of ownership of company securities
and changes in ownership of Zany's securities with the Securities and Exchange
Commission. Zany believes that all filings required to be made during the
fiscal year ended January 29, 2000 were made on a timely basis.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, will issue an
opinion as to the validity of the common stock of Zany to be issued in the
merger. In addition, Kramer Levin Naftalis & Frankel LLP and Morgan, Lewis &
Bockius LLP will issue tax opinions to Noodle and Zany, respectively, in
connection with the merger agreement.
EXPERTS
The consolidated financial statements of Zany as of January 29, 2000 and
January 30, 1999 and for each of the three years in the periods ended January
29, 2000, January 30, 1999 and January 31, 1998, included in this joint proxy
statement/prospectus and elsewhere in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Noodle as of January 29, 2000 and
January 30, 1999 and for each of the three years in the periods ended January
29, 2000, January 30, 1999 and January 28, 1998, included in this joint proxy
statement/prospectus and registration statement, have been audited by Janover
Rubinroit, LLC, independent auditors, as set forth in their report thereon.
The financial statements referred to above are included in reliance upon such
reports given on the authority of such firm as experts in accounting and
auditing.
FUTURE SHAREHOLDER PROPOSALS
Shareholders of Zany may submit proposals on matters appropriate for
shareholder action at annual meetings in accordance with regulations adopted by
the Securities and Exchange Commission. Any proposal that an eligible
shareholder desires to have presented at the 2001 annual meeting (which is
expected to occur in June 2001) concerning a proper subject for inclusion in the
proxy statement and for consideration at the annual meeting, will be included in
Zany's proxy statement and related proxy card if it is received by Zany no later
than January 30, 2001.
124
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Zany and Noodle file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
These reports, proxy statements and other information can be read and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549; and Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained at
the prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. by calling the SEC at 1-800-732-0330. In
addition, Zany and Noodle file this material electronically with the SEC, and
the SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy
statements and other information regarding companies (including us) that file
electronically with the SEC. The common stock of Zany and Noodle is listed on
the Nasdaq National Market, and reports, proxy statements and other information
can also be inspected at the office of the Nasdaq, 1735 K Street, NW,
Washington, D.C. 20006.
Zany has filed with the SEC a registration statement on Form S-4, to
register the Zany common stock to be issued to Noodle shareholders in connection
with the completion of the merger, and this prospectus is part of Zany's
registration statement. For further information with respect to Zany and the
shares, we refer you to the registration statement and its exhibits. This
document is part of that registration statement and constitutes a prospectus of
Zany in addition to being a proxy statement for Zany's annual meeting of
shareholders. As allowed by SEC rules, this document does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement.
125
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ZANY BRAINY, INC. SUBSIDIARIES
Report of Independent Public Accountants....................... F-2
Consolidated Balance Sheets.................................... F-3
Consolidated Statements of Operations.......................... F-4
Consolidated Statements of Shareholders' Equity................ F-5
Consolidated Statements of Cash Flows.......................... F-6
Notes to Consolidated Financial Statements..................... F-7
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
Independent Auditors' Report................................... F-17
Consolidated Balance Sheets.................................... F-18
Consolidated Statements of Operations.......................... F-19
Consolidated Statements of Stockholders' Equity................ F-20
Consolidated Statements of Cash Flows.......................... F-21
Notes to Consolidated Financial Statements..................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Zany Brainy, Inc.:
We have audited the accompanying consolidated balance sheets of Zany
Brainy, Inc. (a Pennsylvania corporation) and subsidiaries, as of January 29,
2000 and January 30, 1999 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended January 29, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zany Brainy,
Inc. and subsidiaries as of January 29, 2000 and January 30, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 29, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 6, 2000
F-2
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 24,550 $ 1,695
Receivables, net 4,118 3,390
Inventories, net 71,020 43,252
Deferred tax asset 1,496 4,313
Prepaid expenses 1,458 940
--------------- ---------------
Total current assets 102,642 53,590
PROPERTY AND EQUIPMENT, net 34,602 25,905
DEFERRED TAX ASSET 1,259 2,024
OTHER ASSETS, net 223 622
INVESTMENT IN JOINT VENTURE 5,000 -
--------------- ---------------
$ 143,726 $ 82,141
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 19,898 $ 16,161
Accrued liabilities 13,696 10,205
Current portion of capitalized lease obligations 2,578 1,682
--------------- ---------------
Total current liabilities 36,172 28,048
--------------- ---------------
DEFERRED RENT 5,002 2,942
--------------- ---------------
CAPITALIZED LEASE OBLIGATIONS, net of current portion 3,855 2,860
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY:
Convertible Preferred stock, $.01 par value, 5,000,000
shares authorized at January 29, 2000; 0 and 2,402,955
shares issued and outstanding at January 29, 2000
and January 30, 1999 respectively - 24
Common stock, $.01 par value, 100,000,000
shares authorized at January 29, 2000; 21,674,362
and 5,383,571 shares issued and outstanding at
January 29, 2000 and January 30, 1999 respectively 216 54
Additional paid-in capital 104,190 60,826
Accumulated deficit (5,709) (12,613)
--------------- ---------------
Total shareholders' equity 98,697 48,291
--------------- ---------------
$ 143,726 $ 82,141
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements
F-3
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
------------------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
NET SALES $ 241,194 $ 168,471 $ 123,345
COST OF GOODS SOLD, including
occupancy costs 165,950 118,153 89,452
---------------------- ---------------------- ----------------------
Gross profit 75,244 50,318 33,893
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 63,592 46,376 33,581
---------------------- ---------------------- ----------------------
Operating income 11,652 3,942 312
INTEREST INCOME 520 81 253
INTEREST EXPENSE (1,037) (1,211) (718)
---------------------- ---------------------- ----------------------
Income (loss) before income tax benefit (expense) 11,135 2,812 (153)
INCOME TAX BENEFIT (EXPENSE) (4,231) 6,187 -
---------------------- ---------------------- ----------------------
NET INCOME (LOSS) $ 6,904 $ 8,999 $ (153)
====================== ====================== ======================
NET INCOME (LOSS) PER COMMON
SHARE:
Basic $ 0.44 $ 1.67 $ (0.03)
Diluted $ 0.33 $ 0.51 $ (0.03)
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 15,834 5,373 5,085
Diluted 21,211 17,770 5,085
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
---------------------------------------
Series Series Series Series
A B BB C Common Stock
-------- -------- --------- -------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997 $ 8 $ 1 $ 7 $ 8 $ 51
Issuance of warrants to a consultant - - - - -
Exercise of common stock options - - - - -
Exercise of warrants - - - - 3
Net loss - - - - -
-------- -------- --------- -------- --------------
BALANCE, JANUARY 31, 1998 8 1 7 8 54
Exercise of common stock options - - - - -
Net income - - - - -
-------- -------- --------- -------- --------------
BALANCE, JANUARY 30, 1999 8 1 7 8 54
Exercise of common stock options - - - - 3
Exercise of warrants - - - - -
Conversion of preferred stock (8) (1) (7) (8) 112
Initial public offering of common stock, net - - - - 47
Deferred compensation in connection with issuance of
common stock options and amortization of deferred
compensation - - - - -
Income tax benefit from exercise of stock options - - - - -
Net income - - - - -
-------- -------- --------- -------- --------------
BALANCE, JANUARY 29, 2000 $ - $ - $ - $ - $ 216
======== ======== ========= ======== ==============
<CAPTION>
Additional Paid-
In Capital Accumulated Deficit Total
------------------ --------------------- -----------
<S> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997 $ 59,931 $ (21,459) $ 38,547
Issuance of warrants to a consultant 40 - 40
Exercise of common stock options 35 - 35
Exercise of warrants 747 - 750
Net loss - (153) (153)
--------------- --------------------- -----------
BALANCE, JANUARY 31, 1998 60,753 (21,612) 39,219
Exercise of common stock options 73 - 73
Net income - 8,999 8,999
--------------- --------------------- -----------
BALANCE, JANUARY 30, 1999 60,826 (12,613) 48,291
Exercise of common stock options 795 - 798
Exercise of warrants 130 - 130
Conversion of preferred stock (88) - -
Initial public offering of common stock, net 42,266 - 42,313
Deferred compensation in connection with issuance of
common stock options and amortization of deferred
compensation 19 - 19
Income tax benefit from exercise of stock options 242 - 242
Net income - 6,904 6,904
--------------- --------------------- -----------
$ 104,190 $ (5,709) $ 98,697
=============== ===================== ===========
</TABLE>
F-5
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
----------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,904 $ 8,999 $ (153)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--------
Depreciation and amortization 8,698 6,859 5,017
Provision for deferred rent 2,060 1,086 700
Amortization of deferred compensation 19 - -
Issuance of warrants to consultants - - 40
Deferred income tax expense (benefit) 3,582 (6,337) -
Tax benefit from exercise of options 242 - -
Changes in assets and liabilities--------
(Increase) decrease in
Receivables (728) (1,759) (457)
Inventories (27,768) (13,430) (5,544)
Prepaid expenses (518) (268) 840
Other assets 399 (270) 33
Increase in
Accounts payable 3,737 7,565 1,680
Accrued liabilities 3,491 2,930 1,388
---------------- ---------------- ----------------
Net cash provided by operating activities 118 5,375 3,544
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (13,612) (7,309) (6,420)
Investment in joint venture (5,000) - -
---------------- ---------------- ----------------
Net cash used in investing activities (18,612) (7,309) (6,420)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common stock 42,313 - -
Payments on capitalized lease obligations (1,892) (1,379) (1,309)
Debt issuance costs - (95) (258)
Proceeds from exercise of stock options 798 73 35
Proceeds from exercise of warrants 130 - 750
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities 41,349 (1,401) (782)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 22,855 (3,335) (3,658)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,695 5,030 8,688
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,550 $ 1,695 $ 5,030
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
ZANY BRAINY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Background
- ----------
Zany Brainy, Inc. is a retailer of high quality toys, games, books, and
multimedia products for kids. Zany Brainy, Inc. was incorporated in
Pennsylvania on August 19, 1991. As of January 29, 2000, Zany Brainy, Inc.
operated 103 stores in 26 states, under the name "Zany Brainy," offering
educational products for children.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Zany Brainy, Inc.
and its wholly owned subsidiaries, Children's Products, Inc., Children's
Development, Inc., and Children's Distribution, LLC. (collectively, "the
Company"). All significant intercompany transactions and accounts have been
eliminated in consolidation.
Fiscal Year-End
- ---------------
The Company operates under a 52-53 week fiscal year ending the Saturday nearest
January 31. The financial statements for the years ended January 29, 2000
(fiscal 1999), January 30, 1999 (fiscal 1998) and January 31, 1998 (fiscal 1997)
each include 52 weeks.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and debt
instruments. The carrying values of these assets and liabilities are considered
to be representative of their respective fair values.
Business and Credit Risk Concentration
- --------------------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk are cash and cash equivalents and accounts receivable. The Company
limits its credit risk associated with cash and cash equivalents by placing its
investments in highly liquid funds. Receivables associated with third party
credit cards are processed by financial institutions which are monitored for
financial stability. The Company is dependent on key suppliers to provide
sufficient quantities of inventory at competitive prices. No single supplier
represented 10% or more of net purchases in fiscal 1999, fiscal 1998, or fiscal
1997.
F-7
<PAGE>
Use of Estimates
- ----------------
The presentation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Included in cash and cash
equivalents are $19,388,000 and $672,000 of overnight investments in repurchase
agreements at January 29, 2000 and January 30, 1999, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method based on moving average and includes certain
buying and distribution costs relating to the processing of merchandise. Buying
and distribution costs charged to cost of goods sold were $9,253,000, $6,833,000
and $5,752,000 during fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
Buying and distribution costs remaining in inventories at January 29, 2000 and
January 30, 1999 were $3,394,000 and $2,093,000, respectively. Store occupancy
costs include store rental, utilities and maintenance expenditures and are
included in cost of goods sold.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Additions and improvements are
capitalized, while repairs and maintenance are charged to expense as incurred.
The straight-line method of depreciation is used for financial reporting
purposes. The estimated useful lives are three to ten years for furniture and
fixtures, computers and equipment and the shorter of ten years, or the lease
term, for leasehold improvements. Certain personnel costs and out-of-pocket
costs directly associated with the construction or remodeling of stores are
capitalized and amortized over the lease term.
Long-Lived Assets
- -----------------
The Company follows Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Accordingly, in the event that facts and circumstances
indicate that property, equipment and intangible or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flow associated with the
asset is compared to the asset's carrying value to determine if a write-down to
recoverable value is necessary. Management believes that there has been no
impairment of the Company's long-lived assets.
Store Pre-opening Costs
- -----------------------
Pre-opening costs incurred at new store locations are charged to expense as
incurred.
Deferred Rent
- -------------
Rent expense on leases is recorded on a straight-line basis over the lease
period. The excess of rent expense over the actual cash paid is recorded as
deferred rent.
Revenue Recognition
- -------------------
Revenue is recognized at the point of sale.
F-8
<PAGE>
Advertising Costs
- -----------------
Advertising costs are charged to expense the first time the advertising takes
place. Advertising expense, including grand opening, was $6,530,000,
$5,036,000 and $2,301,000, net of certain vendor reimbursements, in fiscal 1999,
fiscal 1998 and fiscal 1997, respectively.
Supplemental Cash Flows Information
- -----------------------------------
For fiscal 1999, fiscal 1998, and fiscal 1997, the Company paid $680,000,
$1,028,000 and $718,000, respectively, for interest expense. For fiscal 1999
and 1998, the Company paid $229,000 and $57,000 for income taxes. Capital lease
obligations of $3,783,000, $3,315,000 and $45,000 were incurred on equipment
leases entered into in fiscal 1999, 1998 and 1997, respectively.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year presentation.
2. INITIAL PUBLIC OFFERING
------------------------
In June 1999, the Company 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). The Company used $18.4 million to pay
down an outstanding 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 joint venture. The remainder of the net
proceeds was used for general corporate purposes.
3. NET INCOME (LOSS) PER SHARE
---------------------------
Net income (loss) per share is calculated utilizing the principles of SFAS No.
128, "Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive
securities and is computed by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed, using the treasury stock method, assuming the
conversion or exercise of all dilutive securities such as Preferred stock,
options and warrants.
Under SFAS No. 128, the Company's granting of certain stock options, warrants
and Preferred stock resulted in potential dilution of basic EPS. The following
table summarizes the differences between basic weighted average shares
outstanding and diluted weighted average shares outstanding used to compute
diluted EPS.
<TABLE>
<CAPTION>
January 29, January 30, January 31,
2000 1999 1998
----------------- ---------------- ---------------
<S> <C> <C> <C>
Basic weighted average number of shares outstanding 15,834,260 5,373,365 5,085,153
Incremental shares from assumed exercise or conversion of:
Stock Options 1,380,224 1,118,803 -
Warrants 9,092 27,496 -
Preferred Stock 3,987,047 11,250,273 -
----------------- ---------------- ---------------
Diluted weighted average number of shares outstanding 21,210,623 17,769,937 5,085,153
================= ================ ===============
</TABLE>
The number of incremental shares from the assumed exercise of stock options and
warrants is calculated applying the treasury stock method. Stock options,
warrants and Preferred stock convertible into common shares were excluded from
the fiscal 1997 calculation as they were anti-dilutive.
F-9
<PAGE>
4. PROPERTY AND EQUIPMENT (in thousands)
-------------------------------------
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
-------------------- --------------------
<S> <C> <C>
Furniture and fixtures $ 26,164 $ 18,739
Computers and equipment 20,368 12,596
Leasehold improvements 15,395 13,158
---------- -----------
61,927 44,493
Less- Accumulated depreciation and amortization (27,325) (18,588)
---------- -----------
$ 34,602 $ 25,905
========== ===========
</TABLE>
Due to the relocation of the Company's distribution center, the Company recorded
a charge of $450,000 in fiscal 1998. This charge was due to a change in the
estimated useful life of certain property to be abandoned and the estimated loss
associated with assignment of the existing lease. This charge is included in
selling, general and administrative expenses in fiscal 1998.
5. ACCRUED LIABILITIES (in thousands)
-------------------
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
-------------------- --------------------
<S> <C> <C>
Payroll and related expenses $ 2,785 $ 3,163
Marketing Expense 2,883 -
Other 8,028 7,042
----------- ---------
$ 13,696 $ 10,205
=========== =========
</TABLE>
6. LINE OF CREDIT AND MASTER LEASE AGREEMENT
-----------------------------------------
In June 1999, the Company's existing line of credit was paid down with proceeds
from the Offering and the existing credit facility was terminated. The Company
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, at the
Company's option, at an annual rate of LIBOR plus 1.75%. The Company had no
outstanding balance on the line of credit as of January 29, 2000. The credit
facility requires the Company to comply with various covenants, as defined, and
restricts the payment of dividends. At January 29, 2000 and January 30, 1999,
there were $2,109,000 and $914,000, respectively, in outstanding letters of
credit issued against the lines.
In July 1999, the Company entered into a master lease agreement with a bank
which provides for $5,000,000 for leasing new and used equipment. The agreement
requires that the leases be capital in nature and is subject to certain
covenants, as defined. In fiscal 1999, the Company financed $3,783,000 of
equipment under the agreement. The Company is required to make monthly payments
including interest payments at an average rate of 10.3%. The equipment leased
under the agreement is the collateral. This agreement expires June 30, 2000.
7. INCOME TAXES
------------
The Company files a consolidated Federal income tax return. The Company has
adopted SFAS No. 109, "Accounting for Income Taxes." The effect of this
statement is to take principally a balance sheet approach to providing deferred
income taxes. Deferred tax balances are regularly adjusted through the income
statement to reflect the current year estimate of future tax payments.
F-10
<PAGE>
Income tax expense (benefit) consists of the following components (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
------------------ --------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ 262 $ 136 $ -
State 458 14 -
------- --------- --------
720 150 -
------- --------- --------
Deferred:
Federal 3,490 829 39
State 84 - 4
------- --------- --------
3,574 829 43
------- --------- --------
Increase (decrease) in valuation allowance (63) (7,166) 43
------- --------- --------
Income tax expense (benefit) $4,231 $(6,187) $ -
======= ========= ========
</TABLE>
F-11
<PAGE>
The deferred tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities consists of the following components (in
thousands):
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
------------------ -------------------
<S> <C> <C>
Deferred tax assets:
Deferred rent $1,751 $ 984
Inventory reserves 495 613
Other 310 503
Net operating loss carryforwards 1,352 5,652
AMT credit carryforwards 402 159
----------- ----------
Gross deferred tax asset 4,310 7,911
----------- ----------
Deferred tax liabilities:
Depreciation (580) (694)
Other (358) (200)
----------- ----------
Gross deferred tax liabilities (938) (894)
----------- ----------
Net deferred tax asset, before valuation 3,372 7,017
Less-Valuation allowance (617) (680)
----------- ----------
Net deferred tax asset $2,755 $6,337
=========== ==========
</TABLE>
Valuation allowances, primarily attributable to the Federal net operating loss
carryforward, were established in fiscal 1996 and 1997 in accordance with the
provisions of FASB Statement No. 109, "Accounting for Income Taxes". The Company
reversed $7,166,000 of the valuation allowance in fiscal 1998 based on
management's assessment that it is more likely than not that the net deferred
tax assets will be realized through future taxable earnings.
The reconciliation of the Federal statutory rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
------------------ ------------------- -------------------
<S> <C> <C> <C>
Tax provision (benefit) at Federal statutory 35.0% 34.0% (34.0)%
rate
State taxes, net of Federal benefit 2.7 0.3 (2.7)
Other 0.9 0.5 8.1
Increase (decrease) in valuation allowance (0.6) (254.8) 28.6
------------ ------------ -----------
38.0% (220.0)% 0%
============ ============ ===========
</TABLE>
The Company has Federal net operating loss carryforwards of approximately $2.0
million which expire in 2016.
F-12
<PAGE>
8. CONVERTIBLE PREFERRED STOCK
---------------------------
The components of Preferred stock as of January 30, 1999 were as follows:
Preferred Shares
Stock Series Price/Share Outstanding
- ------------- ----------------- ---------------
A $24.00 806,559
B 24.00 98,078
BB 24.00 748,334
C 22.50 749,984
----------
2,402,955
==========
The series A, B, BB and C Preferred stock (collectively, the Preferred stock) is
convertible into Common stock based on a defined conversion rate and must be
converted upon the closing of a public Common stock offering, as defined. The
Preferred stock has voting rights equal to the number of Common shares into
which it is convertible, participates in dividends to the extent they are
declared on the Common stock and has preference in liquidation equal to the sum
of the price paid per share and all declared but unpaid dividends. Upon
liquidation, the series C holders would receive $11.25 per share plus accrued
but unpaid dividends before any other distributions, with the remainder paid in
parity with the series A, B and BB preferred holders.
In June 1999, the Company converted all outstanding Preferred stock into
11,250,273 shares of Common stock. As of January 29, 2000, 5,000,000 shares of
Preferred stock were authorized, none of which is outstanding.
9. COMMON STOCK OPTIONS AND WARRANTS
---------------------------------
The Company's 1993 Stock Incentive Plan provides for the granting of Common
stock, Common stock options and stock appreciation rights to key employees and
members of the Board of Directors. The Company's 1998 Equity Compensation Plan
provides for the granting of Common stock options, restricted stock, stock
appreciation rights and performance units to employees, Board members and
consultants. Required disclosure information regarding the 1993 Stock Incentive
Plan and the 1998 Equity Compensation Plan (collectively, the "Plans") have been
combined due to similarities in the Plans.
The Company reserved 5,500,000, 3,700,000 and 2,500,000 shares of its Common
stock for awards under the Plans as of January 29, 2000, January 30, 1999 and
January 31, 1998, respectively. The Company accounts for the Plans under
Accounting Principles Board Opinion No. 25. Had compensation cost for the
options issued under the Plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation,"
F-13
<PAGE>
The Company's net income (loss), basic EPS and diluted EPS would have been equal
to the pro forma amounts indicated below (in thousands except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $6,904 $8,999 $ (153)
Pro forma 5,985 8,102 (626)
Basic EPS As reported $ 0.44 $ 1.67 $(0.03)
Pro forma 0.38 1.51 (0.12)
Diluted EPS As reported $ 0.33 $ 0.51 $(0.03)
Pro forma 0.28 0.46 (0.12)
</TABLE>
The weighted average fair value of options granted in fiscal 1999, 1998 and 1997
was $11.32, $2.60 and $0.78, respectively. The fair value of each option grant
is estimated on the grant date using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend rate - - -
Expected volatility 45.0% 45.0% -
Weighted average risk-free interest rate 5.3% 5.3% 6.4%
Expected lives (years) 4 4 4
</TABLE>
In fiscal 1999 and 1998, the Company granted 846,750 and 472,497 options,
respectively, under the Plans to employees and directors to purchase Common
stock at prices ranging from $3.33 to $11.75 per share. Options to purchase
400,000 shares of Common stock vest 100% after three years and remaining options
primarily vest over a four-year period from the date of grant. During 1999,
options to purchase 8,200 shares of common stock were granted with exercise
prices below the fair market value of the Company's common stock on the date of
grant. These options were valued at $43,000 and are being amortized as deferred
compensation expense over the vesting period. All other options were issued
with exercise prices equal to or greater than the fair market value on the grant
date. The options are exercisable over a maximum of 10 years.
Information with respect to all options outstanding, including options to
purchase 130,000 shares of Common stock issued outside the Plans prior to fiscal
1996, is as follows:
<TABLE>
<CAPTION>
Option Price Per Weighted Average
Shares Share Price Per Share
----------------- ------------------- ---------------------
<S> <C> <C> <C>
Options outstanding, February 1, 1997 1,583,200 $ 0.67-4.00 $ 3.79
Granted 1,169,507 3.33-4.00 3.56
Exercised (10,392) 3.33-4.00 3.46
Canceled (186,583) 3.33-4.00 3.40
Change in exercise price
Original price (1,222,685) 4.00 4.00
New price 1,222,685 3.33 3.33
----------- ----------- ----------
Options outstanding, January 31, 1998 2,555,732 0.67-4.00 3.39
Granted 472,497 4.00-9.00 6.26
Exercised (22,048) 3.33 3.33
Canceled (153,319) 3.33-9.00 3.83
----------- ----------- ----------
Options outstanding, January 30, 1999 2,852,862 0.67-9.00 3.84
Granted 846,750 3.33-11.75 11.32
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Exercised (262,869) 0.67-5.25 3.04
Canceled (237,952) 3.33-11.75 6.38
----------- ------------ ---------
Options outstanding January 29, 2000 3,198,791 $ 2.67-11.75 $ 5.70
=========== ============ =========
</TABLE>
Of the 130,000 shares of Common stock issued outside the Plans, 40,000 were
exercised in fiscal 1999.
At January 29, 2000, the weighted average contractual life of all options
outstanding was 7.4 years, there were 1,360,286 options vested at a weighted
average exercise price of $3.60 and there were 2,131,022 shares reserved under
the Plans which were not covered by stock options granted.
In fiscal 1996 and fiscal 1997, the Company granted warrants to purchase 15,000
shares and 32,550 shares of Common stock, respectively, to certain consultants.
The warrants have an exercise price of $4.00 per share and are exercisable on
various dates through January 2003. In June 1999, the warrants to purchase
32,550 shares of Common stock at $4.00 per share were exercised. In addition,
the agent who placed the series A preferred purchased for $561 warrants to
purchase 56,073 shares of Common stock at $6.00 per share. These warrants were
exercised in conjunction with the Offering.
10. RELATED PARTY TRANSACTIONS
---------------------------
In October 1999, the Company formed ZB Holdings LLC, a joint venture with Online
Retail Partners, LLC. ZB Holdings LLC 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 LLC formed ZanyBrainy.com LLC
("ZanyBrainy.com"), a wholly owned subsidiary, for the purpose of developing and
operating such a site. The Company contributed $5.0 million for the purchase of
100% of the outstanding Preferred interests of ZB Holdings LLC and Online Retail
Partners LLC contributed a total of $15.0 million for the purchase of 100% of
the Common interests of ZB Holdings LLC. Both partners hold 50% of the voting
stock of the joint venture and the Company had an ownership interest in the
joint venture of approximately 57%. There could be future dilution of the
Company's interests if further investments, or stock grants, in the joint
venture are made.
The investment is accounted for under the equity method of accounting with
profits and losses allocated in accordance with the joint venture agreement. As
of January 29, 2000, no losses were allocated to the Company's preferred
interests in ZB Holdings LLC under the terms of the joint venture agreement.
The Company has entered into certain agreements with ZanyBrainy.com pursuant to
which it will provide services to, and act as an agent for, ZanyBrainy.com.
Under the terms of the agreements, these services are to be provided at cost to
ZanyBrainy.com. During fiscal 1999, the Company procured and transferred, at
cost, $8,186,000 of merchandise, including freight and other procurement costs,
to ZanyBrainy.com. In addition, the Company transferred costs of $2,673,000 for
the cost of production and marketing materials, and $250,000 for the cost of
other services rendered. At January 29, 2000, a receivable of $1,378,000 from
ZanyBrainy.com was included in receivables, net on the accompanying balance
sheet.
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
Leases
- -------
The Company leases retail, distribution and office space and equipment under
various operating leases. Most store leases typically have an average initial
term of ten years, with two five-year renewal options. Certain leases provide
for additional rent contingent upon store sales levels. Base rent expense for
fiscal 1999, 1998 and 1997 was approximately $20,332,000, $13,927,000, and
$11,468,000, respectively.
The Company has entered into several leases for store and distribution center
equipment and fixtures that have been accounted for as capital leases. The
capitalized cost of $10,130,000 and $6,961,000 and related accumulated
amortization of $4,044,000 and $2,336,000 has been included in property and
equipment at
F-15
<PAGE>
January 29, 2000 and January 30, 1999, respectively. The present value of the
minimum lease payments is as follows (in thousands):
As of
January 29,
2000
--------------
Total minimum lease payments $ 7,343
Less - Amount representing interest (910)
--------------
Present value of minimum lease payments $ 6,433
==============
Future minimum lease payments under the Company's operating and capital leases,
including leases for stores opening in fiscal 2000 which were entered into
before the period indicated, are as follows (in thousands):
As of January 29, 2000
-----------------------------------------------
Fiscal Operating Capital
- ------ --------- -------
2000 $ 24,759 $3,093
2001 26,806 2,314
2002 27,000 1,533
2003 27,306 403
2004 26,472 -
2005 and thereafter 79,661 -
---------- ---------
$212,004 $7,343
========== =========
Subsequent Event
- ----------------
Subsequent to year-end, the Company committed to contribute an additional
$6,840,000 to ZB Holdings, LLC and Online Retail Partners committed to
contribute an additional $5,160,000. These contributions will result in a total
additional investment in ZB Holdings, LLC of $12,000,000. After these
contributions, both partners will retain 50% of the voting stock of the joint
venture and the Company will have an ownership interest in the joint venture of
approximately 51%.
401(k) Plan
- -----------
On October 1, 1996, the Company adopted a 401(k) plan for its employees (the
Plan). The Plan allows participants to contribute up to 15% of their
compensation and permits a discretionary employer match, subject to certain
defined limitations. Employer contributions vest 20% per year. No employer
contributions were made during fiscal 1999 or 1998. The cost to administer the
Plan was $16,000 and $10,000 for fiscal 1999 and 1998, respectively.
General
- -------
From time to time, the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be estimated, in
the opinion of the Company, any such liability will not have a material adverse
effect on its financial position or operating results.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Noodle Kidoodle, Inc.
We have audited the accompanying consolidated balance sheets of Noodle Kidoodle,
Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended January 29, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Noodle Kidoodle,
Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999 and the
results of their operations and cash flows for each of the years in the three
year period ended January 29, 2000 in conformity with generally accepted
accounting principles.
As discussed in Note 12 to the Consolidated Financial Statements, the Company
changed its method of accounting for start-up costs.
Janover Rubinroit, LLC
/s/ Janover Rubinroit, LLC
Garden City, New York
March 15, 2000
F-17
<PAGE>
<TABLE>
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, 2000 and January 30, 1999
January 29, January 30,
2000 1999
(In thousands except share data)
ASSETS
<CAPTION>
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 491 $10,188
Merchandise inventories 33,610 21,074
Prepaid expenses and other current assets 3,244 3,780
Deferred income taxes 1,448 -
Total current assets 38,793 35,042
Property, plant and equipment at cost 41,874 32,138
Less accumulated depreciation 12,943 9,238
28,931 22,900
Other assets
Deferred income taxes 4,992 -
Other 166 20
5,158 20
Total Assets $72,882 $57,962
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,019 $ 21
Trade accounts payable 9,498 8,576
Accrued expenses and taxes 9,976 9,738
Net liabilities of discontinued operations - 1,303
Total current liabilities 23,493 19,638
Long-term debt 689 712
Deferred income taxes - -
Minority interest - -
Commitments and contingencies - -
Stockholders' equity:
Preferred stock-authorized 1,000,000 shares,
par value $.001 (none issued) - -
Common stock-authorized 15,000,000 shares,
par value $.001; issued 8,506,901 shares 9 9
Capital in excess of par value 43,097 43,087
Retained earnings (deficit) 9,291 (1,747)
52,397 41,349
Less treasury stock, at cost, 901,261 and
910,861 shares, respectively 3,697 3,737
Total stockholders' equity 48,700 37,612
Total Liabilities and Stockholders' Equity $72,882 $57,962
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-18
<PAGE>
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended
January 29, 2000, January 30, 1999 and January 31, 1998
<TABLE>
<CAPTION>
January 29, January 30, January 31,
2000 1999 1998
(In thousands except share data)
<S> <C> <C> <C>
Net sales $135,038 $107,886 $81,664
Costs and expenses:
Cost of products sold including
buying and warehousing costs 82,770 65,405 50,388
Selling and administrative expenses 49,356 38,804 33,552
------- ------- -------
132,126 104,209 83,940
------- ------- -------
Operating income (loss) 2,912 3,677 (2,276)
Interest income 116 269 448
Interest expense (616) (194) (90)
------- ------- -------
Income (loss)from continuing
operations before income taxes 2,412 3,752 (1,918)
Income taxes (benefit) (7,271) - -
Minority interest - - -
------- ------- -------
Income (loss) from continuing operations 9,683 3,752 (1,918)
Gain on disposal of discontinued operation,
net of income taxes of $950 1,550 - -
------- ------- -------
Net income (loss) before cumulative
effect of change in accounting principle 11,233 3,752 (1,918)
Cumulative effect of change in accounting
principle, net of income taxes (benefit)
of $(119) (195) - -
------- ------- -------
Net income (loss) $11,038 $3,752 $(1,918)
Basic income (loss) per share:
Continuing operations $ 1.27 $ .49 $ (.25)
Discontinued operations .20 - -
Cumulative effect of change in
accounting principle (.03) - -
------- ------- -------
$ 1.45 $ .49 $ (.25)
Diluted income (loss) per share:
Continuing operations $ 1.25 $ .49 $ (.25)
Discontinued operations .20 - -
Cumulative effect of change in
accounting principle (.03) - -
------- ------- -------
$ 1.42 $ .49 $ (.25)
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-19
<PAGE>
<TABLE>
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended
January 29, 2000, January 30, 1999, and January 31, 1998
(In thousands)
Capital in Retained Treasury Stock
Common Stock Excess of Earnings (at Cost)
Shares Amount Par Value (Deficit) Shares Amount
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance - February 1, 1997 8,504 $ 9 $43,063 $ (3,581) 924 $3,792
Net loss for the year - - - (1,918) - -
Balance - January 31, 1998 8,504 9 $43,063 $ (5,499) 924 $3,792
Exercise of stock options 3 - 24 - (13) (55)
Net income for the year - - - 3,752 - -
Balance - January 30, 1999 8,507 9 43,087 (1,747) 911 3,737
Exercise of stock options - - 10 - (10) (40)
Net income for the year - - - 11,038 - -
Balance - January 29, 2000 8,507 $ 9 $43,097 $ 9,291 901 $ 3,697
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-20
<PAGE>
<TABLE>
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
January 29, 2000, January 30, 1999 and January 31, 1998
(In thousands)
January 29, January 30, January 31,
2000 1999 1998
<CAPTION>
<S> <C> <C> <C>
Continuing Operations:
Cash flows from operating activities:
Net income (loss) from continuing operations $ 9,683 $ 3,752 $(1,918)
Adjustments to reconcile to net cash
provided (used):
Depreciation 3,787 2,932 2,490
Deferred income taxes (6,440) - -
Loss on disposal of fixtures and equipment 17 - 243
Cumulative effect of accounting change (195) - -
Decrease (increase) in non-cash
working capital accounts:
Merchandise inventories (12,536) (4,253) 497
Prepaid expenses and other current assets 536 (756) (272)
Trade accounts payable 922 2,528 999
Accrued expenses and taxes 238 2,012 634
Increase in other assets (146) - -
Net cash provided by (used in) continuing
operations (4,134) 6,215 2,673
Discontinued Operations:
Net gain from disposal of discontinued
operating activities 1,550 - -
Decrease (increase) in non-cash working
capital accounts (1,303) 130 (1,252)
Net cash provided by (used in)
discontinued operations 247 130 (1,252)
Net cash provided by (used in) operating
activities (3,887) 6,345 1,421
Cash flows from investing activities:
Property additions (9,835) (7,318) (1,664)
Other - 3 27
Net cash used in investing activities (9,835) (7,315) (1,637)
Cash flows from financing activities:
Proceeds from line of credit 53,326 - -
Payments on line of credit (49,330) - -
Maturities of long-term debt (21) (20) (18)
Exercise of employee options 50 79 -
Net cash provided by (used in) financing
activities 4,025 59 (18)
Net increase (decrease) in cash and cash
equivalents (9,697) (911) (234)
Cash and cash equivalents - beginning of
year 10,188 11,099 11,333
Cash and cash equivalents - end of year $ 491 $10,188 $11,099
Supplemental cash flow information:
Net cash paid during the year for:
Interest expense $ 617 $ 195 $ 91
Income taxes, net - - -
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-21
<PAGE>
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
The following summary of the Company's major accounting policies is presented to
assist in the interpretation of the financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of the parent company
and all majority owned subsidiary and partnership companies. All significant
intercompany balances and transactions are eliminated in consolidation. The
Company and its subsidiaries are on a 52-53 week accounting period ending on the
Saturday closest to January 31. The fiscal years for the financial statements
presented all consist of 52 week periods.
The Company has reported 100% of its majority owned partnership's loss for the
year since the minority interest is limited to the extent of its equity capital.
Should the losses reverse in subsequent years, the Company will be credited with
the amount of minority interest losses previously absorbed before credit is made
to the minority interest.
Description of business
The Company is in one business segment, a specialty retailer of a broad
assortment of educationally oriented, creative and non-violent children's
products, including toys, books, games, video and audio tapes, computer
software, crafts, and other learning products, and follows the requirements of
SFAS No. 131.
Revenue recognition
Revenue is recognized at the point of sale to retail customers.
Cash and cash equivalents
All highly liquid investments purchased with a maturity of three months or less
are considered to be cash equivalents. The Company places its temporary cash
investments in high grade instruments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Earnings per share
Basic earnings per share has been computed based on the average number of common
shares outstanding. Diluted earnings per share reflects the increase in average
common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock method.
F-22
<PAGE>
Property, plant and equipment
Plant and equipment is stated at cost and is depreciated on a straight-line
basis over estimated useful lives. Repairs and maintenance are charged to
expense as incurred; renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized.
Leasehold improvements are amortized over the terms of the respective leases or
over their useful lives, whichever is shorter. Useful lives of other plant and
equipment vary among the classifications, but range for buildings and
improvements from 10-40 years and for fixtures and equipment from 4-10 years.
Store Pre-opening Costs
Pre-opening costs incurred at new store locations are charged to expense as
incurred in accordance with AICPA statement of position 98-5.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. This method also
requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
Fair value disclosures
The carrying amounts of cash and cash equivalents, other current assets,
accounts payable and other current liabilities approximates fair value because
of the short term maturity of these instruments. The stated value of long-term
debt, including current maturities, approximates fair value.
NOTE 2 - DISCONTINUED OPERATIONS:
During the third quarter of fiscal 2000, the Company adjusted the estimated gain
on disposal of its discontinued wholesale operations recognized in fiscal 1996.
The adjustment, resulting in an additional net gain on disposal of discontinued
operations of $1,550 net of income taxes of $950, arose from the sale of the
Company's leasehold interest in its former distribution center in Birmingham,
Alabama and the finalization of liabilities related to its discontinued
wholesale operations.
F-23
<PAGE>
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
Fiscal Years Ended
January 29, January 30,
2000 1999
(In thousands)
<CAPTION>
<S> <C> <C>
Land $ 272 $ 272
Building and improvements 1,986 1,896
Fixtures and equipment 19,621 14,839
Leasehold improvements 19,995 15,131
------ ------
41,874 32,138
Less accumulated depreciation (12,943) (9,238)
------ ------
$28,931 $22,900
</TABLE>
NOTE 4 - ACCRUED EXPENSES AND TAXES:
<TABLE>
Fiscal Years Ended
January 29, January 30,
2000 1999
(In thousands)
<CAPTION>
<S> <C> <C>
Payroll and related benefits $1,372 $1,721
Rent and occupancy 2,600 2,051
Insurance 193 226
Advertising 1,286 2,103
Fixtures and equipment 256 302
Other 4,269 3,335
----- -----
$9,976 $9,738
</TABLE>
F-24
<PAGE>
NOTE 5 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
Fiscal Years Ended
January 29, January 30,
2000 1999
(In thousands)
<CAPTION>
<S> <C> <C>
Revolving credit facility $3,996 $ -
8% unsecured promissory note,
due in quarterly installments
through 2016 712 733
------ ----
4,708 733
Less current maturities 4,019 21
------ ----
$ 689 $712
</TABLE>
The Company has a revolving credit agreement which provides for maximum
borrowings of up to $15 million until June 27, 2000. Borrowings may not exceed
certain percentages of, and are collateralized by, inventories, receivables, and
certain other assets. The agreement provides for an annual collateral management
fee and a commitment fee on the unused portion of the commitment. Outstanding
borrowings bear interest, at the option of the Company, based on the prime rate
or LIBOR. Interest rates on borrowings ranged from 7.75% to 8.50% during the
year. The agreement contains certain covenants which among other items, limits
the payment of cash dividends when borrowings under the agreement are
outstanding.
Annual maturities of long-term debt during the next five years are $4,019,000,
$25,000, $26,000, $28,000 and $31,000.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Minimum annual commitments under non-cancelable leases in effect at January
29, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2001 $ 14,821
2002 14,936
2003 14,724
2004 14,714
2005 14,383
Thereafter 51,419
$124,997
</TABLE>
At January 29, 2000, the Company and its subsidiaries were lessees of office and
warehouse space, stores and transportation equipment under various leases. In
addition to fixed rents and rentals based on sales, certain of the leases
require the payment of taxes and other costs. Some leases include renewal
options.
F-25
<PAGE>
Rental expense (income) for operating leases was as follows:
<TABLE>
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
(In thousands)
<CAPTION>
<S> <C> <C> <C>
Minimum rentals $10,310 $ 7,853 $6,979
Taxes and other costs 3,438 2,775 2,637
Sublease rentals (133) (73) -
------- ------- ------
$13,615 $10,555 $9,616
</TABLE>
Litigation
The Company is not party to any legal proceedings other than claims and lawsuits
arising in the normal course of its business which, in the opinion of the
Company's management, are not individually or in the aggregate material to its
business.
Employment agreements
The Company has employment agreements with certain officers. Those agreements
provide for minimum salary levels as well as for incentive bonuses which are
payable if specified performance goals are attained.
NOTE 7 - CAPITAL STOCK:
Preferred stock
The Company has 1,000,000 authorized (none-issued) shares of preferred stock,
par value $0.001, consisting of 440,000 shares of Series A Junior Participating
Preferred reserved for use under the Stockholders' Rights Plan and the remainder
for other unspecified purposes.
Stockholders' Rights Plan
On March 11, 1998, the Board of Directors of the Company adopted a new
Stockholder Rights Plan (the "Plan") to succeed the Stockholder Rights Plan that
expired on May 15, 1998. Under the terms of the Plan, which expires on May 15,
2008, the Company declared a dividend of one preferred stock purchase right for
every outstanding share of common stock to stockholders of record on May 15,
1998. The rights are exercisable, if not previously redeemed, under certain
circumstances involving actual or potential acquisitions of 15% or more of the
outstanding common stock of the Company. Each right represents a right to buy
from the Company 1/100th of a share of Series A Junior Participating Stock, par
value $.001, at a price of $25.00, subject to certain anti-dilution adjustments.
The rights are redeemable by the Company at a redemption price of $.001 per
right.
NOTE 8 - STOCK OPTIONS:
Stock Incentive Plan
The Company's Stock Incentive Plan (the "Plan") for key employees, directors and
consultants provides for the granting of stock options, stock appreciation
rights (SAR's), dividend equivalent rights, restricted stock, unrestricted stock
and performance shares and is administered by the Compensation and Stock Option
Committee (the "Committee") of the Board of Directors of the Company. The Plan
provides for automatic increases in the number of shares available for issuance
under the plan of 2% per year of
F-26
<PAGE>
the total outstanding shares of common stock at the end of the immediately
preceding year. In no event may the sum of the number of shares subject to then
outstanding awards under all of the Company's stock-based incentive plans
("Stock Plans") and the shares then available for future awards under the Stock
Plans exceed 15% of the number of then outstanding shares of Common Stock,
together with the shares subject to the then outstanding awards under the Stock
Plans and the shares then available for future awards under the Stock Plans.
Under the terms of the Plan, options granted may be either non-qualified or
incentive stock options and the exercise price, determined by the Committee,
shall be at least 75% (100% in the case of an incentive stock option) of the
fair market value of a share on the date of grant. SAR's may be granted (subject
to specified restrictions) in connection with all or any part of, or
independently of, any option granted under the Plan. No SAR's, dividend
equivalent rights, restricted stock, unrestricted stock or performance shares
have been granted to date under the Plan. Options granted under the Plan are
exercisable in installments; however, no options are exercisable within one year
or later than ten years from the date of grant.
Stock option plan for outside directors
The Company's Outside Directors Stock Option Plan reserves 125,000 shares of
common stock for the issuance of stock options related to this plan. The Stock
Option Plan for Outside Directors provides that upon the initial election to the
Board, each eligible director is granted an option to purchase 5,000 shares of
common stock and 6,000 shares each year thereafter at the fair market value on
the date of grant. The options have a term of five years and become exercisable
50% on the first anniversary of the date of grant and 50% on the second
anniversary of the date of grant. The Outside Directors Stock Option Plan
expired in April, 1999, and there will be no future grants under this plan.
F-27
<PAGE>
The following summary sets forth the activity under the Company's stock
incentive plans:
<TABLE>
Weighted Average
Shares Exercise Price
<CAPTION>
<S> <C> <C>
Outstanding at February 1, 1997 630,859 $5.81
Granted 247,000 3.39
Exercised - -
Terminated (358,034) 5.36
Outstanding at January 31, 1998 519,825 4.97
Granted 291,600 4.83
Exercised (16,400) 4.82
Terminated (67,900) 5.26
Outstanding at January 30, 1999 727,125 4.92
Granted 311,500 5.12
Exercised (9,600) 5.12
Terminated (97,200) 5.77
Outstanding at January 29, 2000 931,825 $4.90
Options exercisable at:
January 29, 2000 358,944 $5.16
January 30, 1999 232,913 5.56
January 31, 1998 141,406 6.01
Available for grant at:
January 29, 2000 85,657
January 30, 1999 198,036
January 31, 1998 128,800
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
Outstanding Options Options Exercisable
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Out- Contractual Exercise Exer- Exercise
Prices standing Life Price cisable Price
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ 3.00 - $ 5.00 609,825 3.57 4.07 161,693 3.64
$ 5.01 - $10.00 317,000 3.20 6.39 192,251 6.23
$10.01 - Up 5,000 5.75 13.13 5,000 13.13
-------- --------
931,825 358,944
</TABLE>
F-28
<PAGE>
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting For Stock Based Compensation", and, accordingly, no compensation
cost has been recognized for the stock option plans. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
<TABLE>
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
<CAPTION>
<S> <C> <C> <C>
Expected life (years) 5 5 5
Risk-free interest rate 6.77% 4.55% 6.0%
Expected volatility 53.8% 50.1% 44.7%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
Had compensation for options granted in Fiscal 2000, 1999 and 1998 been
determined consistent with SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would approximate the pro-forma amounts indicated below.
<TABLE>
Fiscal Years Ended
January 29, January 30, January 30,
2000 1999 1998
(In thousands except share data)
<CAPTION>
<S> <C> <C> <C>
Net income (loss) $10,721 $3,546 $(2,042)
Basic income (loss) per share $ 1.41 $ .47 $ (.27)
Diluted income (loss) per
share $ 1.38 $ .46 $ (.27)
</TABLE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of future effects. SFAS No. 123 does not apply to awards prior to
Fiscal 1996, and additional awards in future years are anticipated.
The weighted average fair value of options granted was $2.77, $2.27, and $1.61
for Fiscal 2000, 1999 and 1998 respectively.
F-29
<PAGE>
NOTE 9 - TAXES ON INCOME:
Income taxes (benefit) consist of the following:
<TABLE>
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
(In thousands)
<CAPTION>
<S> <C> <C> <C>
Current:
Federal $ 20 $ 100 $ -
State and local - - -
20 100 -
Deferred (20) (100) -
- - -
Decrease in valuation allowance (7,271) - -
Continuing operations (7,271) - -
Discontinued operations 950 - -
Cumulative effect of change in
accounting principle (119) - -
$(6,440) $ - $ -
</TABLE>
A reconciliation of the statutory federal income tax rate attributable to income
(loss) from continuing operations to the effective income tax rate is as
follows:
<TABLE>
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
(In thousands)
<CAPTION>
<S> <C> <C> <C>
Federal at statutory rates 34% 34% (34)%
State and local taxes
net of federal tax benefits 4 4 (4)
Losses with no current tax
benefit - - 38
Utilization of loss carryforwards (38) (38) -
Decrease in valuation allowance (301) - -
(301)% -% -%
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
revenue and expense for tax and financial statement purposes. The components of
deferred tax assets (liabilities) consist of the following:
F-30
<PAGE>
<TABLE>
Fiscal Years Ended
January 29, January 30,
2000 1999
(In thousands)
<CAPTION>
<S> <C> <C>
Net operating loss carryforward $6,042 $6,282
Capitalizable inventory costs 566 342
Discontinued operations - 711
Allowance for doubtful accounts - 485
Restructured operations and other 487 680
Gross deferred tax assets 7,095 8,500
Depreciation (655) (827)
Gross deferred tax liabilities (655) (827)
Net deferred tax assets 6,440 7,673
Valuation allowance - 7,673
Net tax assets $6,440 $ -
</TABLE>
Valuation allowances, primarily attributable to the Federal net operating loss
carryforward, were established in fiscal 1996 through 1998 in accordance with
the provisions of SFAS No. 109, "Accounting for Income Taxes". The Company
reversed $6,440 of the valuation allowance in the current fiscal year based on
management's assessment that it is more likely than not that the net deferred
tax assets will be realized through future taxable earnings.
The Company has available net operating loss carryforwards of approximately
$16.0 million which expire between 2011 and 2013 and alternative minimum tax
credit carryovers of approximately $100 thousand which can be carried forward
indefinitely.
NOTE 10 - EMPLOYEE RETIREMENT PLANS:
The Company has a 401-k savings plan designed to provide additional financial
security during retirement by providing eligible employees with an incentive to
make regular savings contributions. The Company previously matched 10% of the
first 4% of compensation contributed by the employee. Effective during fiscal
year 2000, the Company's matching contribution increased to 25% of the first 5%
of compensation contributed.
The Company also has a non-qualified deferred compensation program which permits
key employees to defer a portion of their compensation until their retirement.
F-31
<PAGE>
NOTE 11 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted income
(loss) per share from continuing operations:
<TABLE>
Fiscal Years Ended
January 29, January 30, January 31,
2000 1999 1998
(In thousands except share data)
<CAPTION>
<S> <C> <C> <C>
Numerator
Net income (loss) from continuing
operations - numerator for
basic and diluted income (loss)
per share $9,683 $ 3,752 $ (1,918)
Denominator
Denominator for basic income (loss)
per share - weighted average
shares 7,603 7,588 7,580
Effect of dilutive securities -
employee stock options 158 134 7
Denominator for diluted
earnings per share -
weighted average shares
and dilutive potential
common shares 7,761 7,722 7,587
Income (loss) per share - continuing
operations:
Basic $ 1.27 $ .49 $ (.25)
Diluted $ 1.25 $ .49 $ (.25)
</TABLE>
In accordance with SFAS No. 128, as a result of losses from continuing
operations in fiscal 1998, the inclusion of stock options were antidilutive and,
therefore, were not utilized in the computation of diluted earnings per share.
F-32
<PAGE>
NOTE 12 - ACCOUNTING CHANGE:
In the first quarter of fiscal 2000, the Company adopted Statement of Position
("SOP") 98-5, "Reporting on The Costs of Start-Up Activities". The change
involved expensing store pre-opening costs as incurred. Previously, the Company
capitalized such costs and amortized them over the first twelve months of a
store's operations.
NOTE 13 - INTERIM FINANCIAL DATA (UNAUDITED):
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except share data)
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal Year Ended January 29, 2000:
Sales $22,890 $20,795 $27,205 $64,148
Gross profit 8,990 8,229 10,522 24,527
------- ------- ------- -------
Net income (loss):
Continuing operations (1,054) (3,339) (2,996) 17,072
Discontinued operations - - 2,500 (950)
Accounting change (314) - - 119
------- ------- ------- -------
Net income (loss) $(1,368) $(3,339) $ (496) $16,241
Basic income (loss) per share:
Continuing operations $ (.14) $ (.44) $ (.39) $ 2.24
Discontinued operation - - .33 (.12)
Accounting change (.04) - - .02
------- ------- ------- -------
Net income (loss) $ (.18) $ (.44) $ (.06) $ 2.14
Diluted income (loss) per share:
Continuing operations $ (.14) $ (.44) $ (.39) $ 2.21
Discontinued operations - - .33 (.12)
Accounting change (.04) - - .01
------- ------- ------- -------
Net income (loss) $ (.18) $ (.44) $ (.06) $ 2.10
Weighted average shares:
Basic 7,599 7,604 7,604 7,605
Assuming dilution 7,852 7,770 7,681 7,740
Fiscal Year Ended January 30, 1999:
Sales $18,045 $18,431 $22,670 $48,740
Gross profit 7,015 7,342 8,854 19,270
------- ------- ------- -------
Net income (loss) $(1,049) $(1,525) $(1,554) $ 7,880
Net income (loss) per share:
Basic $ (.14) $ (.20) $ (.20) $ 1.04
Assuming dilution $ (.14) $ (.20) $ (.20) $ 1.00
Weighted Average Shares:
Basic 7,580 7,587 7,592 7,594
Assuming dilution 7,670 7,699 7,661 7,860
</TABLE>
F-33
<PAGE>
APPENDIX I
================================================================================
AGREEMENT AND PLAN OF MERGER
Among
ZANY BRAINY, INC.
(a Pennsylvania corporation),
NOODLE KIDOODLE, INC.
(a Delaware corporation)
and
NIGHT OWL ACQUISITION, INC.
(a Delaware corporation)
Dated as of April 21, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
ARTICLE I THE MERGER............................................................................. 2
Section 1.1. The Merger........................................................................ 2
Section 1.2. Closing, Effective Time of the Merger............................................. 2
Section 1.3. Conversion and Cancellation of Securities......................................... 2
Section 1.4. Exchange of Certificates.......................................................... 3
Section 1.5. Options........................................................................... 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................... 5
Section 2.1. Organization, Powers and Qualifications........................................... 5
Section 2.2. Subsidiaries...................................................................... 6
Section 2.3. Capital Stock..................................................................... 6
Section 2.4. Certificate of Incorporation, By-Laws, Minute Books and Records................... 7
Section 2.5. Authority; Binding Effect......................................................... 7
Section 2.6. No Conflict; Approvals............................................................ 8
Section 2.7. Governmental Consents and Approvals............................................... 8
Section 2.8. SEC Reports....................................................................... 8
Section 2.9. Financial Statements.............................................................. 9
Section 2.10. Absence of Certain Changes........................................................ 9
Section 2.11. Indebtedness; Absence of Undisclosed Liabilities.................................. 10
Section 2.12. Assets............................................................................ 10
Section 2.13. Contracts......................................................................... 10
Section 2.14. Insurance......................................................................... 11
Section 2.15. Authorizations; Compliance With Law............................................... 11
Section 2.16. Taxes............................................................................. 12
Section 2.17. Absence of Litigation; Claims..................................................... 13
Section 2.18. Employee Benefit Plans; Employment Agreements..................................... 13
Section 2.19. Labor Matters..................................................................... 16
Section 2.20. Environmental Matters............................................................. 16
Section 2.21. Intellectual Property; Year 2000.................................................. 18
Section 2.22. Adequacy of Disclosure............................................................ 19
Section 2.23. Real Property..................................................................... 20
Section 2.24. Tax Matters....................................................................... 21
Section 2.25. Affiliates........................................................................ 21
Section 2.26. Board Action; Amendment of Rights Agreement; Applicability of Takeover Statutes... 21
Section 2.27. Opinion of Financial Advisor...................................................... 22
Section 2.28. Brokers and Finders............................................................... 22
Section 2.29. Accounting Matters................................................................ 22
Section 2.30. Voting Requirements............................................................... 22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.............................. 22
Section 3.1. Organization and Powers........................................................... 23
Section 3.2. Capital Stock..................................................................... 23
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 3.3. Authority; Binding Effect......................................................... 24
Section 3.4. No Conflict; Approvals............................................................ 24
Section 3.5. Governmental Consents and Approvals............................................... 24
Section 3.6. SEC Reports....................................................................... 24
Section 3.7. Financial Statements.............................................................. 25
Section 3.8. Absence of Certain Changes........................................................ 25
Section 3.9. Absence of Undisclosed Liabilities................................................ 25
Section 3.10. Absence of Litigation; Claims..................................................... 26
Section 3.11. Authorizations; Compliance With Law............................................... 26
Section 3.12. Adequacy of Disclosure............................................................ 26
Section 3.13. Assets............................................................................ 26
Section 3.14. Taxes............................................................................. 27
Section 3.15. Employee Benefit Plans; Employment Agreements..................................... 27
Section 3.16. Labor Matters..................................................................... 27
Section 3.17. Environmental Matters............................................................. 28
Section 3.18. Intellectual Property............................................................. 28
Section 3.19. Tax Matters....................................................................... 29
Section 3.20. Affiliates........................................................................ 29
Section 3.21. Opinion of Financial Advisor...................................................... 29
Section 3.22. Brokers and Finders............................................................... 29
Section 3.23. Board Action...................................................................... 29
Section 3.24. Accounting Matters................................................................ 29
Section 3.25. Voting Requirements............................................................... 29
Section 3.26. ZB Holdings LLC................................................................... 30
ARTICLE IV OTHER AGREEMENTS...................................................................... 30
Section 4.1. Conduct of the Company's Business................................................. 30
Section 4.2. Conduct of Business by Parent Pending the Merger.................................. 32
Section 4.3. Parent's Undertakings............................................................. 33
Section 4.4. Access to Information............................................................. 33
Section 4.5. Stockholder Vote; Proxy Statement................................................. 33
Section 4.6. Reasonable Best Efforts........................................................... 35
Section 4.7. Public Announcements.............................................................. 35
Section 4.8. Notification...................................................................... 36
Section 4.9. Subsequent Financial Statements................................................... 36
Section 4.10. Regulatory and Other Authorizations............................................... 36
Section 4.11. Takeover Statute.................................................................. 37
Section 4.12. Indemnification of Directors and Officers......................................... 37
Section 4.13. Affiliates........................................................................ 37
Section 4.14. Tax-Free Reorganization........................................................... 38
Section 4.15. No Solicitation................................................................... 38
Section 4.16. Accountant's Letters.............................................................. 39
Section 4.17. Employee Matters.................................................................. 40
Section 4.18. The Company's Chief Executive Officer and President............................... 40
Section 4.19. Board of Directors................................................................ 40
Section 4.20. Undertakings Relating to the Real Property........................................ 40
Section 4.21. Company 401(k) Plans.............................................................. 41
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE V CONDITIONS TO CLOSING.................................................................. 41
Section 5.1. Conditions to the Obligations of the Company and Parent and Merger Sub............ 41
Section 5.2. Conditions to the Obligations of the Company...................................... 42
Section 5.3. Conditions to the Obligations of Parent and Merger Sub............................ 43
ARTICLE VI TERMINATION, AMENDMENT AND WAIVER..................................................... 44
Section 6.1. Termination....................................................................... 44
Section 6.2. Effect of Termination............................................................. 46
Section 6.3. Amendment......................................................................... 47
Section 6.4. Waiver............................................................................ 47
ARTICLE VII MISCELLANEOUS........................................................................ 47
Section 7.1. Survival of Representations and Warranties........................................ 47
Section 7.2. Entire Agreement.................................................................. 48
Section 7.3. Notices........................................................................... 48
Section 7.4. Governing Law..................................................................... 49
Section 7.5. Jurisdiction...................................................................... 49
Section 7.6. Descriptive Headings.............................................................. 49
Section 7.7. Parties in Interest............................................................... 49
Section 7.8. Counterparts...................................................................... 49
Section 7.9. Expenses.......................................................................... 49
Section 7.10. Personal Liability................................................................ 49
Section 7.11. Binding Effect; Assignment........................................................ 49
Section 7.12. Severability...................................................................... 50
Section 7.13. Legal Fees and Costs.............................................................. 50
</TABLE>
Schedule A: Exceptions to the Definition of "Company Material Adverse Effect"
Schedule B: Company Affiliate Agreement
Schedule C: Exceptions to the Definition of "Parent Material Adverse Effect"
Schedule D: Parent Affiliate Agreement
Schedule E: Principal Terms of Employment Arrangements for Stanley Greenman
and Stewart Katz
Schedule F: Principal Terms of Severance Pay Plan for Certain Company
Employees
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of April 21,
---------
2000, is made by and among ZANY BRAINY, INC., a Pennsylvania corporation
("Parent"), NOODLE KIDOODLE, INC., a Delaware corporation ("the Company"), and
------ -------
NIGHT OWL ACQUISITION, INC., a Delaware corporation and wholly-owned subsidiary
of Parent ("Merger Sub").
----------
W I T N E S S E T H
-------------------
WHEREAS, the respective Boards of Directors of Parent and the Company have
each approved the business combination described herein in which the Company
will become a subsidiary of Parent as a result of a merger of Merger Sub with
and into the Company upon the terms and subject to the conditions hereinafter
set forth (the "Merger"), pursuant to which each outstanding share of Common
------
Stock, par value $0.001 per share ("Company Common Stock"), of the Company will
--------------------
be converted into the right to receive shares of Common Stock, par value $0.01
per share ("Parent Common Stock"), of Parent in the manner set forth herein;
-------------------
WHEREAS, the Boards of Directors of Parent and the Company have each
determined that the Merger and the other transactions contemplated hereby are
consistent with, and in furtherance of, their respective business strategies and
goals and have each approved the Merger upon the terms and conditions set forth
herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code");
----
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests transaction under United States
generally accepted accounting principles.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER
Section 1.1. The Merger. Subject to the terms and conditions hereof and
in accordance with the Delaware General Corporation Law (the "DGCL"), as amended
----
as of the Effective Time (hereinafter defined): (a) Merger Sub shall be merged
with and into the Company and the separate existence of Merger Sub shall cease;
(b) the Company shall continue as the surviving entity in the Merger (the
"Surviving Entity") and shall succeed to all rights, assets, liabilities and
----------------
obligations of Merger Sub and the Company in accordance with the DGCL; (c) the
Certificate of Incorporation and by-laws of Merger Sub, both as in effect
immediately prior to the Effective Time, shall become the Certificate of
Incorporation and by-laws of the Surviving Entity until thereafter altered,
amended or repealed as provided therein and in accordance with applicable law,
except that the first article of the Certificate of Incorporation shall be
amended to read "The name of the Corporation is Noodle Kidoodle, Inc."; (d) the
directors of Merger Sub immediately prior to the Effective Time shall be the
directors of the Surviving Entity; and (e) the officers of Merger Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Entity. From and after the Effective Time, the Merger will have all the effects
set forth in Section 259 of the DGCL, the Certificate of Merger (hereinafter
defined) and the Agreement.
Section 1.2. Closing, Effective Time of the Merger. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
-------
the offices of Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia,
Pennsylvania as soon as practicable but no later than the fifth business day
after the satisfaction or waiver of the conditions set forth in Article V hereof
or at such other time and place as the parties shall agree. The date on which
the Closing occurs is herein referred to as the "Closing Date." At the Closing,
------------
the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") with the Secretary of State
---------------------
of the State of Delaware in such form as required by, and executed in accordance
with the relevant provisions of, the DGCL (the date and time of such filing, or
such later date or time agreed upon by Parent and the Company and set forth
therein, the "Effective Time").
--------------
Section 1.3. Conversion and Cancellation of Securities.
(a) At the Effective Time, each share of Company Common Stock
issued and outstanding immediately prior to the Effective Time (other than
shares of Company Common Stock described in Section 1.3(b) hereof) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into, and become exchangeable for, the right to receive 1.233 (the
"Common Exchange Ratio") shares of Parent Common Stock; provided that no
---------------------
fractional shares of Parent Common Stock shall be issued and, in lieu thereof, a
cash payment shall be made pursuant to Section 1.4(i) hereof. The consideration
to be received by the holders of Company Common Stock pursuant to this Section
1.3(a) is hereinafter referred to as the "Merger Consideration."
---------------------
(b) At the Effective Time, each share of Company Common Stock
held in the treasury of the Company immediately prior to the Effective Time,
shall by virtue of the Merger and without any action on the part of the holder
thereof, be automatically canceled and retired and cease to exist, and no cash,
securities or other property shall be payable in respect thereof.
(c) At the Effective Time, each share of Merger Sub common
stock, par value $.01 per share, issued and outstanding immediately prior to the
Effective Time shall, by virtue of the
2
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Merger and without any action by the holder thereof, be converted into one
validly issued, fully paid and nonassessable share of common stock, par value
$.01 per share, of the Surviving Entity.
(d) Pursuant to the DGCL, the holders of shares of Company
Common Stock shall not have any dissenters or appraisal rights with respect to
this Agreement or the Merger.
(e) The Common Exchange Ratio shall be appropriately adjusted to
reflect fully the effect of any stock split, reverse split or stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Stock), with respect to Parent Common Stock having a record date after
the date hereof and prior to the Effective Time. The Common Exchange Ratio
shall be appropriately adjusted to reflect fully the effect of any stock split,
reverse split or stock dividend (including any dividend or distribution of
securities convertible into the Company Common Stock), with respect to the
Company Common Stock having a record date after the date hereof and prior to the
Effective Time.
Section 1.4. Exchange of Certificates.
(a) Prior to the Closing Date, Parent shall select a bank or
trust company to act as exchange agent (the "Exchange Agent") in connection with
--------------
the surrender of certificates (each, a "Certificate" and together, the
-----------
"Certificates") evidencing shares of Company Common Stock converted into shares
------------
of Parent Common Stock pursuant to the Merger. At the Effective Time, Parent
shall deposit with the Exchange Agent one or more certificates representing the
shares of Parent Common Stock to be issued in the Merger (the "Merger Stock"),
------------
which shares of Merger Stock shall be deemed to be issued at the Effective Time.
At and following the Effective Time, Parent shall deliver to the Exchange Agent
such cash as may be required from time to time to make payment of cash in lieu
of fractional shares in accordance with Section 1.4(i) hereof.
(b) As soon as practicable after the Effective Time, Parent
shall cause the Exchange Agent to mail to each person who was, at the Effective
Time, a holder of record of a certificate or certificates that immediately prior
to the Effective Time evidenced outstanding shares of Company Common Stock (i) a
letter of transmittal specifying that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent, which shall be in a form and contain any
other provisions as Parent and the Surviving Entity may reasonably agree, and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing the Merger Stock. Upon the proper
surrender of Certificates to the Exchange Agent, together with a properly
completed and duly executed letter of transmittal and such other documents as
may be required by the Exchange Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor certificates representing the shares of
Merger Stock that such holder has the right to receive pursuant to the terms
hereof (together with any dividend or distribution with respect thereto made
after the Effective Time and any cash paid in lieu of fractional shares pursuant
to Section 1.4(i)), and the Certificate so surrendered shall be canceled. In the
event of a transfer of ownership of Company Common Stock that is not registered
in the transfer records of the Company, a certificate representing the proper
number of shares of Merger Stock may be issued to a transferee if the
Certificate representing such Company Common Stock is presented to the Exchange
Agent, accompanied by all documents required to properly evidence and effect
such transfer and by evidence reasonably satisfactory to the Surviving Entity
and Parent that any applicable stock transfer tax has been paid.
(c) After the Effective Time, each outstanding Certificate which
theretofore
3
<PAGE>
represented shares of Company Common Stock shall, until surrendered for exchange
in accordance with this Section 1.4, be deemed for all purposes to evidence the
right to receive upon such surrender the number of full shares of Parent Common
Stock into which the shares of Company Common Stock (which, prior to the
Effective Time, were represented thereby) shall have been so converted.
(d) Except as otherwise expressly provided herein, the Surviving
Entity shall pay all charges and expenses, including those of the Exchange
Agent, in connection with the exchange of Certificates for shares of Merger
Stock. Any Merger Stock deposited with the Exchange Agent pursuant to Section
1.4(a) hereof, and not exchanged pursuant to Section 1.4(b) hereof for Company
Common Stock within twelve months after the Effective Time, and any cash
deposited with the Exchange Agent pursuant to Section 1.4(a) hereof, and not
exchanged for fractional interests pursuant to Section 1.4(i) hereof for Company
Common Stock within twelve months after the Effective Time, shall be returned by
the Exchange Agent to the Surviving Entity which shall thereafter act as
exchange agent subject to the rights of holders of Company Common Stock
hereunder.
(e) At the Effective Time, the stock transfer books of the
Company shall be closed and no transfer of shares of Company Common Stock shall
thereafter be made.
(f) None of Parent, Merger Sub, the Company, the Surviving
Entity or the Exchange Agent will be liable to any holder of shares of Company
Common Stock for any shares of Merger Stock, dividends or distributions with
respect thereto or cash payable in lieu of fractional shares pursuant to Section
1.4(i) hereof delivered to a state abandoned property administrator or other
public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) If any Certificates shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the holder thereof,
the Exchange Agent will deliver in exchange for such lost, stolen or destroyed
Certificates the Merger Stock for the shares represented thereby, deliverable in
respect thereof, as determined in accordance with the terms hereof. When
authorizing such payment in exchange for any lost, stolen or destroyed
Certificates, the owner of such Certificate, as a condition precedent to such
delivery, shall give Parent a bond satisfactory to Parent against any claim that
may be made against Parent with respect to the Certificates alleged to have been
lost, stolen or destroyed.
(h) No dividend or other distribution declared or made after the
Effective Time with respect to the Merger Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Merger Stock issuable upon surrender thereof until the
holder of such Certificate shall surrender such Certificate in accordance with
Section 1.4(b). Subject to the effect of applicable law, following surrender of
any such Certificate there shall be paid, without interest, to the record holder
of certificates representing whole shares of Merger Stock issued in exchange
therefor: (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Merger Stock and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to surrender of such Certificate and a payment date
subsequent to such surrender payable with respect to such whole shares of Merger
Stock. No holder of Company Common Stock shall be entitled to any interest on
any cash amount payable for fractional interests pursuant to Section 1.4(i)
hereof.
(i) No certificates or scrip evidencing fractional shares of
Merger Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests shall not
4
<PAGE>
entitle the owner thereof to any rights of a shareholder of Parent. In lieu of
any such fractional shares, each holder of a Certificate previously evidencing
Company Common Stock, upon surrender of such Certificate for exchange pursuant
to this Article I, shall be paid an amount in cash (without interest), rounded
to the nearest cent, determined by multiplying (i) the closing price for a share
of Parent Common Stock on the Nasdaq National Market on the date of the
Effective Time by (ii) the fractional interest to which such holder would
otherwise be entitled (after taking into account all shares of Company Common
Stock held of record by such holder at the Effective Time).
Section 1.5. Options. At the Effective Time, each option granted by the
Company pursuant to the Company Stock Plans (hereinafter defined) to purchase
shares of Company Common Stock, which is outstanding and unexercised immediately
prior to the Effective Time shall be assumed by Parent and be converted into an
option to purchase shares of Parent Common Stock in such amount and at such
exercise price as provided below and otherwise having the same terms and
conditions as are in effect immediately prior to the Effective Time (except to
the extent that such terms, conditions and restrictions may be altered in
accordance with their terms as a result of the transactions contemplated
hereby):
(a) the number of shares of Parent Common Stock to be subject to
the new option shall be equal to the product of (i) the number of shares of
Company Common Stock subject to the original option, and (ii) the Common
Exchange Ratio, the product being rounded down, if necessary, to the nearest
whole share; and
(b) the exercise price per share of Parent Common Stock under
the new option shall be equal to (i) the exercise price per share of Company
Common Stock under the original option divided by (ii) the Common Exchange
Ratio, rounded up, if necessary, to the nearest cent.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub as follows,
except as set forth on a Disclosure Schedule delivered by the Company
concurrently with the execution and delivery of this Agreement (the "Company
-------
Schedule"), each of which exceptions shall specifically identify the relevant
- --------
subsection hereof to which it relates and shall be deemed to be representations
and warranties as if made hereunder:
Section 2.1. Organization, Powers and Qualifications. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the properties and assets used in connection
therewith. The Company is duly qualified as a foreign corporation authorized to
do business and is in good standing in every jurisdiction in which such
qualification is required, all of which jurisdictions are disclosed in the
Company Schedule, except where the failure to be so qualified or in good
standing would not reasonably be expected to have a Company Material Adverse
Effect. As used in this Agreement, "Company Material Adverse Effect" means any
-------------------------------
fact, condition, event, development
5
<PAGE>
or occurrence which, individually or when taken together with all other facts,
conditions, events, developments or occurrences, has an adverse effect of
$2,500,000 or more on the financial condition, operating results or business of
the Company and the Subsidiaries (hereinafter defined), taken as a whole;
provided, however, that in no event shall the items set forth in Schedule A
hereto be taken into account in determining whether a Company Material Adverse
Effect has occurred.
Section 2.2. Subsidiaries.
(a) "Subsidiary" means, with respect to any party, any
----------
corporation, limited liability company, partnership, Joint Venture or other
business association or entity, at least a majority of the voting securities or
economic interests of which is directly or indirectly owned or controlled by
such party or by any one or more of its Subsidiaries. As used in this Agreement,
"Joint Venture" means, with respect to any party, any corporation, limited
-------------
liability company, partnership, joint venture or other business association or
entity in which (i) such party or any one or more of its Subsidiaries, directly
or indirectly, owns or controls more than five percent (5%) and less than a
majority of any class of the outstanding voting securities or economic
interests, or (ii) such party or a Subsidiary of such party is a general
partner.
(b) The Company Schedule lists each Subsidiary and each Joint
Venture of the Company, the jurisdiction of its organization and the amount of
its securities outstanding and the owners thereof. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Each Subsidiary has all requisite power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the assets and properties used in connection
therewith. Each Subsidiary is duly qualified as a foreign corporation authorized
to do business and is in good standing in every jurisdiction in which such
qualification is required, all of which jurisdictions are disclosed in the
Company Schedule, except where the failure to be so qualified or in good
standing would not reasonably be expected to have a Company Material Adverse
Effect. All issued and outstanding shares of capital stock of each Subsidiary
have been duly authorized, are validly issued and outstanding, and are fully
paid and nonassessable, and, except as set forth in the Company Schedule, are
lawfully owned of record and beneficially by the Company or another Subsidiary
free and clear of all pledges, liens, claims, security interests and other
charges or defects in title of any nature whatsoever ("Liens"). There are no
-----
existing subscriptions, options, warrants, convertible securities, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) calling for or requiring the issuance, transfer, sale
or other disposition of any shares of the capital stock of any Subsidiary, or
calling for or requiring the issuance of any securities or rights convertible
into or exchangeable for shares of capital stock of any Subsidiary, nor is the
Company or any Subsidiary subject to any obligation (contingent or otherwise) to
repurchase, redeem or otherwise acquire shares of capital stock of any
Subsidiary, in any case except as set forth in the Company Schedule. Except for
the Subsidiaries and the Joint Ventures or as set forth in the Company Schedule,
neither the Company nor any Subsidiary directly or indirectly (i) owns or
controls any shares of any corporation nor has any voting securities of, or
economic interest in, either of record, beneficially or equitably, in any
association, partnership, limited liability company, joint venture or other
legal entity, or (ii) is a general partner of any partnership.
Section 2.3. Capital Stock. The Company has authorized capital stock
consisting of 15,000,000 shares of Company Common Stock and 1,000,000 shares of
Preferred Stock, par value $0.001 per share ("Company Preferred Stock"), of
-----------------------
which only 440,000 shares have been designated Series A Junior Participating
Preferred Shares. As of April 17, 2000: (a) 7,605,640 shares of
6
<PAGE>
Company Common Stock were issued and outstanding, (b) no shares of Company
Preferred Stock were issued and outstanding, (c) 901,261 shares of Company
Common Stock were held as treasury shares, and (d) 1,181,219 shares of Company
Common Stock were reserved for issuance under the Company's Stock Incentive Plan
(the "Plan") and the Outside Directors' Stock Option Plan (the "Directors' Plan"
---- ---------------
and, together with the Plan, the "Company Stock Plans") (including (i) 1,107,219
-------------------
shares reserved for issuance under the Plan, 861,675 of which were subject to
outstanding options and 236,721 of which were reserved for future option grants,
and (ii) 74,000 shares reserved for issuance under the Directors' Plan, all of
which were subject to outstanding options. Since April 17, 2000, no additional
shares of capital stock have been reserved for issuance by the Company and the
only issuances of shares of capital stock of the Company have been issuances of
Company Common Stock upon the exercise of outstanding Company stock options. All
of the issued and outstanding shares of Company Common Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
and were issued in compliance with all applicable federal and state securities
laws, and all of such treasury shares were acquired by the Company in compliance
with all applicable laws, including, without limitation, all applicable federal
and state securities laws. No shares of capital stock issued by the Company are
or were at the time of their issuance subject to preemptive rights. There are no
existing subscriptions, options, warrants, convertible securities, calls,
commitments, agreements, conversion rights or other rights of any character
(contingent or otherwise) calling for or requiring the issuance, transfer, sale
or other disposition of any shares of the capital stock of the Company, or
calling for or requiring the issuance of any securities or rights convertible
into or exchangeable for shares of capital stock of the Company, in any case
except as set forth in the Company Schedule. There are no securities, rights,
warrants, options or other instruments outstanding which, after consummation of
the Merger, would be convertible into or exercisable for securities of the
Surviving Entity, and all outstanding options and warrants of the Company will
become options or warrants solely with respect to Parent Common Stock on the
terms described in Section 1.5 hereof. There are no voting trusts or other
agreements or understandings to which the Company is a party, nor, to the
knowledge of the Company, to which any stockholder of the Company is a party,
with respect to the voting of capital stock of the Company.
Section 2.4. Certificate of Incorporation, By-Laws, Minute Books and
Records. The copies of (a) the Certificate of Incorporation and all amendments
thereto and of the By-laws, as amended, of the Company and (b) the Certificate
of Formation and all amendments thereto and of the Operating Agreement of the
Subsidiary, which have been made available to Parent are true, correct and
complete copies thereof as in effect on the date hereof. The minute books of the
Company which have been made available for inspection contain minutes, which are
accurate and complete in all material respects, of all meetings, except for the
Board of Directors meetings held on April 14, 2000 and April 19, 2000, and
accurate consents in lieu of meetings of the Board of Directors (and any
committee thereof) and of the Stockholders of the Company since its date of
incorporation.
Section 2.5. Authority; Binding Effect. The Company has all requisite
corporate power and authority to execute and deliver this Agreement to
consummate the transactions contemplated hereby and to perform its obligations
hereunder. All necessary action, corporate or otherwise, required to have been
taken by or on behalf of it by applicable law, its charter document or otherwise
to authorize (a) the approval, execution and delivery on its behalf of this
Agreement, and (b) its performance of its obligations under this Agreement and
the consummation of the transactions contemplated hereby have been taken, except
that the adoption of this Agreement must be approved by the affirmative vote of
a majority of the votes cast by the holders of the then outstanding shares of
Company Common Stock of record on the record date for the Company Stockholders
Meeting (the "Required Company Stockholder Approval"). This Agreement
-------------------------------------
constitutes the Company's valid and
7
<PAGE>
binding agreement, enforceable against it in accordance with its terms, except
(y) as the same may be limited by applicable bankruptcy, insolvency, moratorium
or similar laws of general application relating to or affecting creditors'
rights, including, without limitation, the effect of statutory or other laws
regarding fraudulent conveyances and preferential transfers, and (z) for the
limitations imposed by general principles of equity.
Section 2.6. No Conflict; Approvals. The execution and delivery of this
Agreement does not and the consummation of the transactions contemplated hereby
and the performance of the obligations herein will not, (a) violate or conflict
with the Company's charter or by-laws or the comparable organizational documents
of any of its Subsidiaries, (b) constitute a breach or default (or an event that
with notice or lapse of time or both would become a breach or default) or give
rise to any Lien, third party right of termination, cancellation, material
modification or acceleration, or loss of any benefit, under any Contract
(hereinafter defined) to which the Company or any Subsidiary is a party or by
which it is bound, or (c) subject to the consents, approvals, orders,
authorizations, filings, declarations and registrations specified in Section 2.7
or in the Company Schedule in response thereto, conflict with or result in a
violation of any permit, concession, franchise or license or any law, rule or
regulation applicable to the Company or any of its Subsidiaries or any of their
properties or assets, except, in the case of clauses (b) and (c), for any such
breaches, defaults, Liens, third party rights, cancellations, modifications,
accelerations or losses of benefits, conflicts or violations which would not
have a Company Material Adverse Effect and would not prevent the Company from
performing its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby.
Section 2.7. Governmental Consents and Approvals. Except as set forth in
the Company Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will require any
consent, approval, order, authorization, or permit of, or filing with or
notification to, any local, state, federal or foreign court, administrative
agency, commission or other governmental or regulatory authority, agency or
instrumentality ("Governmental Entity"), except (a) the filing of the
-------------------
Registration Statement (hereinafter defined) with the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Act of 1933, as
---
amended, and the rules and regulations thereunder (the "Securities Act") and the
--------------
entry of an order by the SEC permitting such Registration Statement to become
effective, and compliance with applicable state securities laws, (b) the filing
of the Proxy Statement (hereinafter defined) and related proxy materials with
the SEC in accordance with the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (the "Exchange Act"), (c) notification
------------
pursuant to, and expiration or termination of the waiting period under, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder (the "HSR Act"), (d) the filing and recording of the
-------
Certificate of Merger in accordance with the DGCL and (e) where the failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not prevent it from performing its obligations
under this Agreement or have a Company Material Adverse Effect.
Section 2.8. SEC Reports. The Company has filed all required forms,
reports and documents with the SEC since February 1, 1997 (collectively, the
"Company's SEC Reports"). The Company's SEC Reports have complied in all
---------------------
material respects with all applicable requirements of the Securities Act and the
Exchange Act. As of their respective dates, none of the Company's SEC Reports,
including, without limitation, any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the
8
<PAGE>
statements therein, in light of the circumstances under which they were made,
not misleading. The Company has heretofore delivered to Parent, in the form
filed with the SEC, all of the Company's SEC Reports.
Section 2.9. Financial Statements. The Company has delivered to Parent
true and complete copies of the (a) consolidated balance sheet of the Company
and Subsidiaries at January 30, 1999 and the related consolidated income
statement and statement of cash flow for the year then ended, together with the
notes thereto, audited by Janover Rubinroit, LLC, and (b) unaudited consolidated
balance sheet of the Company and Subsidiaries at January 29, 2000 and February
26, 2000 and the related consolidated income statement and statement of cash
flow for the periods ended January 29, 2000 and February 26, 2000, all of which
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved ("GAAP") (except as may be
----
indicated in the notes thereto and except that the unaudited interim financial
statements may not include all notes thereto required by GAAP). Such balance
sheets, including the related notes, fairly present the consolidated financial
position of the Company and Subsidiaries at the dates indicated and such
consolidated income statements and statements of cash flow fairly present the
consolidated results of operations, and cash flow of the Company and
Subsidiaries for the periods indicated (subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments, which will not be
material). The unaudited consolidated balance sheet of the Company and its
Subsidiaries at January 29, 2000 described above is referred to herein as the
"Company 1999 Balance Sheet." The unaudited consolidated financial statements of
---------------------------
the Company and its Subsidiaries as at and for the year ended January 29, 2000
are referred to herein as the "Company Unaudited Financial Statements."
---------------------------------------
Section 2.10. Absence of Certain Changes. Except as described in the
Company Schedule, since January 29, 2000 (the "Balance Sheet Date"), the Company
-------------------
and the Subsidiaries have conducted their business solely in the ordinary course
consistent with past practice. Except as otherwise disclosed in the Company
Schedule, since the Balance Sheet Date, the Company and the Subsidiaries have
not:
(a) suffered any Company Material Adverse Effect;
(b) been subject to any other events or conditions of any
character that would prevent the Company from performing its obligations under
this Agreement or the Stockholder Agreements or prevent or delay the
consummation of any of the transactions contemplated hereby or thereby;
(c) incurred any material liabilities, other than liabilities
incurred in the ordinary course of business consistent with past practice, or
discharged or satisfied any material Lien, or paid any material liabilities,
other than in the ordinary course of business consistent with past practice, or
failed to pay or discharge when due any liabilities of which the failure to pay
or discharge has caused or will cause any material damage or risk of material
loss to it or any of its material assets or properties; or
(d) taken or been subject to any other action or event that
would have required the consent of Parent pursuant to Section 4.1(a), (b), (c)
or (d) hereof had such section then been in effect.
9
<PAGE>
Section 2.11. Indebtedness; Absence of Undisclosed Liabilities. The
Company Schedule discloses as of the Balance Sheet Date all indebtedness for
money borrowed of the Company or any Subsidiary, accurately disclosing for each
such indebtedness the payee, the original principal amount of the loan, the
unpaid balance of the loan, the interest rate and the maturity date. Neither the
Company nor the Subsidiaries have any material indebtedness, liability or
obligation of any kind (whether known or unknown, accrued, absolute, asserted or
unasserted, contingent or otherwise) except (a) as and to the extent reflected,
reserved against or otherwise disclosed in the Company 1999 Balance Sheet, (b)
for liabilities and obligations incurred subsequent to the Balance Sheet Date in
the ordinary course of business and which do not have a Company Material Adverse
Effect or prevent the Company from performing its obligations under this
Agreement or prevent or delay the consummation of any of the transactions
contemplated hereby or (c) as disclosed in the Company Schedule.
Section 2.12. Assets. Except as described in the Company Schedule, each of
the Company and the Subsidiaries have valid leasehold title to all personal
property leased by it and good and marketable title to its owned personal
property, including, without limitation, those assets and properties reflected
in the Company 1999 Balance Sheet in the amounts and categories reflected
therein, free and clear of all Liens, except (a) the lien of current taxes not
yet due and payable, (b) properties, interests, and assets disposed of by the
Company or any Subsidiary since the Balance Sheet Date solely in the ordinary
course of business consistent with past practice, (c) liens in respect of
pledges or deposits under workmen's compensation, unemployment insurance, social
security and public liability laws and other similar legislation, (d) liens
imposed by law, such as carriers', warehousemen's or mechanics' liens, incurred
in good faith in the ordinary course of business, (e) such secured indebtedness
as is disclosed in the Company 1999 Balance Sheet covering the properties
referred to therein, and (f) such imperfections of title, easements and
encumbrances, if any, as do not materially detract from the value, or interfere
with the present or proposed use, of the properties subject thereto ("Permitted
---------
Liens"). Except as set forth in the Company Schedule, all buildings, structures,
- -----
facilities, equipment and other items of tangible personal property reflected on
the Company 1999 Balance Sheet or acquired since the Balance Sheet Date are in
good operating condition and repair, subject to normal wear and maintenance and
are useable in the ordinary course of business of the Company and the
Subsidiaries.
Section 2.13. Contracts.
(a) The Company Schedule lists each written or oral contract,
agreement, arrangement, lease, instrument, mortgage or commitment, and provides
an accurate summary of all material terms, to which the Company or a Subsidiary
is a party or may be bound or to which their respective properties or assets may
be subject ("Contract") (i) which is material to the Company or a Subsidiary
--------
other than Contracts that are cancelable by the Company upon 90 days or less
prior written notice, have no penalty for cancellation by the Company or involve
the expenditure of less than $50,000; (ii) which is with any present or former
employee or for the employment of any person or consultant or which is a non-
compete arrangement with any employee of the Company or a Subsidiary; (iii)
which is a severance agreement, program or policy of the Company or a Subsidiary
with or relating to its employees; (iv) under the terms of which any of the
rights or obligations of a party thereto will be modified or altered as a result
of the transactions contemplated hereby or which contain change in control
provisions; (v) which involves a material commission, representative, franchise,
distributorship or sales agency arrangement; (vi) which is a material
conditional sale or lease arrangement; (vii) which involves a material license
or other arrangement which relates in whole or in part to any software, patent,
trademark, trade name, service mark or copyright or to any
10
<PAGE>
ideas, technical assistance or other know-how of or used by the Company or a
Subsidiary in the conduct of its business; (viii) which represents any
confidentiality or non-disclosure arrangement pursuant to which the Company or a
Subsidiary has agreed to keep confidential information obtained from any other
person; (ix) which imposes an obligation of exclusivity on the Company or any
Subsidiary or any successor thereto or which is an arrangement limiting or
restraining the Company or any Subsidiary or any successor thereto from engaging
or competing in any manner or in any business; or (x) under which the Company or
any Subsidiary guarantees the payment or performance by others or in any way is
or will be liable with respect to obligations of any other person.
(b) All Contracts other than Real Estate Leases, which are
addressed in Section 2.23 hereof, are valid and binding and in full force and
effect as to the Company on the date of this Agreement except to the extent they
have previously expired in accordance with their terms or except to the extent
that their invalidity would not have a Company Material Adverse Effect. None of
the Company, the Subsidiaries nor, to the Company's knowledge, any other
parties, have violated any provision of, or committed or failed to perform any
act which with notice, lapse of time or both would constitute a default under
the provisions of, any Contract other than Real Estate Leases, which are
addressed in Section 2.23 hereof, the termination or violation of which, or the
default under which, might have a Company Material Adverse Effect. True and
complete copies of all Contracts listed in the Company Schedule, together with
all amendments thereto through the date hereof, have been delivered to Parent.
Section 2.14. Insurance. The Company Schedule accurately sets forth as of
the day preceding the date hereof all policies of insurance, other than title
insurance policies, held by or on behalf of the Company. All such policies of
insurance are in full force and effect, and no notice of cancellation has been
received. In the reasonable judgment of the Company, such policies are in
amounts which are adequate in relation to the business and properties of the
Company, and all premiums due on the Balance Sheet Date have been paid in full
or are fully reserved for on the Company 1999 Balance Sheet.
Section 2.15. Authorizations; Compliance With Law.
(a) The Company and the Subsidiaries hold all licenses,
certificates, consents, permits, approvals, and authorizations
("Authorizations") from all Governmental Entities and other persons which are
--------------
necessary for the lawful conduct of their respective businesses and their use
and occupancy of their assets and properties in the manner heretofore conducted,
used and occupied, except where the failure to hold any of the foregoing would
not impose a material penalty or liability on the Company or prevent the Company
from performing its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby. A complete and
correct list of the material Authorizations held by the Company and its
Subsidiaries are set forth in the Company Schedule. All of such Authorizations
are valid, in good standing and in full force and effect and the Company and the
Subsidiaries are in compliance in all material respects with the requirements,
standards, criteria and conditions set forth in such Authorizations. No event
has occurred with respect to the material Authorizations which permits, or after
notice or lapse of time or both would permit, revocation or termination thereof
or would result in any other material impairment of the rights of the holder of
any of the Authorizations, and no terminations thereof have been, to the
knowledge of the Company, threatened.
(b) The Company and each of the Subsidiaries is in compliance in
all material respects with all applicable laws, statutes, ordinances, codes,
rules and regulations of any
11
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Governmental Entities other than Environmental Laws, which are addressed in
Section 2.20 of this Agreement.
Section 2.16. Taxes.
(a) All federal, state, local and foreign tax returns, reports,
statements and other similar filings required to be filed by the Company or the
Subsidiaries (the "Tax Returns") on or prior to the date hereof or with respect
-----------
to taxable periods ending on or prior to the date hereof with respect to any
federal, state, local or foreign taxes, assessments, deficiencies, fees and
other governmental charges or impositions (including, without limitation, all
income tax, unemployment compensation, social security, payroll, sales and use,
excise, privilege, property, ad valorem, transfer, franchise, license, school
and any other tax or similar governmental charge or imposition (including
interest, penalties or additions with respect thereto) under laws of the United
States or any state or municipal or political subdivision thereof or any foreign
country or political subdivision thereof) ("Taxes") have been or will be timely
-----
filed with the appropriate Governmental Entities in all jurisdictions in which
such Tax Returns are required to be filed, and all such Tax Returns correctly
reflect in all material respects the liabilities of the Company and the
Subsidiaries for Taxes for the periods, property or events covered thereby.
(b) All Taxes, including, without limitation, those which are
called for by the Tax Returns, required to be paid, withheld or accrued by the
Company or any Subsidiary as of the date hereof have been timely paid, withheld
or accrued. The accruals for Taxes contained in the Company 1999 Balance Sheet
are adequate to cover the tax liabilities of the Company and the Subsidiaries as
of the Balance Sheet Date and include adequate provision for all deferred taxes,
and nothing has occurred subsequent to that date to make any of such accruals
inadequate.
(c) Neither the Company nor the Subsidiaries have received any
notice of assessment or proposed assessment in connection with any Taxes or Tax
Returns other than in connection with routine state examinations for sales or
property taxes, and the like, none of which individually or in the aggregate are
material, and there are no material pending tax examinations of or material tax
claims asserted against the Company or the Subsidiaries or any of their
respective assets or properties. Neither the Company nor any Subsidiary has
extended, or waived the application of, any statute of limitations of any
jurisdiction regarding the assessment or collection of Taxes other than in
connection with routine state examinations for sales or property taxes, and the
like, none of which individually or in the aggregate are material.
(d) There are no material tax liens (other than any lien for
current taxes not yet due and payable) on any of the assets or properties of the
Company or the Subsidiaries. The Company has no knowledge of any basis for any
additional assessment of any Taxes. The Company and the Subsidiaries have made
all deposits required by law to be made with respect to employees' withholding
and other employment taxes, including, without limitation, the portion of such
deposits relating to taxes imposed upon the Company or the Subsidiaries.
(e) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
current or former officer, director, employee, consultant or independent
contractor of the Company or any Subsidiary that, individually or collectively,
could give rise to or entail any payment (or portion thereof) that would not be
deductible pursuant to Sections 280G, 404 or 162 of the Code. There is no
contract, agreement, plan
12
<PAGE>
or arrangement to which the Company or any Subsidiary is a party or by which it
is bound to compensate any individual for excise Taxes pursuant to Section 4999
of the Code.
(f) Neither the Company nor any Subsidiary (i) has filed a
consent under Section 341(f) of the Code or (ii) is or has been a United states
real property holding corporation within the meaning of Section 897(c) of the
Code during the period specified in Section 897(c)(1)(A)(ii) of the Code.
(g) Neither the Company nor any Subsidiary is or has been at any
time a party to a Tax sharing, Tax indemnity or Tax allocation agreement, and
neither the Company nor any Subsidiary has (i) been a member of an affiliated
group filing a consolidated federal Tax Return (other than a group the common
parent of which was the Company), or (ii) has any liability for Taxes of any
Person (other than the Company and its Subsidiaries) under Treasury Regulation
1.1502-6 (or any similar provision of state, local or foreign Law), as a
transferee or successor or assumed the Tax liability of any other Person under
contract.
(h) None of the Company's assets are tax exempt use property
within the meaning of Section 168(h) of the Code.
(i) Neither the Company nor any Subsidiary has constituted
either a "distributing corporation" or a "controlled corporation" in a
distribution of stock qualifying for tax-free treatment under Section 355 of the
Code (A) in the two years prior to the date of this Agreement or (B) in a
distribution which might otherwise constitute a part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
Section 2.17. Absence of Litigation; Claims. Except as disclosed on the
Company Schedule, there are no material claims, actions, suits, proceedings or
investigations pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries, or any properties or rights of the
Company or any of its Subsidiaries, or with respect to which any director,
officer, employee or agent is or may be entitled to claim indemnification from
the Company or any Subsidiary, before any Governmental Entity or arbitrator,
which, if decided adversely to the Company or such Subsidiary, could prevent the
Company from performing its obligations under this Agreement or prevent or delay
the consummation of any of the transactions contemplated hereby, nor is there
any judgement, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries which
could reasonably be expected to have such effect.
Section 2.18. Employee Benefit Plans; Employment Agreements
(a) The Company Schedule lists (i) all employee benefit plans
(as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) that is maintained or sponsored by the Company, any
-----
trade or business (whether or not incorporated) which is a member of a
controlled group including the Company or which is under common control with the
Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or
---------------
any Subsidiary of the Company, and (ii) any other benefit arrangement,
obligation or other practice, whether or not legally enforceable, to provide
benefits, other than salary, as compensation for services rendered, to one or
more present or former employees, directors, agents, or independent contractors
that is maintained by the Company or to which the Company contributes or for
which the Company has or may have any liability, contingent or otherwise, either
directly or as a result of an ERISA
13
<PAGE>
Affiliate including, without limitation, all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance,
incentive arrangement, sick leave, vacation pay, salary continuation, consulting
or other compensation arrangements, worker's compensation, stock option, stock
grant or stock purchase plans, medical insurance, life insurance, tuition
reimbursement programs or scholarship programs, any plans subject to Section 125
of the Code, and any plans providing benefits or payments in the event of a
change of ownership or control and other similar fringe or employee benefit
plans, programs or arrangements, and any employment or executive compensation or
severance policies or agreements, written or otherwise, for the benefit of, or
relating to, any employee or former employee of the Company, as well as each
plan with respect to which the Company or an ERISA Affiliate could incur
liability under Section 4069 (if such plan has been or were terminated) or
Section 4212(c) of ERISA (together, the "Employee Plans"), excluding former
--------------
agreements under which the Company has no remaining obligations and any of the
foregoing that are required to be maintained by the Company under the laws of
any foreign jurisdiction. The Company Schedule lists all plan documents, trust
agreements, brochures, summaries, policies and Form 5500s related to the
Employee Plans that have been provided or have been made available to Parent.
The plans marked on the Company Schedule as "Qualified Plans" are the only
Employee Plans that are intended to meet the requirements of 401(a) of the Code
(a "Qualified Plan"). The Company does not sponsor, maintain or have any
liability with respect to, and to the knowledge of the Company, the Company has
never maintained or contributed, to any other Qualified Plan.
(b) (i) Except as set forth in the Company Schedule, or as
required by Section 4980B of the Code, none of the Employee Plans promises or
provides retiree medical or other retiree welfare benefits to any person, none
of the Employee Plans is a `multiemployer plan' as such term is defined in
Section 3(37) of ERISA and the Company does not sponsor, maintain, contribute or
have any liability with respect to, and to the knowledge of the Company has
never sponsored, maintained, or contributed to any employee benefit plan subject
to Section 302 of ERISA, Section 412 of the Code or Title IV of ERISA; (ii)
there has been no breach of any fiduciary duty, as described in Section 404 of
ERISA, or no `prohibited transaction', as such term is defined in Section 406 of
ERISA or Section 4975 of the Code, with respect to any Employee Plan, which
could result in any material liability of the Company or any of its
Subsidiaries; (iii) all Employee Plans are in compliance in all material
respects with the requirements prescribed by any and all statutes (including
ERISA and the Code), orders or governmental rules and regulations currently in
effect with respect thereto (including all applicable requirements for
notification to participants or the Department of Labor, Internal Revenue
Service (the "IRS") or Secretary of the Treasury), all employee plans have been
---
operated at all times in accordance with their terms, and the Company and each
of its Subsidiaries have performed all material obligations required to be
performed by them under, are not in any material respect in default under or
violation of, and have no knowledge of any default or violation by any other
party to, any of the Employee Plans; (iv) each Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify as exempt
from tax under Section 501(a) of the Code is the subject of a favorable
determination letter from the IRS or is a standardized prototype plan with an
IRS identification number, and nothing has occurred with respect to the design
or operation of any Qualified Plan that could cause the loss of such
qualification or exemption or the imposition of any liability, lien, penalty, or
tax under ERISA or the Code, and the Qualified Plans have been timely amended to
comply with current law; (v) all contributions required to be made to any
Employee Plan pursuant to Section 412 of the Code, or the terms of the Employee
Plan or any collective bargaining agreement, have been made on or before their
due dates and a reasonable amount has been accrued for contributions to each
Employee Plan for the current plan years and the Company has paid all amounts
that the Company is required to pay as contributions to the Employee Plans as of
the last day of the most recent fiscal year of each of the Employee Plans, all
benefits
14
<PAGE>
accrued under any funded or unfunded Employee Plan will have been paid, accrued,
or otherwise adequately reserved in accordance with GAAP as of the Balance Sheet
Date, and all monies withheld from employee paychecks with respect to Employee
Plans have been transferred to the appropriate Employee Plan in a timely manner
as required by applicable law; (vi) with respect to each Employee Plan, no
`reportable event' within the meaning of Section 4043 of ERISA (excluding any
such event for which the 30 day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063, 4604 or 4041 of ERISA has occurred; (vii) neither the Company nor any
ERISA Affiliate has incurred, nor reasonably expects to incur, any liability
under Title IV of ERISA (other than liability for premium payments to the
Pension Benefit Guaranty Corporation arising in the ordinary course); (viii)
neither the Company nor any ERISA Affiliate has incurred any liability for any
excise, income or other taxes or penalties with respect to any Employee Plan,
and no event has occurred and no circumstance exists that could give rise to any
such liability; (ix) there are no pending or threatened claims against any
Employee Plan (other than routine claims for benefits) or against any fiduciary
of an Employee Plan with respect to such plan, nor is there any basis for such a
claim; (x) no Employee Plan is presently under audit or examination (nor has
notice been received of a potential audit or examination) by any governmental
entity; and (xi) no matters are pending with respect to any Employee Plan under
any governmental corrective or remedial program. The Company has made no plan or
commitment to create any additional Employee Plan or to modify or change any
existing Employee Plan, no written statement or, to the knowledge of the
Company, oral statement, has been made by the Company to any person with regard
to any Employee Plan that was not in accordance with the Employee Plans and that
could have adverse economic consequences to the Company. Except as set forth in
the Company Schedule, all Employee Plans may be amended or terminated without
penalty by the Company at any time on or after the Closing Date.
(c) The Company Schedule sets forth a true and complete list of
each current or former employee, officer or director of the Company or any of
its Subsidiaries who holds any option to purchase Company Common Stock as of the
date hereof, together with the number of shares of Company Common Stock which
are subject to such option, the date of grant of such option, the extent to
which such option is vested (or will become vested within six months from the
date hereof, or as a result of, the Merger), the option price of such option (to
the extent determined as of the date hereof), whether such option is intended to
qualify as an incentive stock option within the meaning of Section 422(b) of the
Code (an "ISO"), and the expiration date of such option. The Company Schedule
---
also sets forth the total number of such ISOs and such nonqualified options.
(d) Except as disclosed on the Company Schedule, no amount that
could be received (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement by any
employee, officer or director of the Company or any of its affiliates who is a
"disqualified individual" (as such term is defined in Proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Employee Plan currently in effect
could be characterized as an "excess parachute payment" (as such term is defined
in Section 280G of the Code).
(e) All persons classified by the Company as independent
contractors satisfy and have at all times satisfied the requirements of
applicable federal or state law to be so classified; the Company has fully and
accurately reported their compensation on IRS Forms 1099 when required to do so;
and the Company has no obligations to provide benefits with respect to such
persons under Employee Plans or otherwise. The Company does not employ and has
not employed any "leased employees" as defined in Section 414(a) of the Code.
15
<PAGE>
Section 2.19. Labor Matters. Except as disclosed on the Company Schedule,
there are no material controversies pending or, to the knowledge of the Company,
threatened, between the Company or any of its Subsidiaries and any of their
respective employees. Neither the Company nor any of its Subsidiaries is party
to any collective bargaining agreement or other labor agreement with any union
or labor organization and no union or labor organization has been recognized by
the Company or any of its Subsidiaries as an exclusive bargaining representative
for employees of the Company or any of its Subsidiaries. Except as disclosed on
the Company Schedule, to the Company's knowledge, there is no significant
activity or proceeding of any labor organization (or representative thereof) or
employee group to organize any such employees. Except as disclosed in the
Company Schedule, (a) there is no active arbitration under any collective
bargaining agreement involving the Company or any of its Subsidiaries, (b) there
is no unfair labor practice, grievance, employment discrimination or other labor
or employment related charge, complaint or claim against the Company or any of
its Subsidiaries pending before any court, arbitrator, mediator or governmental
agency or tribunal, or, to the Company's knowledge, threatened, and (c) there is
no strike, picketing or work stoppage by, or any lockout of, employees of the
Company or any of its Subsidiaries pending, or to the Company's knowledge,
threatened, against or involving the Company or any of its Subsidiaries. There
is no proceeding, claim, suit, action or governmental investigation pending or,
to the knowledge of the Company, threatened, relating to labor matters in
respect of which any director, officer, employee or agent of the Company or any
of its Subsidiaries is or may be entitled to claim indemnification from the
Company or a Subsidiary pursuant to their respective charters or by-laws or
under any indemnification agreements.
Section 2.20. Environmental Matters
(a) Except as set forth in the Company Schedule:
(i) no written notice, notification, demand, request for
information, citation, summons or order has been received by the Company or any
Subsidiary, no complaint has been filed, no penalty has been assessed and no
investigation, action, claim or proceeding is pending or, to the knowledge of
the Company, threatened by any Governmental Entity or other Person against the
Company or any Subsidiary under any Environmental Law, except for those which
would not reasonably be expected to result in a Company Material Adverse Effect;
(ii) neither the Company nor any Subsidiary has incurred
any Environmental Liabilities, which would result in a Company Material Adverse
Effect, and, to the knowledge of the Company, there are no facts, conditions or
circumstances which could reasonably be expected to result in or be the basis
for any such liability, which, if adversely determined, would result in a
Company Material Adverse Effect;
(iii) no polychlorinated biphenyls, radioactive material,
lead, asbestos-containing material, incinerator, sump, surface impoundment,
lagoon, landfill, septic, wastewater treatment or underground storage tank
(active or abandoned) are or have been present at, on, under or in any property
currently owned, or to the Company's knowledge, operated or leased by the
Company or any Subsidiary, or, to the Company's knowledge, at, on, under or in
any property previously owned, operated or leased by the Company or any
Subsidiary, which would result in a Company Material Adverse Effect.
(iv) no Releases of Hazardous Substance have occurred at,
on, under or from
16
<PAGE>
any real property or any other property currently owned, or to the Company's
knowledge, operated or leased by the Company or any Subsidiary or, to the
Company's knowledge, previously owned, operated or leased by the Company or any
Subsidiary in a concentration, amount or location that would require any
remedial investigation or action obligations, including any remedial
obligations, under any Environmental Law, which would give rise to a Company
Material Adverse Effect;
(v) neither the Company nor any Subsidiary has
transported or arranged for the treatment, storage, handling or disposal of any
Hazardous Substances to any off-site location that has or, to the Company's
knowledge, would result in liability to the Company or any Subsidiary, except
for such liability that would not reasonably be expected to result in a Company
Material Adverse Effect;
(vi) the Company and each Subsidiary and their respective
operations are in compliance with all Environmental Laws, and have and are in
compliance with all Environmental Permits, except where such non-compliance
would not reasonably be expected to have a Company Material Adverse Effect.
(b) Except as set forth in the Company Schedule, there has been
no environmental investigation, study, audit, test, review or other analysis
conducted (except as set forth in schedule) in relation to any property or
facility now owned or, to the Company's knowledge, previously owned or leased by
the Company or any Subsidiary, which has not been delivered by the Company to
Parent prior to the date of this Agreement.
(c) Except as set forth in the Company Schedule, the Merger will
not require any governmental approvals under Environmental Laws, including those
that are triggered by sales or transfers of businesses or real property, except
for such governmental approvals, the absence of which would not result in a
Company Material Adverse Effect.
(d) For purposes of this Section, the terms "Company" and
-------
"Subsidiary" and "Subsidiaries" shall include any and all predecessor entities.
---------- ------------
(e) As used in this Section 2.20:
(i) "Environmental Laws" means any federal, state or
------------------
local law (including, without limitation, common law), judicial decision,
regulation, rule, judgment, order, decree, injunction, permit or agreements with
any Governmental Entity relating to the environment, human health and safety,
worker health and safety and/or governing the handling, use, generation,
treatment, storage, transportation, disposal, manufacture, distribution,
formulation, packaging, labeling or Release of Hazardous Substances.
(ii) "Environmental Liabilities means any and all
-------------------------
liabilities resulting from the operations of the Company or any of its
Subsidiaries at any property now or previously owned, leased or operated by the
Company or any of its Subsidiaries or any activities or operations occurring or
conducted at the real property owned, leased or used by the Company or any
Subsidiary (including, without limitation, offsite disposal), whether accrued,
contingent, absolute, determined, determinable or otherwise, which arise under
or relate to any Environmental Law.
(iii) "Environmental Permits" means all permits, licenses,
---------------------
franchises, certificates, approvals and other similar authorizations of any
Governmental Entity relating to or
17
<PAGE>
required by Environmental Laws and affecting, or relating in any way to, the
business operations, assets, liabilities, rights or obligations of the Company
or any Subsidiary.
(iv) "Hazardous Substance" means petroleum, petroleum
-------------------
hydrocarbons or petroleum products, petroleum by-products, radioactive
materials, asbestos or asbestos-containing materials, gasoline, diesel fuel,
pesticides, radon, urea formaldehyde, lead or lead-containing materials,
polychlorinated biphenyls; and any other chemicals, materials, substances or
wastes which are defined as or included in the definition of "hazardous
---------
substances," "hazardous materials," "hazardous wastes," "extremely hazardous
- ---------- ------------------- ---------------- -------------------
wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants,"
- ------ --------------------------- ---------------- ----------------
"pollutants," "regulated substances," "solid wastes," or "contaminants" or words
---------- -------------------- ------------ ------------
of similar import, under any Environmental Law.
(v) "Release" means any spilling, leaking, pumping,
-------
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping, or disposing of a Hazardous Substance into the environment.
Section 2.21. Intellectual Property; Year 2000.
(a) The Company Schedule lists each patent or registered
copyright, trademark, service mark and any pending application filed for any of
the foregoing of the Company and its Subsidiaries. Except as set forth in the
Company Schedule, the Company and each of its Subsidiaries owns, or is licensed
pursuant to fully-paid (other than upgrade costs and purchaser maintenance
costs), perpetual licenses to use, or otherwise possesses or has legally
enforceable rights to use, all software (including object and source codes and
all related manuals and other documentation), firmware, copyrights, patents,
trademarks, service marks, trade names, trade secrets and proprietary
technologies, know-how, and all other inventions, discoveries, improvements,
processes and formulas (secret or otherwise) and any related documentation
thereto used or possessed by or related to the Company and to any Subsidiary or
necessary for the current conduct of the business of the Company or of any
Subsidiary (the "Intellectual Properties").
-----------------------
(b) The Company and its Subsidiaries are not, nor will any of
them be as a result of the execution and delivery of this Agreement or the
performance of the transactions contemplated hereby, in violation of any
licenses, sublicenses and other Contracts to which the Company or any of its
Subsidiaries is a party and pursuant to which the Company or any Subsidiary is
authorized to use any patent, copyright, trademark, trade name, service mark or
any other form of intellectual property or trade secret owned by a third party.
(c) To the knowledge of the Company, all copyrights, patents,
trademarks, service marks and trade names held by the Company and its
Subsidiaries are valid and subsisting, except for any failures so to be valid
and subsisting that, individually or in the aggregate, would not have a Company
Material Adverse Effect.
(d) Except as set forth in the Company Schedule, no present or
former employee of, or consultant to, the Company or, to the knowledge of the
Company, any other person (including, without limitation, any former employer of
a present or former employee or consultant of the Company) has any proprietary,
commercial or other interest, direct or indirect, in the Intellectual
Properties.
18
<PAGE>
(e) To the knowledge of the Company, all of the Intellectual
Properties owned by the Company or by any Subsidiary have been adequately
protected by patents, trade secret processes, non-disclosure agreements, and,
where appropriate, by affixing a copyright notice to any such Intellectual
Properties, and the Company has not received notice from a third party of any
claim of infringement or any other claims relating to any such Intellectual
Properties.
(f) In conducting their respective business as presently
conducted, to the knowledge of the Company, except as disclosed in the Company
Schedule, neither the Company nor any Subsidiary is infringing upon or
unlawfully or wrongfully using any patent, copyright, trademark, trade name,
service mark or any other form of intellectual property or trade secret owned or
claimed by another. Neither the Company nor any Subsidiary is in default under,
nor has it received any notice of any claim of infringement or any other claim
or proceeding relating to, any such patent, copyright, trademark, trade name,
service mark, trade secret or any other form of intellectual property or any
agreement relating thereto.
(g) To the Company's knowledge, there is no unauthorized use,
infringement or misappropriation of any of the Intellectual Properties by any
third party, including any of the Company's or any of its Subsidiaries'
employees or former employees.
(h) To the knowledge of the Company, all information technology
(including, without limitation, software and firmware) used by the Company or by
any Subsidiary, including, without limitation, in all services and products
provided by the Company or any such Subsidiary, whether to third parties or for
internal use, or, to the knowledge of the Company after reasonable
investigation, used in combination with any information technology of its
customers or suppliers, accurately processes date and time data (including,
without limitation, calculating, comparing and sequencing) from, into and
between the years 1999 and 2000 and the twentieth century and the twenty-first
century, including leap year calculations and neither performance nor
functionality of such technology will be affected by dates prior to, during and
after the year 2000. Neither the Company nor any Subsidiary has any obligations
under warranty agreements, service agreements or otherwise to remedy any
information technology defect relating to the year 2000.
Section 2.22. Adequacy of Disclosure. The Company has made available to
Parent copies of all documents listed or referred to in the Company Schedule
hereto or referred to herein. All documents and materials delivered or made
available in connection with Parent's investigation of the Company in connection
with the transactions contemplated hereby, are true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder. No representation or warranty by the Company in this Agreement nor
any certificate, schedule, statement, document or instrument furnished or to be
furnished to Parent pursuant hereto, or in connection with the negotiation,
execution or performance of this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
required to be stated herein or therein or necessary to make any statement
herein or therein not misleading.
Section 2.23. Real Property.
(a) The Company Schedule lists all real estate used in the operation of
the Company and its Subsidiaries as well as any other real estate that is owned
by, leased or otherwise in the possession of the Company and its Subsidiaries
and the improvements (including buildings and other structures) located on such
real estate (collectively, the "Real Property"). The Real Property consists of
the following: (i) the distribution center in Phillipsburg, New Jersey (the
"Phillipsburg Distribution
19
<PAGE>
Center)", (ii) the office facility in Sysosset, New York (the "Sysosset
Facility"), which the Company leases pursuant to the lease described on the
Company Schedule (the "Sysosset Lease"), (iii) the distribution center in
Allentown, Pennsylvania (the "Allentown Distribution Center"), which the Company
leases pursuant to the lease described on the Company Schedule (the "Allentown
Lease"), (iv) all retail store locations (the "Existing Stores") leased by the
Company and/or its Subsidiaries, and (v) all retail store locations as to which
the Company and/or its Subsidiaries are negotiating leases (the "Future
Stores"). The leases for the Existing Stores are referred to as the "Existing
Store Leases", and the leases being negotiated for the Future Stores (so long as
they are not fully executed by the parties thereto) are referred to as the
"Future Store Leases". The Sysosset Lease, the Allentown Lease, and the Existing
Store Leases are referred to as the "Real Estate Leases".
(b) The Company has good and marketable fee simple title (subject only to
the exceptions set forth in Item 2.23 to the Company Schedule (the "Permitted
---------
Encumbrances")) to the land, buildings and improvements comprising the
- ------------
Phillipsburg Distribution Center. Neither the Company nor any Subsidiary has
any fee ownership interest in any Real Property except the Phillipsburg
Distribution Center.
(c) The Company has made available to Parent correct and complete copies
of the Real Estate Leases, as amended and currently in effect, all
subordination, non-disturbance and attornment agreements and other agreements
with landlord's lenders and/or ground lessors to which the tenant is a party,
and all written violation notices or notices of default concerning the lease or
the leased premises. Each Real Estate Lease (i) is valid and in full force and
effect with respect to the Company and, (ii) to the knowledge of the Company and
its Subsidiaries, (A) constitutes the legal, valid and binding obligation of the
landlord thereunder, enforceable in accordance with its terms, other than with
respect to bankruptcy, fraudulent conveyance, moratorium, insolvency and other
exceptions affecting creditors generally, (B) has not been modified, extended or
supplemented in any material way and (C) constitutes the entire agreement among
the parties thereto such that there are no material understandings,
representations, warranties, allowances, concessions or promises not fully set
forth therein. Neither the Company nor any Subsidiary has assigned any of the
Real Estate Leases, or subleased or granted any license or other rights to use
all or any portion of any leased premises, to any other party, except as set
forth in Item 2.23 on the Company Schedule.
(d) To the knowledge of the Company, neither the Company nor any
Subsidiary is in default under any Real Estate Lease, all rent and other sums
payable by or to the Company or any Subsidiary thereunder are current within
applicable notice and grace periods and no landlord under any Real Estate Lease
has asserted a written notice of default on the part of the Company or any
Subsidiary thereunder and, to the knowledge of the Company, there is no default
under any Real Estate Lease by any other party.
(e) All of the Real Property is usable in the ordinary course of business
and, to the knowledge of the Company, conforms in all material respects with any
applicable laws, statutes, ordinances, codes, rules and regulations of any
Governmental Entities relating to its construction, use and operation. Except
as set forth on the Company Schedule, the Company has not received any written
notice of actual or asserted material violation of any certificate of occupancy
or any material zoning, subdivision, building or other laws or governmental
requirements, or any written notice from an insurance carrier or board of fire
underwriters claiming defects or deficiencies in any Real Property which has not
been corrected. To the knowledge of the Company, all improvements constructed
or to be constructed pursuant to any Real Estate Lease have been completed
substantially
20
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in compliance with such lease and the use of the Real Property in the conduct of
the business of the Company and or a Subsidiary is a permitted use under the
terms of such lease.
(f) Except as set forth on the Company Schedule, (i) neither the Company
nor any Subsidiary has been notified in writing by any landlord under any Real
Estate Lease that the landlord contests or seeks or intends to audit the
Company's records with respect to the Company's sales and/or percentage rent,
(ii) all of the Existing Stores are open for business and operating, and none of
the Existing Stores is subject to any rent abatement or to any limitation on use
due to casualty, condemnation, repair or other matter which is not reasonably
expected to be restored or remedied, (iii) the Company and its Subsidiaries have
no knowledge of any violation of any co-tenancy requirement or tenant exclusive
benefiting the Company or any Subsidiary under any of the Existing Store Leases,
or of the existence of any condition which with the passage of time or the
giving of notice or both would constitute a violation of any such co-tenancy or
exclusivity requirement, (iv) neither the Company nor any Subsidiary has
received any written notice from any landlord exercising any right of relocation
under any Real Estate Lease or stating that the landlord intends to relocate any
Existing Store to alternate space, or to cancel, terminate or refuse to renew
any Real Estate Lease, or to recapture all or any portion of the leased
premises, or to exercise or decline to exercise any option or other right
thereunder, and (v) neither the Company nor any Subsidiary is obligated to pay
any brokerage fees, commissions or finders fees in connection with any of the
Real Estate Leases.
(g) The Company has no written notice of any pending or threatened
condemnation proceeding which would or could result in the termination or
reduction of the use of or current access to any of the Real Property from
existing public streets, or of any reduction in or access to the sewer, water or
other utility services presently serving any of the Real Property.
Section 2.24. Tax Matters. Neither the Company or its Subsidiaries, nor,
to the knowledge of the Company, any of its affiliates has taken or agreed to
take any action that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
Section 2.25. Affiliates. Except for the persons listed in the Company
Schedule, there are no persons who, to the knowledge of the Company, may be
deemed to be affiliates of the Company under Rule 145 under the Securities Act.
Section 2.26. Board Action; Amendment of Rights Agreement; Applicability
of Takeover Statutes.
(a) The Board of Directors of the Company has, by unanimous vote
of those present, duly and validly approved, and taken all corporate actions
required to be taken by the Board of Directors of the Company for the
consummation of the transactions contemplated hereby, including, without
limitation, the Merger, and resolved to recommend that the stockholders of the
Company approve and adopt this Agreement.
(b) The Board of Directors of the Company has amended the Rights
Agreement of the Company (the "Rights Agreement") in accordance with its terms
----------------
to render it inapplicable to the transactions contemplated by this Agreement.
No holder of rights issued under the Rights Agreement shall be entitled to
exercise such rights under, or be entitled to any rights or benefits pursuant
to, such Rights Agreement solely by reason of the approval, execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
21
<PAGE>
(c) The provisions of Section 203 of the DGCL will not apply to
this Agreement or any of the transactions contemplated hereby. No other "fair
price," "moratorium," "control share acquisition" or other form of anti-takeover
statute or regulation (each a "Takeover Statute") as in effect on the date
----------------
hereof or any anti-takeover provision in the Company's Certificate of
Incorporation or By-laws is applicable to the Company, the shares of Company
Common Stock, the Merger or the other transactions contemplated by this
Agreement.
(d) The Company represents and warrants that as of the date
hereof it has been advised by each of its directors and executive officers that
each such person intends to vote his shares of Company Common Stock in favor of
the approval and adoption of this Agreement and the Merger.
Section 2.27. Opinion of Financial Advisor. The Company has received the
opinion of PaineWebber Incorporated (the "Company Financial Advisor"), dated
-------------------------
April 19, 2000, to the effect that, as of such date, the Common Exchange Ratio
is fair to the stockholders of the Company from a financial point of view and a
copy of such opinion has been made available to Parent.
Section 2.28. Brokers and Finders. Neither the Company nor any Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finder's fees in connection with the transactions contemplated herein, except
that the Company has employed the Company Financial Advisor as its financial
advisor pursuant to the terms of an engagement letter, a true and complete copy
of which has previously been furnished to Parent.
Section 2.29. Accounting Matters. Except as set forth on the Company
Schedule, to the knowledge of the Company, neither the Company nor any of its
Subsidiaries or their respective affiliates has taken or agreed to take any
action, and no fact or circumstance is known to the Company or any of its
subsidiaries that would prevent the Company from accounting for the Merger as a
"pooling of interests."
Section 2.30. Voting Requirements. The affirmative vote of the holders of
a majority of the outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of the capital stock of the Company necessary
to approve this Agreement and the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub each represents and warrants to the Company as
follows, except as set forth on a Disclosure Schedule delivered by Parent
concurrently with the execution and delivery of this Agreement (the "Parent
------
Schedule"), each of which exceptions shall specifically identify the relevant
- --------
subsection hereof to which it relates and shall be deemed to be representations
and warranties as if made hereunder:
Section 3.1. Organization and Powers. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each of Parent and Merger Sub has all requisite corporate power and authority to
carry on its business as it has been and is now being conducted and to own,
lease and operate the properties
22
<PAGE>
and assets used in connection therewith. Each of Parent and Merger Sub is duly
qualified as a foreign corporation authorized to do business and is in good
standing in every jurisdiction in which such qualification is required, except
where the failure to be so qualified would not have a Parent Material Adverse
Effect. As used in this Agreement, "Parent Material Adverse Effect" means any
------------------------------
fact, condition, event, development or occurrence which, individually or when
taken together with all other facts, conditions, events, developments or
occurrences has an adverse effect of $2,500,000 or more on the financial
condition operating results or business of Parent and its subsidiaries, taken as
a whole; provided, however, that in no event shall the items set forth in
Schedule C hereto be taken into account in determining whether a Parent Material
Adverse Effect has occurred.
Section 3.2. Capital Stock. Parent has authorized capital stock
consisting of 100,000,000 shares of Parent Common Stock and 5,000,000 shares of
Preferred Stock, par value $0.01 per share ("Parent Preferred Stock"). As of
----------------------
April 17, 2000: (a) 21,681,606 shares of Parent Common Stock were issued and
outstanding, (b) no shares of Parent Preferred Stock were issued and
outstanding, (c) no shares of Parent Common Stock were held as treasury shares,
(d) 5,108,354 shares of Parent Common Stock were reserved for issuance under
Parent's 1998 Equity Compensation Plan (the "1998 Plan") and Parent's 1993 Stock
---------
Incentive Plan (the "1993 Plan" and, together with the 1998 Plan, the "Parent
--------- ------
Stock Plans" (including (i) 2,991,550 shares reserved for issuance under the
- -----------
1998 Plan, 952,200 of which were subject to outstanding options and 2,039,350 of
which were reserved for future option grants, and (ii) 2,116,804 shares reserved
for issuance under the 1993 Plan, all of which were subject to outstanding
options, and (e) 90,000 shares of Parent Common Stock were reserved for issuance
pursuant to stock options that were not issued under the Parent Stock Plans.
Since April 17, 2000, no additional shares of capital stock have been reserved
for issuance by Parent and the only issuances of shares of capital stock of
Parent have been issuances of Parent Common Stock upon the exercise of
outstanding Parent stock options. All of the issued and outstanding shares of
Parent Common Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and were issued in compliance with
all applicable federal and state securities laws, and all of such treasury
shares were acquired by Parent in compliance with all applicable laws,
including, without limitation, all applicable federal and state securities laws.
No shares of capital stock issued by Parent are or were at the time of their
issuance subject to preemptive rights. There are no existing subscriptions,
options, warrants, convertible securities, calls, commitments, agreements,
conversion rights or other rights of any character (contingent or otherwise)
calling for or requiring the issuance, transfer, sale or other disposition of
any shares of the capital stock of Parent, or calling for or requiring the
issuance of any securities or rights convertible into or exchangeable for shares
of capital stock of Parent, in any case except as described in this Section 3.2.
There are no voting trusts or other agreements or understandings to which Parent
is a party, nor, to the knowledge of Parent, to which any shareholder of Parent
is a party, with respect to the voting of capital stock of Parent.
Section 3.3. Authority; Binding Effect. Each of Parent and Merger Sub has
all requisite corporate power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to perform its
obligations hereunder. All necessary action, corporate or otherwise, required to
have been taken by or on behalf of each of Parent and Merger Sub by applicable
law, their respective charter documents or otherwise to authorize (a) the
approval, execution and delivery on its behalf of this Agreement, and (b) its
performance of its obligations under this Agreement and the consummation of the
transactions contemplated hereby has been taken, except that the Merger must be
approved by the affirmative vote of a majority of the votes cast by the holders
of the then outstanding shares of Parent Common Stock of record on the record
date for the Parent Shareholders Meeting (the "Required Parent Shareholder
---------------------------
Approval"). This Agreement constitutes the valid and binding agreement of Parent
- --------
and Merger Sub, enforceable against each of
23
<PAGE>
them in accordance with its terms, except (y) as the same may be limited by
applicable bankruptcy, insolvency, moratorium or similar laws of general
application relating to or affecting creditors' rights, including, without
limitation, the effect of statutory or other laws regarding fraudulent
conveyances and preferential transfers, and (z) for the limitations imposed by
general principles of equity.
Section 3.4. No Conflict; Approvals. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
and the performance of the obligations herein will not, (a) violate or conflict
with Parent's or Merger Sub's charter or bylaws, (b) constitute a breach or
default (or an event that with notice or lapse of time or both would become a
breach or default) or give rise to any Lien, third party right of termination,
cancellation, material modification or acceleration, or loss of any benefit,
under any contract to which Parent or any subsidiary is a party or by which it
is bound, or (c) subject to the consents, approvals, orders, authorizations,
filings, declarations and registrations specified in Section 3.5 or in the
Parent Schedule in response thereto, conflict with or result in a violation of
any permit, concession, franchise or license or any law, rule or regulation
applicable to Parent or any of its subsidiaries or any of their properties or
assets, except, in the case of clauses (b) and (c), for any such breaches,
defaults, Liens, third party rights, cancellations, modifications, accelerations
or losses of benefits, conflicts or violations which would not have a Parent
Material Adverse Effect and do not impair the ability of Parent to perform its
obligations under this Agreement or prevent or delay the consummation of any of
the transactions contemplated hereby.
Section 3.5. Governmental Consents and Approvals. Except as set forth in
the Parent Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will require any
consent, approval, order, authorization, or permit of, or filing with or
notification to, any Governmental Entity, except (a) the filing of the
Registration Statement with the SEC in accordance with the Securities Act and
the entry of an order by the SEC permitting such Registration Statement to
become effective, and compliance with applicable state securities laws, (b) the
filing of the Proxy Statement and related proxy materials with the SEC in
accordance with the Exchange Act, (c) notification pursuant to, and expiration
or termination of the waiting period under the HSR Act, (d) the filing and
recording of the Certificate of Merger in accordance with the DGCL, and (e)
where the failure to obtain such consents, approvals, authorizations or permits,
or to make such filings or notifications, would not prevent it from performing
its obligations under this Agreement without having a Parent Material Adverse
Effect.
Section 3.6. SEC Reports. Parent has filed all required forms, reports
and documents with the SEC since June 2, 1999 (collectively, the "Parent's SEC
------------
Reports"), including, without limitation, Parent's Quarterly Report on Form 10-Q
- -------
for the quarter ended October 30, 1999. Parent's SEC Reports have complied in
all material respects with all applicable requirements of the Securities Act and
the Exchange Act. As of their respective dates, none of Parent's SEC Reports,
including, without limitation, any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Parent
has heretofore delivered to the Company, in the form filed with the SEC, all of
Parent's SEC Reports.
Section 3.7. Financial Statements. Parent has delivered to the Company
true and complete copies of the (a) consolidated balance sheet of Parent and its
subsidiaries at January 30, 1999 and the related consolidated income statement
and statement of cash flow for the year then ended, together with the notes
thereto, audited by Arthur Andersen LLP, and (b) unaudited
24
<PAGE>
consolidated balance sheet of Parent and its subsidiaries at January 29, 2000
and the related consolidated income statement and statement of cash flow for the
year then ended, both of which have been prepared in accordance with GAAP
(except as may be indicated in the notes thereto). Such balance sheets,
including the related notes, fairly present in all material respects the
consolidated financial position of Parent and its subsidiaries at the dates
indicated and such consolidated income statements and statements of cash flow
fairly present in all material respects the consolidated results of operations,
and cash flow of Parent and its subsidiaries for the periods indicated. The
unaudited consolidated balance sheet of Parent and its subsidiaries at January
29, 2000 described above is referred to herein as the "Parent 1999 Balance
-------------------
Sheet." The unaudited consolidated financial statements of Parent and its
- -----
subsidiaries as at and for the year ended January 29, 2000 are referred to
herein as the "Parent Unaudited Financial Statements."
-------------------------------------
Section 3.8. Absence of Certain Changes. Except as otherwise disclosed in
the Parent Schedule, since January 29, 2000, Parent and its subsidiaries have
not (a) been subject to any events or conditions of any character that would
have a Parent Material Adverse Effect or prevent Parent from performing its
obligations under this Agreement or prevent or delay the consummation of any of
the transactions contemplated hereby, (b) amended or otherwise modified its
Articles of Incorporation or bylaws (or similar organization document), (c) made
any material change to accounting methods, principles or practices, except as
required by a change in GAAP occurring after January 29, 2000, (d) sold,
transferred, leased to others or otherwise disposed of any material properties
or assets, except in the ordinary course of business, (e) terminated or received
any notice of termination of any material contract, lease, license or other
agreement or any Authorization other than in the ordinary course of business,
(f) entered into any material transaction, contract or commitment other than in
the ordinary course of business; or (g) entered into any agreement or made any
commitment to take any of the types of action described in subparagraphs (b)
through (f) of this Section 3.8.
Section 3.9. Absence of Undisclosed Liabilities. Neither Parent nor any
of its subsidiaries have any material indebtedness, liability or obligation of
any kind (whether known or unknown, accrued, absolute, asserted or unasserted,
contingent or otherwise) except (a) as and to the extent reflected, reserved
against or otherwise disclosed in the Parent 1999 Balance Sheet, (b) for
liabilities and obligations incurred subsequent to January 29, 2000 in the
ordinary course of business and which do not have a Parent Material Adverse
Effect or prevent Parent from performing its obligations under this Agreement or
prevent or delay the consummation of any of the transactions contemplated
hereby, or (c) as disclosed in the Parent Schedule.
Section 3.10. Absence of Litigation; Claims. There are no claims, actions,
suits, proceedings or investigations pending or, to the knowledge of Parent,
threatened against Parent or any of its subsidiaries, or any properties or
rights of Parent or any of its subsidiaries, before any Governmental Entity or
arbitrator, which, if decided adversely to Parent or such subsidiary, would have
a Parent Material Adverse Effect or prevent Parent from performing its
obligations under this Agreement or prevent or delay the consummation of any of
the transactions contemplated hereby, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Parent or any of its subsidiaries which could reasonably be expected to
have such effect.
Section 3.11. Authorizations; Compliance With Law.
(a) Parent and its subsidiaries hold all Authorizations from all
Governmental Entities and other persons which are necessary for the lawful
conduct of their respective businesses
25
<PAGE>
and their use and occupancy of their assets and properties in the manner
heretofore conducted, used and occupied, except where the failure to hold any of
the foregoing would not have a Parent Material Adverse Effect or prevent Parent
from performing its obligations under this Agreement or prevent or delay the
consummation of any of the transactions contemplated hereby.
(b) Parent and each of its subsidiaries is in compliance in all
material respects with all applicable laws, statutes, ordinances, codes, rules
and regulations of any Governmental Entities.
Section 3.12. Adequacy of Disclosure. Parent has made available to the
Company copies of all documents listed or referred to in the Parent Schedule
hereto or referred to herein. Such copies, and all documents and materials
delivered or made available in connection with the Company's investigation of
Parent in connection with the transactions contemplated hereby, are true and
complete and include all amendments, supplements and modifications thereto or
waivers currently in effect thereunder. No representation or warranty by Parent
in this Agreement nor any certificate, schedule, statement, document or
instrument furnished or to be furnished to the Company pursuant hereto, or in
connection with the negotiation, execution or performance of this Agreement,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact required to be stated herein or therein or
necessary to make any statement herein or therein not misleading.
Section 3.13. Assets. Except as described in the Parent Schedule, Parent
has valid leasehold title to all personal property leased by it and good and
marketable title to its owned personal property, including, without limitation,
those assets and properties reflected in the Parent 1999 Balance Sheet in the
amounts and categories reflected therein, free and clear of all Liens, except
(a) the lien of current taxes not yet due and payable, (b) properties,
interests, and assets disposed of by Parent since January 29, 2000 solely in the
ordinary course of business consistent with past practice, (c) liens in respect
of pledges or deposits under workmen's compensation, unemployment insurance,
social security and public liability laws and other similar legislation, (d)
liens imposed by law, such as carriers', warehousemen's or mechanics' liens,
incurred in good faith in the ordinary course of business, (e) such secured
indebtedness as is disclosed in the Parent 1999 Balance Sheet covering the
properties referred to therein, and (f) such imperfections of title, easements
and encumbrances, if any, as do not materially detract from the value, or
interfere with the present or proposed use, of the properties subject thereto.
Except as set forth in the Parent Schedule, all buildings, structures,
facilities, equipment and other items of tangible personal property reflected on
the Parent 1999 Balance Sheet or acquired since January 29, 2000 are in good
operating condition and repair, subject to normal wear and maintenance and are
useable in the ordinary course of business of Parent.
Section 3.14. Taxes.
(a) All federal, state, local and foreign tax returns, reports,
statements and other similar filings required to be filed by Parent (the "Parent
------
Tax Returns") on or prior to the date hereof or with respect to taxable periods
- -----------
ending on or prior to the date hereof with respect to any Taxes have been or
will be timely filed with the appropriate Governmental Entities in all
jurisdictions in which such Parent Tax Returns are required to be filed, and all
such Parent Tax Returns correctly reflect in all material respects the
liabilities of Parent for Taxes for the periods, property or events covered
thereby.
26
<PAGE>
(b) All Taxes, including, without limitation, those which are
called for by the Parent Tax Returns, or heretofore or hereafter claimed to be
due by any taxing authority from Parent, have been fully paid or properly
accrued. The accruals for Taxes contained in Parent 1999 Balance Sheet are
adequate to cover the tax liabilities of Parent as of January 29, 2000 and
include adequate provision for all deferred taxes, and nothing has occurred
subsequent to that date to make any of such accruals inadequate.
(c) Parent has not received any notice of assessment or proposed
assessment in connection with any Taxes or Parent Tax Returns and there are no
pending tax examinations of or tax claims asserted against Parent or any of its
assets or properties. Parent has not extended, or waived the application of any
statute of limitations of any jurisdiction regarding the assessment or
collection of any Taxes.
Section 3.15. Employee Benefit Plans; Employment Agreements. Except as set
forth on the Parent Schedule, all employee benefit plans (as defined in Section
3(3) of ERISA) that are maintained or sponsored by Parent and any other benefit
arrangement, obligation or other practice, whether or not legally enforceable,
to provide benefits, other than salary, as compensation for services rendered,
to one or more present or former employees, directors, agents, or independent
contracts that is maintained by Parent (together, "Parent Employee Plans") are
---------------------
in compliance in all material respects with the requirements prescribed by any
and all statutes (including ERISA and the Code), orders or governmental rules
and regulations currently in effect with respect thereto (including all
applicable requirements for notification to participants or the Department of
Labor, IRS or Secretary of the Treasury), all Parent Employee Plans have been
operated at all times in accordance with their terms, and Parent has performed
all material obligations required to be performed by it under, is not in any
material respect in default under or violation of, and has no knowledge of any
default or violation by any other party to, any of the Parent Employee Plans.
Section 3.16. Labor Matters. Except as disclosed on the Parent Schedule,
there are no material controversies pending or, to the knowledge of Parent,
threatened, between Parent and any of its employees. Parent is not a party to
any collective bargaining agreement or other labor agreement with any union or
labor organization and no union or labor organization has been recognized by
Parent as an exclusive bargaining representative for employees of Parent. Except
as disclosed on the Parent Schedule, to Parent's knowledge, there is no
significant activity or proceeding of any labor organization (or representative
thereof) or employee group to organize any such employees. Except as disclosed
in the Parent Schedule, (a) there is no active arbitration under any collective
bargaining agreement involving Parent, (b) there is no unfair labor practice,
grievance, employment discrimination or other labor or employment related
charge, complaint or claim against Parent pending before any court, arbitrator,
mediator or governmental agency or tribunal, or, to Parent's knowledge,
threatened, and (c) there is no strike, picketing or work stoppage by, or any
lockout of, employees of Parent pending, or to Parent's knowledge, threatened,
against or involving Parent.
Section 3.17. Environmental Matters. Except as set forth in the Parent
Schedule:
(a) no written notice, notification, demand, request for
information, citation, summons or order has been received by Parent, no
complaint has been filed, no penalty has been assessed and no investigation,
action, claim or proceeding is pending or, to the knowledge of Parent,
threatened by any Governmental Entity or other Person against Parent under any
Environmental Law, except for those which would not reasonably be expected to
result in a Parent Material Adverse Effect;
27
<PAGE>
(b) Parent has not incurred any Environmental Liabilities,
which would result in a Parent Material Adverse Effect, and, to the knowledge of
Parent, there are no facts, conditions or circumstances which could reasonably
be expected to result in or be the basis for any such liability, which, if
adversely determined, would result in a Parent Material Adverse Effect; and
(c) Parent and its respective operations are in compliance
with all Environmental Laws, and have and are in compliance with all
Environmental Permits, except where such non-compliance would not reasonably be
expected to have a Parent Material Adverse Effect.
Section 3.18. Intellectual Property.
(a) Except as set forth in the Parent Schedule, Parent owns, or
is licensed pursuant to fully-paid (other than upgrade costs and purchaser
maintenance costs), perpetual licenses to use, or otherwise possesses or has
legally enforceable rights to use, all software, firmware, copyrights, patents,
trademarks, service marks, trade names, trade secrets and proprietary
technologies, know-how, and all other inventions, discoveries, improvements,
processes and formulas (secret or otherwise) and any related documentation
thereto used or possessed by or related to Parent or necessary for the current
conduct of the business of Parent.
(b) Parent is not, nor will it be as a result of the execution
and delivery of this Agreement or the performance of the transactions
contemplated hereby, in violation of any licenses, sublicenses and other
contracts to which Parent is a party and pursuant to Parent is authorized to use
any patent, copyright, trademark, trade name, service mark or any other form of
intellectual property or trade secret owned by a third party.
(c) To the knowledge of Parent, all copyrights, patents,
trademarks, service marks and trade names held by Parent are valid and
subsisting, except for any failures so to be valid and subsisting that,
individually or in the aggregate, would not have a Parent Material Adverse
Effect.
(d) In conducting its business as presently conducted, to the
knowledge of Parent, except as disclosed in the Parent Schedule, Parent is not
infringing upon or unlawfully or wrongfully using any patent, copyright,
trademark, trade name, service mark or any other form of intellectual property
or trade secret owned or claimed by another. Except as disclosed in the Parent
Schedule, Parent is not in default under, nor has it received any notice of any
claim of infringement or any other claim or proceeding relating to, any such
patent, copyright, trademark, trade name, service mark, trade secret or any
other form of intellectual property or any agreement relating thereto.
Section 3.19. Tax Matters. Neither Parent or Merger Sub nor, to the
knowledge of Parent, any of its affiliates has taken or agreed to take any
action that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
Section 3.20. Affiliates. Except for the persons listed in the Parent
Schedule, there are no persons who, to the knowledge of Parent, may be deemed to
be affiliates of Parent under Rule 145 under the Securities Act.
Section 3.21. Opinion of Financial Advisor. Parent has received the
opinion of Donaldson, Lufkin and Jenrette Securities Corporation (the "Parent
------
Financial Advisor"), dated April 21, 2000, to the effect that, as of such date,
- -----------------
the Common Exchange Ratio is fair to Parent from a
28
<PAGE>
financial point of view and a copy of such opinion has been made available to
the Company.
Section 3.22. Brokers and Finders. Neither Parent nor any of its
respective officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated herein, except that Parent has
employed the Parent Financial Advisor as its financial advisor pursuant to the
terms of an engagement letter, a true and complete copy of which has previously
been furnished to the Company.
Section 3.23. Board Action.
(a) The Board of Directors of Parent has unanimously determined
that the transactions contemplated by this Agreement are in the best interests
of Parent and its shareholders and has resolved to recommend to such
shareholders that they vote in favor of the transactions contemplated by this
Agreement.
(b) Parent represents and warrants that as of the date hereof it
has been advised by each of its directors and executive officers that each such
person intends to vote his shares of Parent Common Stock in favor of the
issuance of the Merger Stock.
Section 3.24. Accounting Matters. To the knowledge of Parent, neither
Parent nor any of its affiliates has taken or agreed to take any action, and,
except as set forth on the Parent Schedule, no fact or circumstance is known to
Parent, that would prevent the Company from accounting for the Merger as a
"pooling of interests."
Section 3.25. Voting Requirements. The affirmative vote of the holders of
a majority of the outstanding shares of Parent Common Stock is the only vote of
the holders of any class or series of the capital stock of Parent necessary to
approve this Agreement and the Merger.
Section 3.26. ZB Holdings LLC. Except as set forth in the Parent Schedule:
(a) Parent has no obligation to provide additional financing to
ZB Holdings LLC, a Delaware limited liability company and affiliate of Parent
("Holdings");
--------
(b) Parent has no obligation to purchase the membership
interests of any other member of Holdings;
(c) Parent owns (or has adequate rights to use or transfer
pursuant to license, sublicence, agreement or permission) the uniform resource
locator www.zanybrainy.com; and
-------------------
(d) Upon the dissolution and cessation of the business of
Holdings and its wholly-owned subsidiary, ZanyBrainy.com LLC, a Delaware limited
liability company, Parent will not be restricted from operating another online
retail website.
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ARTICLE IV
OTHER AGREEMENTS
Section 4.1. Conduct of the Company's Business. The Company covenants and
agrees that, between the date of this Agreement and the Effective Time, unless
Parent shall otherwise consent in writing, the business of the Company and the
Subsidiaries shall be conducted only in, and such entities shall not take any
action except in, the ordinary course of business and in a manner consistent
with past practice; and the Company and its Subsidiaries will use their
commercially reasonable efforts to preserve substantially intact the business
organization of the Company and its Subsidiaries, to keep available the services
of those of its present officers, employees and consultants that are integral to
the operation of its business as presently conducted and to preserve the present
relationships of the Company and its Subsidiaries with customers, suppliers and
other persons with which the Company and the Subsidiaries have significant
business relations. By way of amplification and not limitation, except as
otherwise expressly contemplated by this Agreement, the Company agrees on behalf
of itself and its Subsidiaries that, without the prior written consent of
Parent, which consent in the case of clauses (b)(iii)-(vii), (c), (d) and (e)
below shall not be unreasonably withheld or delayed, each of the Company and its
Subsidiaries will, between the date of this Agreement and the Effective Time:
(a) not, directly or indirectly, do any of the following: (i)
amend or propose to amend its charter documents or by-laws; (ii) split, combine
or reclassify any outstanding shares of its capital stock, or declare, set aside
or pay any dividend payable in cash, stock, property or otherwise with respect
to such shares; (iii) redeem, purchase, acquire or offer to acquire any shares
of its capital stock; (iv) issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional shares of, or securities convertible
or exchangeable for, or any options, warrants or rights of any kind to acquire
any shares of, its capital stock of any class or other property or assets
whether pursuant to any rights agreement, stock option plans described in the
Company Schedule or otherwise, provided that the Company may issue shares of
Company Common Stock pursuant to currently outstanding options or employee stock
purchases referred to in the Company Schedule in response to Section 2.3 above
and the Company may issue options pursuant to the Company Option Plan in amounts
and on terms consistent with past practice, provided that such option grants do
not exceed 50,000 shares in the aggregate; (v) accelerate, amend or change the
period of exerciseability of options or restricted stock granted under any of
the Company Stock Plans or authorize cash payments in exchange for any options
granted under any of such plans except as required by the terms of such plans or
any related agreements in effect as of the date of this Agreement; (vi) except
as set forth in Section 2.26(b) in connection with the transactions contemplated
by this Agreement, amend the Rights Agreement or redeem the rights issued
pursuant thereto; or (vii) enter into any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this paragraph (a);
(b) not, directly or indirectly, (i) acquire (by merger,
consolidation or acquisition of stock or assets) any corporation, partnership,
limited liability company or other business organization or division thereof or
make any equity investments therein; (ii) issue, sell, pledge, dispose of or
encumber any assets (including, without limitation, licenses, Authorizations or
rights) of the Company or the Subsidiaries (except for (A) purchases or sales of
inventory in the ordinary course of business and in a manner consistent with
past practice, (B) dispositions of obsolete or worthless inventory, (C)
purchases or sales of immaterial assets not in excess of $50,000 in the
aggregate and (D) as set forth in the Company Schedule) or enter into any
securitization transactions; (iii) incur any indebtedness for borrowed money or
issue any debt securities exceeding $50,000 in the aggregate except for
borrowings and reborrowings under the Company's existing credit facility in the
ordinary
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course of business and consistent with past practice and except as set forth in
the Company Schedule, (iv) make any commitments or agreements for capital
expenditures or capital additions or betterments exceeding in the aggregate
$50,000 except such as may be involved in ordinary repair, maintenance or
replacement of its assets or except as set forth in the Company Schedule; (v)
enter into or modify any material contract, lease or agreement except in the
ordinary course of business and consistent with past practice or except as set
forth in the Company Schedule; (vi) terminate, modify, assign, waive, release or
relinquish any material contract rights or amend any material rights or claims
not in the ordinary course of business or except as expressly provided herein;
or (vii) enter into any contract, agreement, commitment or arrangement with
respect to any of the matters set forth in this paragraph (b);
(c) not, directly or indirectly, (i) initiate any litigation or
arbitration proceeding; (ii) revalue any of its assets, including writing down
the value of inventory or writing off notes or accounts receivable, other than
in the ordinary course of business pursuant to arm's length transactions on
commercially reasonable terms; (iii) make any material change to its accounting
methods, principles or practices except as required by a change in GAAP
occurring after the date hereof; or (iv) settle or compromise any Tax liability
for an amount in excess of $25,000 or, on any Tax Return, take any position,
make any election or adopt any method that is inconsistent with positions taken,
elections made or methods used in similar Tax Returns in prior periods;
(d) not, directly or indirectly, (i) grant any increase in the
salary or other compensation of its employees except in the ordinary course of
business and consistent with past practice or grant any bonus to any employee or
enter into any employment agreement or make any loan to or enter into any
material transaction of any other nature with any officer or employee of the
Company; (ii) take any action to institute any new severance or termination pay
practices with respect to any directors, officers or employees of the Company or
to increase the benefits payable under its severance or termination pay
practices; or (iii) adopt or amend, in any respect, except as may be required by
applicable law or regulation, any bonus, profit sharing, compensation, stock
option, restricted stock, pension, retirement, deferred compensation, employment
or other employee benefit plan, agreement, trust, fund, plan or arrangement for
the benefit or welfare of any directors, officers or employees except as set
forth in the Company Schedule; and
(e) not, directly or indirectly, take (and will use reasonable
efforts to prevent any affiliate of the Company from taking) or agree in writing
or otherwise to take, (i) any of the actions described in this Section 4.1; (ii)
any action which would make any of the Company's representations or warranties
in this Agreement, if made on and as of the date of such action or agreement,
untrue or incorrect in any material respect; (iii) any action which could
prevent it from performing, or cause it not to perform, its obligations under
this Agreement; (iv) any action that would cause the Merger not to be treated as
a reorganization within the meaning of Section 368(a) of the Code; or (v) any
action that would prevent or impede the Merger from qualifying as a "pooling of
interests" for accounting purposes.
Section 4.2. Conduct of Business by Parent Pending the Merger. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, Parent covenants and agrees
that, unless the Company shall otherwise agree in writing, Parent shall conduct
its business in the ordinary course of business and consistent with past
practice and shall not directly or indirectly do, or propose to do, any of the
following without the prior written consent of the Company:
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(a) amend or otherwise change Parent's Articles of Incorporation
or By-Laws;
(b) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of any of its capital stock; or (ii) issue, sell, pledge or dispose of,
or agree to issue, sell, pledge or dispose of, any additional shares of, or
securities convertible or exchangeable for, or any options, warrants or rights
of any kind to acquire any shares of, its capital stock of any class or other
property or assets whether pursuant to any rights agreement, stock option plans
or otherwise, provided that Parent may issue shares of Parent Common Stock
pursuant to currently outstanding options or employee stock purchases referred
to on the Parent Schedule in response to Section 3.2 above and Parent may issue
options pursuant to its 1998 Equity Compensation Plan in amounts and on terms
consistent with past practice, provided that such option grants do not exceed
50,000 shares in the aggregate;
(c) acquire or agree to acquire, by merging or consolidating
with, by purchasing an equity interest in or a portion of the assets of, or by
any other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets of any other person, or dispose of any assets, which, in
any such case, would materially delay or prevent the consummation of the Merger
and the other transactions contemplated by this Agreement; or
(d) take any action to change its accounting policies or
procedures except as required by a change in GAAP occurring after the date
hereof; or
(e) take or agree in writing or otherwise to take, (i) any of
the actions described in this Section 4.2; (ii) any action which would make any
of Parent's representations or warranties in this Agreement, if made on and as
of the date of such action or agreement, untrue or incorrect in any material
respect; (iii) any action which could prevent it from performing, or cause it
not to perform, its obligations under this Agreement; (iv) any action that would
cause the Merger not to be treated as a reorganization within the meaning of
Section 368(a) of the Code; or (v) any action that would prevent or impede the
Merger from qualifying as a "pooling of interests" for accounting purposes.
Section 4.3. Parent's Undertakings. Parent will not, directly or
indirectly, take (and will use reasonable efforts to prevent any affiliate of
Parent from taking) any action that would cause the Merger not to be treated as
a reorganization within the meaning of Section 368(a) of the Code or would
prevent or impede the Merger from qualifying as a "pooling of interests" for
accounting purposes. Parent shall as promptly as practicable following the date
hereof apply for approval for listing of Parent Common Stock to be issued
pursuant to the Merger on the Nasdaq National Market upon official notice of
issuance.
Section 4.4. Access to Information. Between the date of this Agreement
and the Closing Date, the Company and Parent will each (a) give the other party
and its authorized representatives reasonable access, during regular business
hours upon reasonable notice, to all offices, warehouses and other facilities
and to all of its books and records, (b) permit the other party and its
authorized representatives to make such reasonable inspections as it may require
and (c) cause its officers and those of its subsidiaries to furnish the other
party and its authorized representatives with such financial and operating data
and other information with respect to its business and properties, as the other
party and its authorized representatives may from time to time reasonably
request. All such access and information obtained by Parent, the Company and
their authorized representatives shall be subject to the terms and conditions of
the confidentiality agreement between the Company and Parent
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dated February 28, 2000 (the "Confidentiality Agreement").
-------------------------
Section 4.5. Stockholder Vote; Proxy Statement.
(a) As promptly as practicable after the date hereof, the
Company shall take all action necessary in accordance with Rules 14a-1 et seq.
-- ----
of the Exchange Act, the DGCL, the rules of the National Association of
Securities Dealers, Inc. and the Company's Certificate of Incorporation and By-
laws to call, give notice of, convene and hold a meeting of the Company's
stockholders to consider and vote upon the approval and adoption of this
Agreement and the transactions contemplated hereby and for such other purposes
as may be necessary or desirable (the "Company Stockholders Meeting"). Subject
----------------------------
to the fiduciary duties of the Board of Directors under applicable law, as
determined by such directors in good faith after consultation with and based
upon the written advice of independent legal counsel, the Board of Directors of
the Company shall use its reasonable best efforts to solicit and secure from its
stockholders such approval and adoption of this Agreement and the transactions
contemplated hereby, which efforts may include, without limitation, soliciting
stockholder proxies therefor, and to advise the other party upon its request,
from time to time, as to the status of the stockholder vote then tabulated.
(b) As promptly as practicable after the date hereof, Parent
shall take all action necessary in accordance with Rules 14a-1 et seq. of the
-- ----
Exchange Act, the laws of the Commonwealth of Pennsylvania, the rules of the
National Association of Securities Dealers, Inc. and Parent's Articles of
Incorporation and Bylaws to call, give notice of, convene and hold a meeting of
Parent's shareholders to consider and vote upon the approval of the Merger and
for such other purposes as may be necessary or desirable (the "Parent
------
Shareholders Meeting"). Subject to the fiduciary duties of the Board of
- --------------------
Directors of Parent under applicable law, as determined by such directors in
good faith after consultation with and based upon the written advice of
independent legal counsel, the Board of Directors of Parent shall use its
reasonable best efforts to solicit and secure from its shareholders such
approval, which efforts may include, without limitation, soliciting shareholder
proxies therefor, and to advise the other party upon its request, from time to
time, as to the status of the shareholder vote then tabulated.
(c) As promptly as practicable after the date hereof, the
Company and Parent shall jointly prepare and file with the SEC preliminary proxy
materials that shall constitute the joint proxy statement of the Company and
Parent under the Exchange Act with respect to the Merger (the "Proxy
-----
Statement"), and a registration statement on Form S-4 with respect to the Parent
- ---------
Common Stock to be issued in connection with the Merger (the "Registration
------------
Statement") and will thereafter use their respective best efforts to respond to
- ---------
any comments of the SEC with respect thereto and to cause the Registration
Statement to become effective, and the Proxy Statement and proxy to be mailed to
the Company's and the Parent's stockholders, as promptly as practicable. The
Proxy Statement shall include the unqualified recommendation of (i) the
Company's Board of Directors that the Company's stockholders vote in favor of
the approval and adoption of this Agreement and the transactions contemplated
hereby, unless otherwise necessary due to the applicable fiduciary duties of the
directors of the Company, as determined by such directors in good faith after
consultation with and based upon the written advice of independent legal counsel
and (ii) Parent's Board of Directors that Parent's shareholders vote in favor of
the approval and adoption of this Agreement and the transactions contemplated
hereby, unless otherwise necessary due to the applicable fiduciary duties of the
directors of Parent, as determined by such directors in good faith after
consultation with and based upon the written advice of independent legal
counsel.
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(d) As soon as practicable after the date hereof, the Company
and Parent shall prepare and file any other filings required to be filed by each
under the Exchange Act or any other federal or state securities laws relating to
the Merger and the transactions contemplated hereby (collectively, "Other
-----
Filings") and will use their best efforts to respond to any comments of the SEC
- -------
or any other appropriate government official with respect thereto.
(e) The Company and Parent shall cooperate with each other and
provide to each other all information necessary in order to prepare the
Registration Statement, the Proxy Statement and the Other Filings (collectively,
the "SEC Transaction Filings") and shall provide promptly to the other party any
-----------------------
information that such party may obtain that could necessitate amending any such
document.
(f) The Company and Parent will notify the other party promptly
of the receipt of any comments from the SEC or its staff or any other
appropriate government official and of any requests by the SEC or its staff or
any other appropriate government official for amendments or supplements to any
of the SEC Transaction Filings or for additional information and will supply the
other party with copies of all correspondence between the Company or any of its
representatives or Parent and any of its representatives, as the case may be, on
the one hand, and the SEC or its staff or any other appropriate government
official, on the other hand, with respect thereto. If at any time prior to the
Effective Time, any event shall occur that should be set forth in an amendment
of, or a supplement to, any of the SEC Transaction Filings, the Company and
Parent agree promptly to prepare and file such amendment or supplement and to
distribute such amendment or supplement as required by applicable law,
including, in the case of an amendment or supplement to the Proxy Statement,
mailing such supplement or amendment to the Company's stockholders. Parent shall
not be required to maintain the effectiveness of the Registration Statement for
the purpose of resale by stockholders of the Company who may be affiliates of
the Company or Parent pursuant to Rule 145 under the Securities Act.
(g) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement not misleading. The information supplied by the Company for inclusion
in the Proxy Statement shall not, at the time the Proxy Statement is first
mailed to stockholders, at the time of the Company Stockholders Meeting, or at
the Effective Time, contain any statement which, at such time and in light of
the circumstances under which it was made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Proxy Statement not false or misleading or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to the Company, any of its Subsidiaries
or any affiliates of the foregoing should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Parent.
(h) The information supplied by Parent for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the Registration
Statement or necessary in order to make the statements in the Registration
Statement not misleading. The information supplied by Parent for inclusion in
the Proxy Statement shall not, at the
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time the Proxy Statement is first mailed to stockholders of the Company, at the
time of the Company Stockholders Meeting, or at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Proxy Statement not false or misleading or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to Parent or any of its affiliates should be discovered by Parent which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Parent shall promptly inform the Company.
Section 4.6. Reasonable Best Efforts. Subject to the fiduciary duties of
its Board of Directors, as determined by such directors in good faith after
consultation with and based upon the written advice of independent legal
counsel, and except as otherwise provided herein, each of the parties hereto
agrees to use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws, statutes, ordinances, codes, rules and
regulations to consummate and make effective the transactions contemplated by
this Agreement in the most expeditious manner practicable, including, without
limitation, the satisfaction of all conditions to the Merger, and to consummate
the Merger as promptly as practicable.
Section 4.7. Public Announcements. No party hereto shall make any public
announcements or otherwise communicate with any news media with respect to this
Agreement or any of the transactions contemplated hereby without prior
consultation with the other parties as to the timing and contents of any such
announcement as may be reasonable under the circumstances; provided, that
nothing contained herein shall prevent any party from promptly making all
filings with Governmental Entities and all disclosure as may, in its good faith
judgment, be required or advisable in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby
(in which case the disclosing party shall advise the other parties and provide
them with a copy of the proposed disclosure or filing prior to making the
disclosure or filing).
Section 4.8. Notification. Each party hereto shall, in the event of, or
promptly after obtaining knowledge of the occurrence or threatened occurrence of
(i) any fact or circumstance that would cause or constitute a breach of any of
its representations and warranties set forth herein or (ii) any failure to
materially comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it, give notice thereof to the other parties and
shall use its best efforts to prevent or promptly to remedy such breach or
failure; provided, however, that none of such notices shall be deemed to modify,
amend or supplement the representations and warranties of the such party or the
disclosure schedules of such party for the purposes of Article V hereof, unless
the other party shall have consented thereto in writing.
Section 4.9. Subsequent Financial Statements. Prior to the Effective
Time, each party will consult with the other prior to (a) making publicly
available its financial results for any period, and (b) the filing of (which
shall be a timely filing with the SEC) each Annual Report on Form 10-K,
Quarterly Report on Form 10-Q and Current Report on Form 8-K required to be
filed by it under the Exchange Act and will promptly deliver to the other copies
of each such report filed with the SEC.
35
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Section 4.10. Regulatory and Other Authorizations.
(a) Each party hereto agrees to use commercially reasonable
efforts to comply with all legal requirements which may be imposed on such party
with respect to the Merger and to obtain all Authorizations, consents, orders
and approvals of Governmental Entities and non-governmental third parties that
may be or become necessary for (i) the performance of its respective obligations
pursuant to this Agreement, and (ii) the ownership of the Surviving Entity by
Parent, and each party will cooperate fully with the other party in promptly
seeking to obtain all such Authorizations, consents, orders and approvals. The
foregoing covenant shall not include any obligation by Parent or the Company to
agree to divest, abandon, license or take similar action with respect to any
assets (tangible or intangible) of Parent or the Company, except as to any
stores of the Company and its Subsidiaries which account for no more than 5% of
the total revenues of the Company and its Subsidiaries taken as a whole or any
stores of Parent and its subsidiaries which account for no more than 3% of the
total revenues of Parent and its subsidiaries taken as a whole.
(b) The Company and Parent shall each promptly make an
appropriate filing of a Notification and Report Form pursuant to the HSR Act and
shall promptly respond to any request for additional information with respect
thereto. Each such filing shall request early termination of the waiting period
imposed by the HSR Act.
(c) The Company and Parent will consult with each other with
respect to any suit, action or proceeding by any third party, including any
Governmental Entity, to restrain, prohibit or otherwise oppose the Merger or any
other transaction contemplated by this Agreement and will use their commercially
reasonable best efforts to resist any such effort to restrain, prohibit or
otherwise oppose the Merger or any other transaction contemplated by this
Agreement; provided, however, that neither the Company nor Parent shall have any
obligation to make material expenditures in connection with such efforts.
Section 4.11. Takeover Statute. If any Takeover Statute shall become
applicable to the transactions contemplated hereby, each of the Company and
Parent and the members of their respective Boards of Directors shall grant such
approvals and take such actions as are reasonably necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of such statute.
Section 4.12. Indemnification of Directors and Officers.
(a) The By-Laws and Certificate of Incorporation of the
Surviving Entity shall contain the provisions with respect to indemnification
set forth in the By-Laws and Certificate of Incorporation of the Company, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would adversely affect the
rights thereunder as of the Effective Time of individuals who at the Effective
Time were directors or officers of the Company or its Subsidiaries, unless such
modification is required after the Effective Time by law.
(b) For a period of six years after the Effective Time, Parent
shall cause the Surviving Entity to maintain in effect, if available, directors'
and officers' liability insurance covering those individuals who served as
directors or officers of the Company at any time during the 12
36
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months immediately preceding the Effective Time on terms comparable to those now
applicable to directors and officers of the Company; provided, however, that in
no event shall the Surviving Entity be required to expend in excess of 300% of
the annual premium currently paid by the Company for such coverage.
(c) From and after the Effective Time, Parent shall
unconditionally guarantee the timely payment of all funds owning by, and the
timely performance of all other obligations of, the Surviving Entity under this
Section 4.12.
(d) The provisions of this Section 4.12 shall survive the
consummation of the Merger at the Effective Time, are intended to benefit the
Company, the Surviving Entity and the Indemnified Parties, shall be binding on
all successors and assigns of the Surviving Entity and shall be enforceable by
the Indemnified Parties.
Section 4.13. Affiliates.
(a) The Company shall use all reasonable efforts to cause each
person who is so identified as an "affiliate" of it for purposes of Rule 145
under the Securities Act or the rules and regulations of the SEC relating to
pooling of interests accounting treatment for merger transactions to deliver to
Parent as promptly as practicable but in no event later than five business days
prior to the Closing Date, a signed agreement substantially in the form of
Schedule B. The Company shall notify Parent from time to time of any other
persons who then are, or may be, such an "affiliate" and use all reasonable
efforts to cause each additional person who is identified as an "affiliate" to
execute a signed agreement as set forth in this Section 4.13(a).
(b) Parent shall use all reasonable efforts to cause each person
who is so identified as an "affiliate" of it for purposes of Rule 145 under the
Securities Act or the rules and regulations of the SEC relating to pooling of
interests accounting treatment for merger transactions to deliver to the Company
as promptly as practicable but in no event later than five business days prior
to the Closing Date, a signed agreement substantially in the form of Schedule D.
Parent shall notify the Company from time to time of any other persons who then
are, or may be, such an "affiliate" and use all reasonable efforts to cause each
additional person who is identified as an "affiliate" to execute a signed
agreement as set forth in this Section 4.13(b).
Section 4.14. Tax-Free Reorganization. Each of Parent and the Company will
use its best efforts to cause the Merger to qualify as a "reorganization" within
the meaning of Section 368(a) of the Code, and to enable its respective counsel
to render the opinions contemplated by Sections 5.2(f) and 5.3(g). Each party
shall make, and shall use its best efforts to cause those of its respective
officers and stockholders that counsel to the parties shall reasonably request
to make, such representations and certifications as counsel to the parties shall
reasonably request to enable them to render such opinion, including, without
limitation, the representations of Parent contained in a certificate of Parent
and the representations of the Company contained in a certificate of the
Company.
Section 4.15. No Solicitation.
(a) Without the prior written consent of Parent, from and after
the date hereof, the Company shall not, and shall not authorize or permit any of
its Subsidiaries or any officers, directors, employees, financial advisors,
agents and other representatives of any of the foregoing
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("Representatives") to, directly or indirectly, (i) solicit, initiate or
---------------
encourage (including by way of furnishing information) or take any other action
to facilitate knowingly any inquiries or the making of any proposal which
constitutes or may reasonably be expected to lead to an Acquisition Proposal (as
hereinafter defined) from any person; (ii) engage in any discussion or
negotiations relating to any Acquisition Proposal; or (iii) enter into any
agreement with respect to, agree to, approve or recommend any Acquisition
Proposal. Notwithstanding any other provision hereof, the Company may, at any
time prior to the time the Company's stockholders shall have voted to approve
this Agreement engage in discussions or negotiations with a third party (and may
furnish such third party information concerning the Company and its business,
properties and assets to such party), provided that all of the following has
occurred: (1) such party has (without any solicitation, initiation,
encouragement, discussion or negotiation, directly or indirectly, by or with the
Company or the Representatives after the date hereof) made an unsolicited bona
fide written Acquisition Proposal, which proposal the Company's Board of
Directors in good faith concludes (after consultation with its financial
advisors and outside counsel) would result in a transaction that is more
favorable to its stockholders from a financial point of view than the
transactions contemplated by this Agreement and the Company's Board of Directors
shall determine in good faith (after consultation with its financial advisors
and outside counsel) that such third party is financially able to consummate the
Acquisition Proposal (such an Acquisition Proposal, a "Superior Proposal"), (2)
-----------------
the Company's Board of Directors shall determine in good faith (after
consultation with outside counsel) that such action is necessary for it to act
in a manner consistent with its fiduciary duties under applicable law, (3) prior
to furnishing such information to or entering into discussions or negotiations
with such person or entity, the Company receives from such person or entity an
executed confidentiality agreement in the same form as the Confidentiality
Agreement, (4) the Company shall have fully complied with this Section 4.15; (5)
Parent shall have been promptly notified in writing of such Acquisition
Proposal, including all of its terms and conditions, shall have promptly been
given copies of such proposal and shall have promptly been apprised of all
material discussions, and the content thereof, with respect to the Acquisition
Proposal. In addition, the Company may (A) comply with Rule 14d-9 and 14e-2
promulgated under the Exchange Act with regard to a tender or exchange offer;
and/or (B) change its recommendation concerning the Merger or accept a Superior
Proposal from a third party, provided that in either case the Company terminates
this Agreement pursuant to Section 6.1(i) hereof. As used herein, "Acquisition
-----------
Proposal" means a proposal or offer for a tender or exchange offer, merger,
- --------
consolidation or other business combination involving the Company or any
Subsidiary of the Company or any proposal to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, the Company or
any Subsidiary thereof.
(b) The Company shall immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Company or its
Representatives with respect to the foregoing and shall promptly request the
return of all confidential or proprietary information of the Company furnished
to any of such parties. The Company shall give Parent at least two business days
prior written notice of (i) any meeting of the Board of Directors of the Company
to take any action with respect to an Acquisition Proposal or to withdrawing or
modifying, in a manner adverse to Parent, its recommendation to the Company's
stockholders in favor of approval of the Merger and (ii) any agreement to be
entered into with any person making such inquiry, offer or proposal.
(c) Prior to accepting a Superior Proposal, the Company shall,
and shall cause its financial and legal advisors to, negotiate in good faith
with Parent, for a period of not less than three business days, to make such
changes to the terms and conditions of this Agreement as would enable the
Company to proceed with the transactions contemplated hereby.
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(d) During the period from the date of this Agreement through
the Effective Time, the Company shall not terminate, amend, modify or waive any
provision of any confidentiality or standstill agreement to which it or any of
its Subsidiaries is a party. During such period, the Company shall enforce, to
the fullest extent permitted under applicable law, the provisions of any such
agreement, including, without limitation, by obtaining injunctions to prevent
any breaches of such agreements and to enforce specifically the terms and
provisions thereof in any court of the United States of America or of any state
having jurisdiction.
(e) The Company shall ensure that the officers, directors and
Affiliates of the Company and its Subsidiaries and any investment banker or
other financial advisor or representative retained by the Company or any
Subsidiary of the Company are aware of the restrictions described in this
Section 4.15.
Section 4.16. Accountant's Letters.
(a) Following receipt by the Company's independent public
accountants of an appropriate request from Parent pursuant to Statement of
Auditing Standards ("SAS") No. 72, the Company shall use reasonable best efforts
to cause to be delivered to Parent two letters from the Company's independent
public accountants, one dated approximately the date on which the Registration
Statement shall become effective and one dated the Closing Date, each addressed
to the Company and Parent, in form reasonably satisfactory to Parent and
customary in scope for comfort letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement. The Company shall use reasonable best efforts to cause
to be delivered to Parent a copy of a letter from the Company's independent
accountants dated as of the Closing Date, regarding the qualification of the
Merger as a pooling-of-interests under Opinion 16 of the Accounting Principles
Board.
(b) Following receipt by the Parent's independent public
accountants of an appropriate request from the Company pursuant to SAS No. 72,
Parent shall use reasonable best efforts to cause to be delivered to the Company
two letters from Parent's independent public accountants, one dated
approximately the date on which the Registration Statement shall become
effective and one dated the Closing Date, each addressed to Parent and the
Company, in form reasonably satisfactory to the Company and customary in scope
for comfort letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement. Parent shall
use reasonable best efforts to cause to be delivered to the Company a copy of a
letter from Parent's independent public accountants, addressed to Parent, dated
the Closing Date, regarding the qualification of the Merger as a pooling-of-
interests under Opinion 16 of the Accounting Principles Board.
(c) Each of the Company and Parent shall use reasonable best
efforts to cause the transactions contemplated by this Agreement, including the
Merger, to be accounted for as a pooling of interests under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations, and such
accounting treatment to be accepted by the SEC.
Section 4.17. Employee Matters. Company employees shall be eligible to
participate in all benefit plans in which similarly situated employees of Parent
are eligible to participate. For all purposes, including, without limitation,
eligibility, vesting, vacation accrual and entitlement, benefits and benefit
accruals under all benefit plans of Parent, Parent shall give the Company
employees credit
39
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for all service with the Company prior to the Closing Date as if such service
had been service with Parent, provided that no credit will be given for any
service that would result in a duplication of benefits under any such benefit
plan. Prior to the Effective Time, Parent shall have established a definitive
severance pay plan reflecting the principal terms set forth in Schedule F.
Section 4.18. The Company's Chief Executive Officer and President.. Parent
shall, as of the Effective Time, have entered into a definitive arrangements
with each of Stanley Greenman and Stewart Katz reflecting the principal terms
set forth in Schedule E.
Section 4.19. Board of Directors. The Board of Directors of Parent will
take action prior to the Effective Time to cause the number of directors
comprising the full Board of Directors of Parent at the Effective Time to be
increased to eight persons, and Stanley Greenman shall be elected to the Board
of Directors of Parent by Parent's Board of Directors effective at the Effective
Time, such increase in number and such election to be subject to the Closing.
Section 4.20. Undertakings Relating to the Real Property.
(a) The Company shall promptly deliver to Parent all surveys,
site plans, subdivision plans, schematic drawings, maps, construction drawings,
plans and specifications, certificates of occupancy, permits, licenses and
approvals in its possession concerning the Real Property, as well as copies of
the deeds by which the Company acquired title to the Phillipsburg Distribution
Center and all policies of title insurance, Permitted Encumbrances and other
title information in its possession concerning the Real Property.
(b) At Parent's request, the Company shall promptly deliver to
Parent a schedule listing each of the Real Estate Leases, and as to each
identify the following information: (i) date of initial lease and each
amendment, (ii) name of landlord (if different from that shown in lease), (iii)
remaining options to extend the term, accept expansion space, surrender a
portion of the leased space, and/or terminate the lease, and the dates by which
notice must be given to exercise each such option, and (iv) tenant's share
(expressed as a dollar amount) of operating expenses, common area maintenance
charges, taxes and other costs and expenses.
(c) The Company shall file and cause to be recorded in the
Office of the Recorder of Deeds in and for the County of Warren, State of New
Jersey, a copy of all documents, certified by the appropriate Secretary of
State, evidencing that Noodle Kidoodle, Inc., a Delaware corporation now holds
title to the property conveyed to Martin Zippel, Co., Inc. by deed dated
September 20, 1982 and recorded January 21, 1983 in Book 816, Page 347 in the
Office of the Recorder of Deeds in and for the County of Warren, State of New
Jersey.
(d) At Parent's request, the Company shall provide Parent and
any environmental consultant acting on its behalf (such consultant to be
reasonably acceptable to the Company) access to the two parcels of land owned
by the Company adjacent to the Phillipsburg Distribution Center for the purpose
of performing a Phase I environmental investigation. At the Company's request,
it shall have the right to discuss the investigation with the consultant and
Parent shall promptly deliver to the Company drafts of the consultant's report
as well as the results of any such investigation.
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Section 4.21. Company 401(k) Plans. The Company shall take all such
actions as may be necessary to cause the Noodle Kidoodle, Inc. 401(k) Plan and
Noodle Kidoodle, Inc. Supplemental 401(k) Plan to be terminated effective as of
the Effective Time.
ARTICLE V
CONDITIONS TO CLOSING
Section 5.1. Conditions to the Obligations of the Company and Parent and
Merger Sub. The respective obligations of the Company, on the one hand, and
Parent and Merger Sub, on the other hand, to consummate the transactions
contemplated hereby are subject to the requirements that:
(a) Stockholder Approval. This Agreement and the Merger shall
--------------------
have been approved and adopted by the requisite vote of (i) the stockholders of
the Company in accordance with the DGCL and the Certificate of Incorporation and
By-laws of the Company, and (ii) the shareholders of Parent as may be required
by law and by any applicable provisions of its Articles of Incorporation and
Bylaws.
(b) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition shall have been issued and be in effect (i) restraining or
prohibiting the consummation of the Merger or any of the transactions
contemplated hereby, or (ii) prohibiting or limiting the ownership, operation or
control by the Company, Parent or any of their respective subsidiaries of any
portion of the business or assets of the Company, Parent or any of their
respective subsidiaries, or compelling the Company, parent or any of their
respective subsidiaries to dispose of, grant rights in respect of, or hold
separate any portion of the business or assets of the Company, parent or any of
their respective subsidiaries (except as contemplated by Section 4.10(a)
hereof); nor shall any action have been taken by a Governmental Entity or any
federal, state or foreign statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity or arbitrator, which is in effect and has the effect of
making the Merger illegal or otherwise prohibiting the consummation of the
Merger.
(c) HSR Act. Any waiting period applicable to the consummation
-------
of the Merger under the HSR Act shall have expired or been terminated.
(d) Registration Statement. The Registration Statement shall
----------------------
have been declared effective under the Securities Act and no stop orders with
respect thereto shall have been issued, and Parent shall have received all
requisite authorizations under all applicable state securities or blue sky laws
necessary to consummate the transaction.
(e) Nasdaq Listing. Approval for listing by the Nasdaq National
--------------
Market upon official notice of issuance of Parent Common Stock to be issued in
the Merger shall have been received by Parent.
(f) Pooling. Parent shall have received and delivered to the
-------
Company and the Company's independent public accountants, a letter from its
independent public accountants, dated approximately the date the Registration
Statement is declared effective and as of the Closing Date, stating that the
Merger will qualify as a pooling-of-interests under Opinion 16 of the Accounting
Principles Board. The Company shall have received and delivered to Parent, a
letter from its
41
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independent public accountants, dated approximately the date the Registration
Statement is declared effective and as of the Closing Date, regarding the
qualification of the Merger as a pooling of interests for accounting purposes.
Section 5.2. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated hereby
are subject to the further requirements that:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Parent and Merger Sub contained in this Agreement shall be true
and correct on the date hereof and (except to the extent such representations
and warranties speak as of a date earlier than the date hereof) shall also be
true and correct on and as of the Closing Date, with the same force and effect
as if made on and as of the Closing Date; provided, however, that for purposes
of this Section 5.2(a) only, such representations and warranties shall be deemed
to be true and correct as of the Closing Date unless the failure or failures of
such representations and warranties to be so true and correct (without regard to
materiality qualifiers contained therein), individually or in the aggregate,
results or would reasonably be expected to result in a Parent Material Adverse
Effect.
(b) Performance of Obligations. Each of the obligations of
--------------------------
Parent and Merger Sub to be performed on or before the Closing Date pursuant to
the terms of this Agreement shall have been duly performed in all material
respects on or before the Closing Date and at the Closing Parent shall have
delivered to the Company a certificate to that effect.
(c) Absence of Material Adverse Effect. No Parent Material
----------------------------------
Adverse Effect shall have occurred, and no fact or circumstance shall exist
which could reasonably be expected to result in a Parent Material Adverse
Effect.
(d) Consents. The consents set forth on Item 5.2(d) of the
--------
Parent Schedule shall have been obtained.
(e) Tax Opinion. Kramer Levin Naftalis & Frankel LLP shall have
-----------
delivered to the Company its written opinion, dated as of the Closing Date, in
form and substance reasonably satisfactory to the Company, substantially to the
effect that the Merger constitutes a reorganization under Section 368(a) of the
Code and that Parent, Merger Sub and the Company will each be a party to that
reorganization within the meaning of Section 368(b) of the Code.
(f) Ancillary Agreements. Each of Stanley Greenman and Stewart
--------------------
Katz shall have entered into definitive arrangements reflecting the principal
terms set forth in Schedule E and Parent and the Company shall have entered into
employment agreements with each of them, substantially in the form attached to
Schedule E as Exhibits A and B, respectively. Each affiliate of Parent listed in
the Parent Schedule shall have executed and delivered the Affiliate Agreement
substantially in the form of Schedule D.
(g) Fairness Opinion. The Board of Directors of the Company
----------------
shall have received from the Company Financial Advisor a written opinion, dated
as of the date hereof, in form and substance reasonably satisfactory to the
Board of Directors of the Company, to the effect that the Merger Consideration
is fair to the holders of Company Common Stock from a financial point of view,
which opinion shall have been confirmed in writing to such Board as of the date
the Proxy Statement is first mailed to the stockholders of the Company and not
subsequently withdrawn.
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Section 5.3. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
herebys are subject to the further requirements that:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in this Agreement shall be true and correct
on the date hereof and (except to the extent such representations and warranties
speak as of a date earlier than the date hereof) shall also be true and correct
on and as of the Closing Date, with the same force and effect as if made on and
as of the Closing Date; provided, however, that for purposes of this Section
5.3(a) only, such representations and warranties shall be deemed to be true and
correct as of the Closing Date unless the failure or failures of such
representations and warranties to be so true and correct (without regard to
materially qualifiers contained therein), individually or in the aggregate,
results or would reasonably be expected to result in a Company Material Adverse
Effect.
(b) Performance of Obligations. Each of the obligations of the
--------------------------
Company to be performed on or before the Closing Date pursuant to the terms of
this Agreement shall have been duly performed in all material respects on or
before the Closing Date and at the Closing the Company shall have delivered to
Parent a certificate to that effect.
(c) Absence of Material Adverse Effect. No Company Material
----------------------------------
Adverse Effect shall have occurred, and no fact or circumstance shall exist
which could reasonably be expected to result in a Company Material Adverse
Effect.
(d) No Litigation. There shall not be any litigation or other
-------------
proceeding pending or threatened, which is reasonably likely to be decided
adversely to the Company and reasonably likely to have a Company Material
Adverse Effect.
(e) Consents. The consents set forth on Item 5.3(e) of the
--------
Company Schedule shall have been obtained.
(f) Tax Opinion. Morgan, Lewis & Bockius LLP shall have
-----------
delivered to Parent its written opinion, dated as of the Closing Date, in form
and substance reasonably satisfactory to Parent, substantially to the effect
that the Merger constitutes a reorganization under Section 368 of the Code and
that Parent, Merger Sub and the Company will each be a party to that
reorganization within the meaning of Section 368(b) of the Code.
(h) Fairness Opinion. The Board of Directors of Parent shall
----------------
have received from the Parent Financial Advisor a written opinion, dated as of
the date hereof, in form and substance reasonably satisfactory to the Board of
Directors of Parent, to the effect that the Common Exchange Ratio is fair to
Parent from a financial point of view, which opinion shall have been confirmed
in writing to such Board as of the date the Proxy Statement is first mailed to
the shareholders of Parent and not subsequently withdrawn.
(i) Ancillary Agreements. Each affiliate of the Company listed
--------------------
in the Company Schedule shall have executed and delivered the Affiliate
Agreement substantially in the form of Schedule B.
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ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
Section 6.1. Termination. This Agreement may be terminated (by written
notice by the terminating party to the other party) and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date:
(a) By mutual written consent of each of Parent and the Company;
(b) By either Parent or the Company if the Merger shall not have
been consummated on or before October 31, 2000 (the "Termination Date");
----------------
provided, however, that the right to terminate this Agreement under this Section
6.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the Termination Date;
(c) By either Parent or the Company if a Governmental Entity or
arbitrator shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties shall use their commercially
reasonable efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and such
order, decree, ruling or other action shall have become final and nonappealable;
(d) (i) By Parent if the Company shall have breached, or failed
to comply with, in any material respect any of its obligations under this
Agreement or any representation or warranty made by the Company shall have been
breached in any material respect (except to the extent qualified by materiality,
in which case such representations and warranties shall not have been breached
in any respect) when made or shall have since ceased to be true and correct in
any material respect (except to the extent qualified by materiality, in which
case such representations and warranties shall be true and correct in all
respects) and, with respect to the representations and warranties, such breaches
or misrepresentations, individually or in the aggregate, result or would
reasonably be expected to result in a Company Material Adverse Effect, or (ii)
by the Company if Parent shall have breached, or failed to comply with, in any
material respect any of its obligations under this Agreement or any
representation or warranty made by Parent shall have been breached in any
material respect (except to the extent qualified by materiality, in which case
such representations and warranties shall not have been breached in any respect)
when made or shall have since ceased to be true and correct in any material
respect (except to the extent qualified by materiality, in which case such
representations and warranties shall be true and correct in all respects) and,
with respect to the representations and warranties, such breaches or
misrepresentations, individually or in the aggregate, result or would reasonably
be expected to result in a Parent Material Adverse Effect;
(e) By Parent upon the existence of a condition or after the
occurrence of an event which results in, or could reasonably be expected to
result in, a Company Material Adverse Effect;
(f) By the Company upon the existence of a condition or after
the occurrence of an event which results in, or could reasonably be expected to
result in, a Parent Material Adverse Effect;
(g) By Parent, by written notice to the Company, if (i) the
Board of Directors of the Company shall not have recommended the Merger to the
Company's stockholders, or shall have
44
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modified in a manner adverse to Parent or rescinded its recommendation of the
Merger to the Company's stockholders as being advisable and fair to and in the
best interests of the Company and its stockholders, or shall have modified in a
manner adverse to Parent or rescinded its approval of the Agreement, or shall
have resolved to do any of the foregoing, (ii) the Board of Directors of the
Company shall have recommended to the stockholders of the Company any
Acquisition Proposal (other than by Parent or an affiliate of Parent) or shall
have resolved to do so, (iii) any Person (other than parent of an affiliate of
Parent) acquires beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of 15% or more of the outstanding shares of capital stock of the
Company, (iv) a tender offer or exchange offer (other than by Parent or an
affiliate of Parent) for more than 15% or more of the outstanding shares of
capital stock of the Company is commenced, and the Board of Directors of the
Company fails to recommend against acceptance of such tender offer or exchange
offer by its stockholders within the ten business day period (or such shorter
period) required by Section 14e-2 of the Exchange Act (the taking of no position
by the expiration of such ten business day period (or such shorter period) with
respect to the acceptance of such tender offer or exchange offer by its
stockholders constituting such a failure) or (v) the Company or any of its
Subsidiaries, without having received prior written consent from Parent, shall
have entered into, authorized, recommended or proposed to its stockholders an
agreement, arrangement, understanding or letter of intent with any Person (other
than Parent or any of its Affiliates) to (A) effect a merger or consolidation or
similar transaction involving the Company or any of its Subsidiaries, (B)
purchase, lease, or otherwise acquire all or a substantial portion of the assets
of the Company or any of its Subsidiaries or (C) purchase or otherwise acquire
(including by way of merger, consolidation, share exchange or similar
transaction) beneficial ownership of securities representing 15% or more of the
voting power of the Company (in each case other than any such merger,
consolidation, purchase, lease or other transaction involving only the Company
and one or more of its Subsidiaries or involving only any two or more of its
Subsidiaries);
(h) (i) By Parent or the Company if the Required Company
Stockholder Approval shall fail to have been obtained at the Company
Stockholders Meeting, including any adjournments thereof or (ii) by the Company
or Parent if the Required Parent Shareholder Approval shall fail to have been
obtained at the Parent Shareholders Meeting, including any adjournments thereof;
or
(i) By the Company, by written notice to Parent, if (i) (A) the
Company proposes to accept a Superior Proposal and simultaneously therewith the
Company shall enter into a definitive acquisition merger or similar agreement to
effect such Superior Proposal, or (B) the Company has changed its recommendation
concerning the Merger, and (ii) in either of the foregoing cases, the Company
has fully complied with its obligations under Section 4.15 hereof;
(j) (i) By Parent if the Merger shall not have been consummated
on or before the date that is 30 days following the fulfillment of the
conditions to the Closing set forth in Sections 5.1 and 5.2, or (ii) by the
Company if the Merger shall not have been consummated on or before the date that
is 30 days following the fulfillment of the conditions to the Closing set forth
in Sections 5.1 and 5.3; or
(k) By the Company, by written notice to Parent, if the Board of
Directors of Parent shall have modified in a manner adverse to the Company or
rescinded its recommendations of the Merger to Parent's shareholders as being
advisable and fair to and in the best interests of Parent and its shareholders,
or shall have modified in a manner adverse to the Company or rescinded its
approval of the Agreement, or shall have resolved to do any of the foregoing.
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(l) (i) By Parent if the final audited consolidated financial
statements of the Company and its Subsidiaries as at and for the year ended
January 29, 2000 contain any material adverse change from the Company Unaudited
Financial Statements, or (ii) by the Company if the final audited consolidated
financial statements of Parent and its subsidiaries as at and for the year ended
January 29, 2000 contain any material adverse change from the Parent Unaudited
Financial Statements.
(m) (i) By Parent if the Parent Financial Advisor shall have
withdrawn its written opinion to the effect that the Common Exchange Ratio is
fair to Parent from a financial point of view, or (ii) by the Company if the
Company Financial Advisor shall have withdrawn its written opinion to the effect
that the Merger Consideration is fair to the holders of the Company Common Stock
from a financial point of view.
Section 6.2. Effect of Termination.
(a) In the event of termination of this Agreement as provided in
Section 6.1 hereof, this Agreement shall forthwith become void and there shall
be no liability on the part of any of the parties, except (i) as set forth in
the last sentence of Section 4.4 and in Sections 4.7, 6.2(b), 7.9 and 7.13
hereof, and (ii) nothing herein shall relieve any party from liability for any
willful breach hereof.
(b) If (i) this Agreement (A) is terminated by Parent pursuant
to Section 6.1(g), (h)(i), (j)(i) or (m)(i) hereof or by the Company pursuant to
Section 6.1(h)(i), (i), (j)(ii), (k) or (m)(ii) hereof, or (B) is terminated as
a result of the Company's breach of Section 4.15 hereof, and (ii) other than in
the case of a termination under Section 6.1(j) hereof, either (A) at the time of
such termination or prior to the Company Stockholders Meeting there shall have
been an Acquisition Proposal (whether or not such offer shall have been rejected
or shall have been withdrawn prior to the time of such termination or of the
Company Stockholders Meeting), or (B) within 12 months after termination of the
Agreement the Company shall have entered into an agreement with respect to, or
consummated, an Acquisition Proposal, then either the Company shall pay to
Parent (in the case of a termination under Section 6.1(g), (h)(i), (i), (j)(i)
or (m)(ii)), or Parent shall pay the Company (in the case of a termination under
Section 6.1(j)(ii), (k) or (m)(i)) an amount equal to (i) a cash termination fee
of $2,250,000 (the "Termination Fee"), and (ii) all expenses incurred by such
---------------
party in connection with the negotiation, execution and performance of the
transactions contemplated hereby (including, without limitation, all fees and
expenses payable to such party's financial advisors and counsel) not to exceed
$1,000,000 ("Termination Expenses") within one business day after such
--------------------
termination or, in the case of (ii)(B), entering into an agreement with respect
to, or consummating an Acquisition Proposal. If this Agreement is terminated by
Parent pursuant to Section 6.1(d)(i) or by the Company pursuant to Section
6.1(d)(ii), then either the Company shall pay to Parent (in the case of a
termination under Section 6.1(d)(i)) or Parent shall pay to the Company (in the
case of a termination under Section 6.1(d)(ii)) an amount equal to the
Termination Expenses within one business day after such termination.
(c) If either party fails to promptly pay any Termination Fee or
Termination Expenses due under Section 6.2(b), such party shall pay the costs
and expenses (including legal fees and expenses) in connection with any action,
including, without limitation, the filing of any lawsuit or other legal action,
taken to collect payment, together with interest on the amount of any unpaid fee
at the publicly announced prime rate of interest as announced from time to time
in the Wall Street
46
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Journal from the date such fee was required to be paid.
Section 6.3. Amendment. This Agreement may be amended by Parent and the
Company pursuant to a writing adopted by action taken by Parent and the Company
at any time before the Effective Time; provided, however, that, after approval
of this Agreement by the stockholders of the Company, no amendment may be made
which would alter or change the amount or kinds of consideration to be received
by the holders of Company Common Stock upon consummation of the Merger or which
would materially and adversely affect the holders of Company Common Stock. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
Section 6.4. Waiver. At any time before the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only as against such party and only if set
forth in an instrument in writing signed by such party.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Survival of Representations and Warranties. The
representations and warranties contained herein shall not survive beyond the
Closing Date. This Section 7.1 shall not limit any covenant or agreement of the
parties hereto which by its terms requires performance after the Closing Date.
Section 7.2. Entire Agreement. This Agreement and the Confidentiality
Agreement constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the subject
matter hereof.
Section 7.3. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy, or by registered or certified mail (postage prepaid,
return receipt requested) or by overnight courier service to the respective
parties as follows:
if to Parent or Merger Sub:
Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Telecopy: (610) 278-7805
Attention: Chief Executive Officer
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With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Telecopy: (215) 963-5299
Attention: Timothy Maxwell
if to the Company:
Noodle Kidoodle, Inc.
801 Jericho Turnpike
Syosset, NY
Telecopy: (516) 617-0516
Attention: Chief Executive Officer
with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 3/rd/ Avenue
New York, NY 10022
Telecopy: (212) 715-8000
Attention: Richard Marlin
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
Any notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy or overnight courier
service shall be deemed effective on the first business day at the place of
which such notice or communication is received following the day on which such
notice or communication was sent. Any notice or communication sent by
registered or certified mail shall be deemed effective on the fifth business day
at the place from which such notice or communication was mailed following the
day in which such notice or communication was mailed.
Section 7.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
Section 7.5. Jurisdiction. Each of the parties submits to the non-
exclusive jurisdiction of the state and federal courts of the United States
located in the State of Delaware with respect to any claim or cause of action
arising out of this Agreement or the transactions contemplated hereby. Each of
the parties agrees not to contest such venue as an inappropriate venue or forum
or assert of a claim of forum non conveniens as a basis to move suc h claim or
cause of action to another venue or forum.
Section 7.6. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 7.7. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to
48
<PAGE>
confer upon any other person (including, without limitation, any employee of the
Company or any Subsidiary) any rights or remedies of any nature whatsoever under
or by reason of this Agreement except for Sections 4.12 and 4.18 (which are
intended to be for the benefit of the persons provided for therein, and may be
enforced by such persons.)
Section 7.8. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 7.9. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses except that Parent
and the Company shall share equally (a) the registration fees payable with
respect to filing the Registration Statement and (b) all printing expenses
incurred with respect to the Proxy Statement and the Registration Statement.
Section 7.10. Personal Liability. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect shareholder of any party hereto or any officer, director,
employee, agent, representative or investor of any party hereto.
Section 7.11. Binding Effect; Assignment. This Agreement shall inure to
the benefit of be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto.
Section 7.12. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such person or circumstance in any other jurisdiction or to
other persons or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement shall be severable.
Section 7.13. Legal Fees and Costs. If any party hereto institutes any
action or proceeding, whether before a court or arbitrator, to enforce any
provision of this Agreement, the prevailing party therein shall be entitled to
received from the losing party reasonable attorneys' fees and costs incurred in
such action or proceeding, whether or not such action or proceeding is
prosecuted to judgment.
49
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized on the day
and year first above written.
ZANY BRAINY, INC.
By: /s/ Keith C. Spurgeon
----------------------------------------
Name: Keith C. Spurgeon
Title: Chairman and Chief Executive Officer
NIGHT OWL ACQUISITION, INC.
By: /s/ Keith C. Spurgeon
----------------------------------------
Name: Keith C. Spurgeon
Title: President
NOODLE KIDOODLE, INC.
By: /s/ Stanley Greenman
----------------------------------------
Name: Stanley Greenman
Title: Chairman and Chief Executive Officer
<PAGE>
APPENDIX II
April 21, 2000
Board of Directors
Zany Brainy, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to Zany Brainy, Inc. (the "Company") of the consideration to be paid by the
Company pursuant to the terms of the Agreement and Plan of Merger, to be dated
as of April 21, 2000 (the "Agreement"), by and among the Company, Noodle
Kidoodle, Inc. ("Noodle") and Night Owl Acquisition, Inc. ("Merger Sub"), a
wholly-owned subsidiary of the Company, pursuant to which Noodle will become a
subsidiary of the Company as a result of a merger of Merger Sub with and into
the Company (the "Merger").
Pursuant to the Agreement, each share of common stock, par value $0.01 per
share, of Noodle ("Noodle Common Stock") will be converted into the right to
receive 1.233 shares (the "Exchange Ratio") of common stock, $0.01 par value per
share, of the Company ("Company Common Stock").
In arriving at our opinion, we have reviewed the draft dated April 18, 2000
of the Agreement. We also have reviewed financial and other information that
was publicly available or furnished to us by the Company and Noodle including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of Noodle for the period
beginning January 30, 2000 and ending February 2, 2002 prepared by the
management of Noodle and certain financial projections of the Company for the
period beginning January 30, 2000 and ending February 2, 2002 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company and Noodle with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the Noodle Common Stock and Company Common Stock,
reviewed prices in certain other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Noodle or
their respective representatives, or that was otherwise
<PAGE>
reviewed by us and have assumed that the Company is not aware of any information
prepared by it or its other advisors that might be material to our opinion that
has not been made available to us. In particular, we have relied upon and
assumed the achievement of the estimates of the management of the Company of the
operating synergies achievable as a result of the Merger. With respect to the
financial projections supplied to us, we have relied on representations that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of the Company and Noodle as
to the future operating and financial performance of the Company and Noodle. We
have not assumed any responsibility for making any independent evaluation of any
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on advice
of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect the conclusion reached in this opinion, we do not have
any obligation to update, revise or reaffirm this opinion. We are expressing no
opinion as to the prices at which Company Common Stock will actually trade at
any time. Our opinion does not address the relative merits of the Merger and
the other business strategies being considered by the Company's Board of
Directors, nor does it address the Board's decision to proceed with the Merger.
Our opinion does not constitute a recommendation to any stockholder as to how
such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. DLJ has performed investment
banking and other services for the Company in the past, including acting as the
Company's lead manager for its 1999 initial public offering and placement agent
for its 1996 private placement, and has been compensated for such services. In
addition, Yves Sisteron, an officer of certain affiliates of DLJ, is also a
member of the Board of Directors of the Company.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the Company from a financial
point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Steven Puccinelli
-----------------------
Steven Puccinelli
Managing Director
<PAGE>
APPENDIX III
April 19, 2000
Confidential
- ------------
Board of Directors
Noodle Kidoodle, Inc.
6801 Jericho Turnpike
Syosset, NY 11791
Ladies and Gentlemen:
Noodle Kidoodle, Inc. (the "Company"), and Zany Brainy, Inc. (the
"Acquiring Company") propose to enter into an agreement (the "Agreement")
pursuant to which the Company will be merged with the Acquiring Company in a
transaction (the "Merger") in which each share of the Company's common stock
will be converted into the right to receive 1.235 shares of the Acquiring
Company's common stock. The Merger is expected to be considered by the
shareholders of the Company at a special meeting to be held in May, 2000 and
consummated shortly thereafter.
You have asked us whether or not, in our opinion, the proposed exchange
ratio is fair to the shareholders of the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the past four fiscal years, as well as the
Company's draft Form 10-K and unaudited financial statements for the
fiscal year ending January 29, 2000;
(2) Reviewed financial information included in the Acquiring Company's
audited financial statements for the past four fiscal years, as well
as financial information that has been publicly available since the
Acquiring Company's initial public offering in June 1999 and the
Acquiring Company's draft Form 10-K and unaudited financial
statements for the fiscal year ending January 29, 2000;
(3) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets and prospects of the
Company and the Acquiring
-1-
<PAGE>
Company, furnished to us by the Company and the Acquiring Company,
respectively;
(4) Conducted discussions with members of senior management of the
Company and the Acquiring Company concerning their respective
businesses and prospects;
(5) Reviewed the historical market prices and trading activity for the
shares of the Company's common stock and the shares of the Acquiring
Company's common stock and compared them with that of certain
publicly traded companies which we deemed to be relevant;
(6) Compared the results of operations of the Company and the Acquiring
Company with that of certain companies which we deemed to be
relevant;
(7) Compared the proposed financial terms of the transactions
contemplated by the Agreement with the financial terms of certain
other mergers and acquisitions which we deemed to be relevant;
(8) Reviewed a draft of the Agreement dated April 18, 2000; and
(9) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic,
market and monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness
of all information publicly available, supplied or otherwise communicated to us
by the Company and the Acquiring Company, and we have not assumed any
responsibility to independently verify such information. With respect to the
financial forecasts examined by us, we have assumed that they were reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the management of the Company and the Acquiring Company,
respectively, as to the future performance of the Company and the Acquiring
Company, respectively. We have also relied upon assurances of the management of
the Company and the Acquiring Company, respectively, that they are unaware of
any facts that would make the information or financial forecasts provided to us
incomplete or misleading. We have not made any independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company
or the Acquiring Company nor have we been furnished with any such evaluations or
appraisals. We have also assumed with your consent, that (i) the Merger will be
accounted for under the pooling-of-interests method of accounting, (ii) the
Merger will be a tax free reorganization and (iii) any material liabilities
(contingent or otherwise, known or unknown) of the Company and the Acquiring
Company are as set forth in the consolidated financial statements of the Company
and the Acquiring Company, respectively. This opinion does not constitute a
recommendation to any shareholder of the Company as to how any such shareholder
should vote on the Merger. This opinion does not address the relative merits of
the Merger and any other transactions or business strategies discussed by the
Board of Directors of the Company as alternatives to the Merger or the decision
of the Board of Directors of the Company to proceed with the Merger. We were
not requested to, and did not, solicit third party indications of interest in
acquiring all or any portion
-2-
<PAGE>
of the Company. No opinion is expressed herein as to the price at which the
securities to be issued in the Merger to the shareholders of the Company may
trade at any time. Our opinion is based on economic, monetary and market
conditions existing on the date hereof.
In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and the Acquiring Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold long or
short positions in such securities.
PaineWebber Incorporated is currently acting as financial advisor to the
Company in connection with the Merger and will be receiving a fee in connection
with the rendering of this opinion and upon consummation of the Merger. In the
past, PaineWebber Incorporated and its affiliates have provided investment
banking and other financial services to the Company and have received fees for
rendering these services.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed exchange ratio is fair to the shareholders of the Company from a
financial point of view.
This opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Merger and shall not be
reproduced, summarized, described or referred to, provided to any person or
otherwise made public or used for any other purpose without the prior written
consent of PaineWebber Incorporated; provided, however, that this letter may be
reproduced in full in the Proxy Statement/Prospectus related to the Merger.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/
--------------------------
-3-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
The Pennsylvania Business Corporation Law and Zany's Amended and Restated
Bylaws limit the monetary liability of directors to Zany and to its shareholders
and provide for indemnification of Zany's officers and directors for liabilities
and expenses that they may incur in such capacities. In general, officers and
directors are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
Zany, and with respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful. In addition, Zany's
Amended and Restated Bylaws provide that Zany shall indemnify its officers and
directors to the fullest extent permitted by Pennsylvania law, including some
instances in which indemnification is otherwise discretionary under Pennsylvania
law. Reference is made to Zany's Amended and Restated Bylaws filed as Exhibit
3.2 to its registration statement on Form S-1 (File No. 333-74719) filed with
the SEC.
Zany has an insurance policy which insures the directors and officers of
Zany against certain liabilities which might be incurred in connection with the
performance of their duties.
ITEM 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Description
- ----------- -----------------------------------------------------------
2 Agreement and Plan of Merger dated as of April 21, 2000
among Zany Brainy, Inc., Noodle Kidoodle, Inc. and Night Owl
Acquisition, Inc. (Included as Appendix I to the joint
proxy/prospectus that is part of this registration statement
on Form S-4)(2)
3.1 Amended and Restated Articles of Incorporation of Zany
Brainy, Inc.(1)
3.2 Amended and Restated Bylaws of Zany Brainy, Inc.(1)
5** Opinion of Morgan, Lewis & Bockius LLP regarding legality of
securities being registered(3)
10.1 1993 Stock Incentive Plan(1)(4)
10.2 1998 Equity Compensation Plan(1)(4)
10.3 Form of Stock Purchase Agreement providing registration
rights to certain shareholders(1)
10.4 Employment Agreement with Keith C. Spurgeon(1)(4)
10.5 Employment Agreement with Thomas G. Vellios(1)(4)
10.6 Employment Agreement with Robert A. Helpert(1)(4)
10.7 Credit Agreement dated June 14, 1999 among First Union
National Bank, Zany Brainy, Inc. and the subsidiaries of
Zany Brainy, Inc. set forth therein, as amended by Amendment
No. 1 to Credit Agreement dated March 7, 2000 (2)
10.8 Amended and Restated Limited Liability Company Agreement of
ZB Holdings LLC dated as of March 20, 2000(2)
10.9 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(3)
II-1
<PAGE>
Exhibit No. Description
- --------------- ------------------------------------------------------------
10.10 Second Contribution and Interest Purchase Agreement by and
among Zany Brainy, Inc., Online Retail Partners, Inc. and ZB
Holdings, LLC dated as of March 20, 2000(2)
21.1 Subsidiaries of the Registrant(2)
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Janover Rubinroit, LLC
23.3** Consent of Morgan, Lewis & Bockius LLP (included in its
opinion filed as Exhibit 5)
24.1* Powers of Attorney (included as part of the signature page
hereto)
99.1* Consent of Director Nominee
- -----------
* Filed herewith.
** To be filed by amendment.
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Commission File No. 333-74719) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year January 29, 2000 and incorporated herein by reference.
(3) Previously filed as exhibit 10.2 to the Company's quarterly report on Form
10-Q for the fiscal quarter ended October 30, 1999 and incorporated herein
by reference.
(4) Management contract or compensatory plan or arrangement required to be
filed or incorporated as an exhibit.
(b) Financial Statement Schedules: All schedules are omitted because they are
not applicable or the required information has been provided in the
consolidated financial statements or the notes thereto.
(c) Financial Advisor Opinions:
(i) Opinion of Donaldson, Lufkin & Jenrette Securities Corporation,
attached as Appendix II to the joint proxy statement/prospectus which
is part of this registration statement on Form S-4.
(ii) Opinion of PaineWebber Incorporated, attached as Appendix III to the
joint proxy statement/prospectus which is part of this registration
statement on Form S-4.
ITEM 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price
II-2
<PAGE>
represent no more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form;
(5) that every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(6) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request; and
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction
II-3
<PAGE>
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements on the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of King of Prussia,
Commonwealth of Pennsylvania on May 23, 2000.
ZANY BRAINY, INC.
By: /s/ Keith C. Spurgeon
--------------------------------
Keith C. Spurgeon
Chairman of the Board and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below in so signing also makes, constitutes and appoints Keith C.
Surgeon and Robert A. Helpert, and each of them acting alone, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments and post-effective amendments to this
registration statement, and including any registration statement for the same
offering that is to be effective upon filing, pursuant to Rule 462(b) under the
Securities Act of 1933, with exhibits thereto and other documents in connection
therewith and to file any and all of the same, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
---------- -------- ----
<S> <C> <C>
/s/ Keith C. Spurgeon Chairman of the Board and May 23, 2000
- ------------------------------ Chief Executive Officer
Keith C. Spurgeon (Principal Executive
Officer)
/s/ Robert A. Helpert Chief Financial Officer May 23, 2000
- ------------------------------ (Principal Financial
Robert A. Helpert Officer and Principal
Accounting Officer)
/s/ C. Donald Dorsey Director May 23, 2000
- ------------------------------
C. Donald Dorsey
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
---------- -------- ----
<S> <C> <C>
/s/ Robert A. Fox Director May 23, 2000
- ---------------------------
Robert A. Fox
/s/ Gerald R. Gallagher Director May 23, 2000
- ---------------------------
Gerald R. Gallagher
/s/ Henry Nasella Director May 23, 2000
- ---------------------------
Henry Nasella
Director May __, 2000
- ---------------------------
Yves B. Sisteron
/s/ David V. Wachs Director May 23, 2000
- ---------------------------
David V. Wachs
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- -------------------- ------------------------------------------------------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Janover Rubinroit, LLC
24.1 Powers of Attorney (included as part of the signature
page hereto)
99.1 Consent of Director Nominee
II-7
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in, or made part of, this
registration statement on Form S-4.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
May 22, 2000
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the use of our report
dated March 6, 2000 included herein and to all references to our Firm included
in this registration statement on Form S-4 and related Prospectus of Zany
Brainy, Inc.
/s/ Janover Rubinroit, LLC
Janover Rubinroit, LLC
Garden City, New York
May 22, 2000
<PAGE>
Exhibit 99.1
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the inclusion of the information
regarding the undersigned in the Registration Statement on Form S-4 (the
"Registration Statement") of Zany Brainy, Inc. ("Zany") and any amendment
thereto, in connection with the undersigned being a director nominee of Zany.
The undersigned hereby further consents to being named in the Registration
Statement and any amendment thereto as a director nominee of Zany and that upon
election as a director of Zany in accordance with its Amended and Restated
Bylaws, the undersigned will serve as a director of Zany until her successor is
duly elected and qualified.
/s/ Mary Ann Tocio
Date: May 17, 2000 __________________________________________
Name: Mary Ann Tocio
